Introduction
Ladies and gentlemen, it is a privilege to be invited to brief you today on the work we are doing to enhance our ability to meet our mandate through our Customs Modernisation programme.
As part of our preparations and planning for this programme, we have been engaging with key stakeholders around the design of this programme and its products since the Minister of Finance officially launched this programme in October 2009.
I would like to take the opportunity to thank these partners for the considerable time and effort they have put in to working with us to design and develop solutions which we believe will significantly improve the supply chain for the benefit of us all.
Balancing service with enforcement
Ladies and gentlemen, our customs mandate as contained in the South Africa Revenue Service (SARS) Act is two-fold: namely to facilitate trade and to protect our country’s borders.
However, these two objectives are in many respects contradictory.
Facilitating trade is, at its heart, about speeding up the movement of goods in and out of South Africa with the ultimate goal being the seamless, uninterrupted access to global markets by local manufacturers and visa versa.
Protecting our borders from unwanted and illicit goods, on the other hand, is about control and enforcement. It requires checking and verification – often physically. This is the antithesis of free flow of trade.
So while importers and exporters of legitimate goods want little or no intervention in the process, at the same time they understandably and rightly want us to prevent illegitimate goods from entering our country.
So we are faced with two conflicting requirements – let everything go or stop everything! Clearly neither of these is the answer.
SARS has been faced with this delicate balance between service and enforcement since its inception – not only on the customs side but also on the tax side where we face a similar paradox of wanting to provide efficient service and rapid refunds to compliant taxpayers but making sure we protect the fiscus from abuse and fraud exists.
Ladies and gentlemen, we are painfully aware that we have not always got this balance right – most especially within the Customs environment. Every drug
which corrupts our youth and which has its origins off-shore is a reminder that the safety net we and other agencies of state provide has failed. Every counterfeit product for sale on a street corner is an indictment on our ambition of protecting our people and our local economy.
Customs modernisation
Ladies and gentlemen, the way SARS and other tax and customs authorities around the world are attempting to address these challenges and to manage the contradiction between service and enforcement is through a risk-based approach
in which low risk goods are allowed to move relatively unimpeded while high risk goods are subjected to more stringent verification processes.
A staggering R1.5 trillion worth of goods moves through South Africa’s borders each year. Each year, more than 160 000 trucks move through Beit Bridge Border post along and a further 60 000 move through Lebombo. That is an average of over 600 trucks a day at these two border posts alone.
The only way that we can ensure that those carrying legitimate goods move swiftly and unimpeded through the borders and to ensure that those carrying illicit goods do not, is by adopting a risk-approach.
The key ingredient in any effective risk-based process is information on which to base a risk assessment. Equally importantly, is the provision of this information in a format which allows for rapid, real-time risk assessments to be conducted automatically.
So it boils down to needing accurate, electronic information.
This quest for accurate, electronic information is at the heart of our modernisation programme which began in 2006. This programme looks at how we can harness technology and process change to make it easier for people to meet their obligations and at the same time easier for SARS to detect and deter non- compliance.
Over the past four years this modernisation programme has focused on the income tax process and as compliant taxpayers yourselves you should be familiar with some of the changes we have made from a manual, paper-based system to an electronic, automated system with the resultant gains in efficiency.
While we have been introducing these innovations to the income tax process, we have been designing changes to other parts of our business based on the same principles and applying the lessons we have learned – including Customs.
Already improvements have been introduced in Customs over the past few years and in many respects Customs was a forerunner to our modernisation programme – most especially in the adoption of electronic interchange between traders and SARS.
Electronic Data Interchange (EDI_) has been in use within SARS long before eFiling was opened to all taxpayers and is already far and away the most common form of interaction with SARS with almost 94% of international and Customs Union imports and exports using EDI.
There has also been significant progress made in enhancing our ability to use the information provided to assess risk. The Customs Risk Engine (CRE) was enhanced and this, coupled with the concerted effort to drive up electronic submissions, has improved risk management in Customs whilst reducing the administrative burden on operations.
