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By David Merritt and Jayachand Pachakkil
Governments around the world are updating customs codes, modernizing and introducing technology processes, and changing classifications - all in the name of streamlining revenue collection and enforcing supply chain security.
The European Union (EU) has been and continues to be very active in promulgating legislation to support its drive to create a single customs union for its 27 member states. The latest in a long line of supply chain security legislation is the introduction of the Import Control System (ICS), which requires the provision of advanced shipment information to customs authorities.
Similar to the US "10+2" supply chain security initiative, ICS aims to communicate critical shipment data to customs officials before the shipment reaches the EU, and thereby enable their ability to assess any risks it may pose. Effective January 1, 2011, ICS places the burden of supplying advanced shipment information squarely on the shoulders of carriers, not industry.
However, importers and exporters aren't completely off the hook; they must provide accurate information on a timely basis to their carriers or goods could be held up indefinitely by customs authorities.
A number of member states have gone live with their ICS systems; the remaining member states are working toward the deadline with separate dates for "go live" testing. In the United Kingdom, for example, the intention is to implement ICS Testing on November 2, 2010. The testing is to be completed by carriers or carrier-approved partners to assess their processes and systems interfaces prior to the "go live" date.
Although related, ICS is different from the Authorized Economic Operator (AEO) supply chain security program promulgated by the same EU regulations. AEO is an accreditation regime aimed at improving global security by attempting to certify the cross-border actions of businesses and their trading partners. Whereas AEO is a certification program, ICS is a transactional program requiring data for EU Customs filings on each and every shipment, much like the 10+2 program in the United States, which requires the advance filing of 12 data elements (10 from the Importer of Record and 2 from the carrier) prior to goods being loaded on a carrier at the point of origin. The intention of ICS and 10+2 is the same - securing the supply chain by evaluating shipments prior to arrival.
The pre-arrival information needs to be provided to customs authorities in a specified electronic format at the first point of entry into the EU. The electronic declaration, known as an Entry Summary Declaration (ENS), which includes the following:
- Details that identify the cargo such as unique consignment reference, container numbers, seal numbers, goods description, shipping marks and commodity codes.
- Traders involved in the movement such as the consignor, consignee, carrier, person filing or lodging the ENS.
- Identification of consignee and AEO status.
- Specific route into, across and out of the EU, as applicable to the transaction.
The ENS declaration is required for all shipments, including those en route via the EU to a destination outside of the EU.
Legislation requires that the electronic ENS be lodged before the arrival of cargo in the EU. The time limit for the submission of the ENS varies with the mode of shipping.
Although it is the carrier's responsibility and liability, actual filing of the ENS can be conducted via a third party, such as a forwarder, importer or exporter, but only with the carrier's advance knowledge and consent. It is therefore a carrier's decision to allow clients or forwarders to file the ENS on their behalf.
While the requirements appear to be clear, they mask a fundamental challenge - carriers do not have all the data. Supply chain movement data is spread among exporters, carriers, customs, freight forwarders and importers.
For example, only the importer will know its AEO status and the good's commodity code. The exporter will know consignor, contents, type of packaging, transport charges, method of payment and UN dangerous goods code. The forwarder will know additional elements related to the transaction booking while the carrier will provide details of transport and referencing.
Therefore, these different parties will need to set up a process to accurately communicate required data in a timely manner to the party filing the ENS.
The ability to collect and transmit this data will require resources - technology and people, both of which have cost considerations. Carriers, for example, will need to make changes to their systems and processes. It appears likely that carriers will append a processing fee to offset their resource and messaging costs.
One thing that is not clear is who will bear the burden of these costs. Terms that spell out the responsibilities between the seller/exporter and buyer/importer, known as "incoterms," may support establishing who should pay the fees on a particular shipment. But the carrier may not be aware of these terms. By default, it appears that the importer, as the last trader in the supply chain, will be forced to pay these fees if he wants to get the goods, because without the ENS filing, the shipment cannot take place.
ICS information submitted through ENS will be used by EU customs authorities to conduct a risk assessment of the transaction by evaluating the data against pre-established risk criteria. Though customs authorities are not revealing the criteria, it is safe to assume that they will be profiling trade lanes according to commodity, point of origin and trading partners.
After assessing the data, a decision will be made by the authorities to approve or intervene in a transaction's movement. Types of intervention may include:
- Transmission of messages to customs administrations in other member states about any positive risks (labelled as a risky shipment) identified at the first port of entry to the EU.
- Interception of the goods on arrival in the EU.
- Issuance of a "Do Not Load" message to the loading carrier (ocean only), which stops the loading of goods onto the carrier and therefore shipment
These interventions could result in delays and the examination of cargoes, either as a direct result of the shipment itself or another shipment traveling within the same container or consolidated shipment. To avoid supply chain disruption, it is in the importer's and exporter's best interest to review their order processing procedures to ensure their supply chain time lines are secured, processes are established to provide the required data in an accurate and timely fashion, and that an acceptance process for the receipt of messaging fees has been created.
Some importers may find it prudent during the start-up and bedding in of the ICS process to temporarily increase stock levels, either in the supply chain or at final destination, to avoid potential disruption to critical customer supplies.
As with all legislation, industry wants to understand the consequences for failure to adopt. In this instance, carriers and businesses want to know what will happen should they fail to file the ICS in a timely manner or if the data is inaccurate or incomplete. Failure will impact both carriers and businesses.
Carriers will be on the receiving end of fines, although the level of penalties is still being debated by the authorities. Businesses (importers and exporters) will face supply chain delays if their goods are held up by customs.
What is not clear are the consequences of filing inaccurate data. For example, will there be a penalty for submitting data supporting the movement of a shipment that is then found out to be inaccurate or misleading? Will the carriers be subject to fines or loss of privileges? Will the importer's AEO status be negatively impacted? At this stage, it's too early to tell.
Another question is what will happen when a carrier receives a "Do Not Load" message for a shipment that is already loaded onto a vessel. If it is part of a containerized shipment, does this mean that all the contents of the container are suspect? If not, then the entire container will have to be repackaged, and the carrier will need to communicate with multiple exporters and importers in regards to next steps. In any case, the importer will experience delays receiving his goods. These delays can be costly due to repackaging and storage fees in addition to normal supply chain costs.
ICS enforcement is just around the corner, and industry needs to communicate with its carriers and supply chain partners, and design a mutually acceptable process to collect and file the required data to EU Customs. At a minimum, industry should look at:
ENS declaration processes: All trading partners need to understand who will be making the ENS - is it the carrier, importer or other third party? If the importer wants to file, then he must demonstrate to carriers that he has sound best practices for collecting the information and filing it electronically with EU customs - accurately and on time.
Carrier costs: Will the carrier be adding fees to its services to compensate for the increased resource burden? If so, how will those fees be assessed? Will the carrier append charges to freight bills or will he generate a new invoice monthly, quarterly or annually?
Trade lanes: Evaluate existing supply chains for there may be opportunities to avoid transiting the EU entirely.
Incoterms: Reviewing terms of sale and, therefore, the applicable "incoterm may provide an opportunity to formalize the supply chain participant responsible for providing information to the carrier.
Trading partner processes: Is the declaring partner aware of all the data elements required for the ENS? Traders should complete an analysis of the required data elements and existing channels to collect and transmit the data and determine when it can be collected.
Mitigation strategies: A business needs to evaluate all the scenarios that may subject it to intervention, including all trading partners, how shipments are packaged, and which trade lanes can be modified. In addition, the business needs to formalize a plan of what to do should a critical shipment be delayed.
David Merritt and Jayachand Pachakkil are trade management consultants for JP Morgan.
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