Initiatives to promote trader segmentation are also at an advanced stage with the Preferred Trader Pilot formally come into effect this month following the Proclamation of the Accreditation legal amendment last week.
Those granted Preferred Trader status will have demonstrated a greater assurance of their compliance, thereby being rewarded with greater service benefits that aim to cut the costs associated with trade and increase the competitiveness of key industrial segments.
The segmentation approach enables Customs to minimise transactional interventions on trusted clients, shifting their compliance testing into the regime of post movement audits. This enables scarce inspection resources to be freed up
to provide greater focus on tacking illicit trade at our borders, thereby supporting
Government industrial Policy by protecting key industries from unfair competition.
Other key Customs Modernisation implementations to date include:
1. The Customs Risk Engine (CRE): 2009
An integral part of the modernisation value proposition is the risk based targeting of consignments presented by the Customs Risk Engine (CRE). Advances and refinement made in previous years have enabled more precise risk targeting and selection, driving better operational efficiency and output. This precision has enabled declarations to be controlled by the risk engine, thereby ensuring that declarations targeted for intervention have a more likely chance of being successful therefore not wasting the time and resources of legitimate traders and enforcing compliance on illegitimate traders.
The CRE is at the forefront of Customs battle against fraudulent trade. This tool has given Customs the ability to move from being a gate keeper or stopping as many consignments as possible to a risk manager by targeting specific consignments with a higher hit rate. Importantly, the CRE has also provided a wealth of statistical data through historical data collection, analysis of which has provided the ability to focus resources on specific sectors, traders and even containers.
2. Initial Release of the Customs Modernisation Programme: 2010 & 2011
In November 2010, SARS Customs went live with probably the biggest system release of the past ten years. This implementation was the culmination of months’ of internal development work and made possible by the close collaboration and cooperation with the Trade community. This wave of delivery included:
- Alignment to the World Customs Organisation (WCO) Version 3 Data Model
- Conversion from “Purpose” to “Procedure” Codes
- Vat Indicator
3. Second Release of the Customs Modernisation Programme: 2011
The second release of Modernisation in June this year saw the successful implementation of the SARS enterprise Case Management and workflow system known as Service Manager. This new release is a first both for Customs and the Trade and has required very close collaboration; this mutual drive to simplify the process was lauded by the Trade as a giant step forward in improving supply chain turn around. Key highlights of this enhancement include:
- “Get-Next” work item – Coupled with the risk engine refinement mentioned above, this concept has freed up the Customs inspectors from non-valued added activities and at the same time suppresses the potential for corruption.
- Electronic document submissions – The Imports and Exports processes have both been re-engineered to allow for supporting documents to be requested when altered by CRE. This has drastically reduced the paper handling and storage burden for traders and Customs operations
- E-release functionality – The introduction of this functionality, utilising the EDI channel, has enabled all relevant parties to receive and action their releases electronically. This has vastly reduced the need for paper and the authorising stamp at branches and has greatly benefited traders in reducing their turnaround time. The elimination of the need for paper stamped release notifications has also reduced the prevalence of fraudulent releases.
- Manifest acquittal system – has been re-engineered to allow for speedy intake of data, reconciliation and risk assessment. This will not only enable SARS to reconcile cargo movements with declarations but also empower better risk analysis with a richer data set of information.
Looking ahead
Ladies and gentlemen, these and other initiatives are already significantly changing the way in which goods are managed through our borders – and we are already seeing improvements in both the speed with which legitimate goods are released and the identification of illicit goods. I will highlight some of the impacts we have been having in a moment.
But first let me complete the modernisation story and briefly outline the further waves which are planned for this year and the next to build on this foundation and to deliver a truly world-class customs process.
More and more, Customs will focus on textile and other imported products that specifically target undervalued imports. This was prompted by an ailing local textile industry and will be achieved by utilising historical data analysis gathered over a number of years to identify potentially risky consignments. Additionally, following extensive engagements with local manufacturers and labour, Customs will collaborate with trade and labour to identify appropriate benchmark prices which will assist in identifying potential undervaluation of similar commodities. These consignments will be targeted for very close scrutiny and will only be released following a multi-level approval process, including reference to a valuation data base which contains the necessary reference pricing.
This new focus on valuation of clothing and textiles and its ‘disruption’ implications, largely enabled by the Service Manager functionality that Customs branch offices never had and the enhanced CRE capability, is supported by local manufacturers and labour. Of particular importance is that the fact that the textiles campaign supersedes the call to implement ‘reference pricing systems’ and ‘dedicated ports of entry’ in that CRE will more effectively target potentially undervalued consignments and service manager functionality enables Customs to automatically reassign the release authority to identified experts located at any location in the country.
2. Enhanced Warehousing Process
The Warehousing procedure has posed many problems for Customs over the years as cargo that moves under this procedure is under the control of traders and Customs only becomes aware of any subsequent movements at the initiative of the trader. This poses a risk to Customs and will be addressed by Customs gaining further insight into Warehouse control processes and systems.
The impact of changes to the Customs process
Ladies and gentlemen,
One key area which I know if of pressing interest to the members here today is the area of textiles and clothing.
During the 2010/2011 financial year, clothing and textile imports comprised R20.9 billion of the value of all imports. Customs duty (at an average rate of 13%) and VAT collections amounted to R2.9 billion and R3.2 billion, respectively. The predominant commodities imported were cotton, articles of apparel and accessories. Interestingly, 10 countries constitute 74% of all imports of textiles and clothing with China contributing 47% alone.
Our analysis shows, interestingly, that higher levels of abuse are prevalent in imports from Hong Kong and Indonesia than those from China. These higher levels of abuse are reflected in higher Customs Risk Engine alerts, more physical inspections and higher success rates.
Analysis shows that the likelihood of detaining textile and clothing transactions for further customs intervention is 2.5 times higher than that for other shipments. Between May 2010 and May this year, a total of 315 000 lines were processed for clothing and textile imports of which 41% (130 000) were alerted by the Customs Risk Engine for further intervention by customs in the form of real-time desk audits, physical examination and post clearance audit.
On the whole, risk alerts relate primarily to misclassification, incorrect quantities, country of origin and value. An average of 6% (19 000) lines were stopped for a physical inspection yielding a 12% average success rate.
On the criminal side, SARS has also taken strong action against a variety of alleged smugglers and during the past financial year 149 criminal cases were referred to the National Prosecuting Authority for prosecution. In the same year, 56 cases went to court and convictions were obtained. In addition to the criminal cases, there are eight civil matters relating to clothing and textiles that are currently with the courts.
SARS has also prioritised and increased its raids and seizures with a view to removing illicit goods from the market. In 2010/11, goods to the value of R180 m were detained and seized during raid interventions, and R16 m of revenue was collected as a result of these raids.
Highlights from the raids are as follows:
- 42 interventions were conducted in the second hand clothing industry in three provinces
- 260 tons of second hand clothing were detained at the owners’ premises during raid activities and ports of entry interventions
- A schedule to the amount of R 13 million was issued to four companies found to have contravened rebate 311.18. Two of the companies are currently facing criminal investigation.
- Two cases were registered with the South African Police Service (SAPS) for contraventions by three importers under rebate item 311.18 in Gauteng.
These importers account for 200 000 kilograms of Second Hand Clothing imported by abusing the import permit.
- Ten (10) cases have been registered with SAPS for the importation of Second Hand Clothing by companies that passed RIT and WE entries but then diverted the goods to the local market. One of the suspects is still in police custody.
- A SARS led operation was conducted on 31 March 2011 where a multi- departmental tactical team was established and deployed to China Shopping Centre in the Southern parts of Johannesburg. The SARS component in turn was augmented by members of the South African Police Service (SAPS), the departments of Health, Labour, Home Affairs (Immigration), Trade and Industry (DTI) and International Trade Administration Commission (ITAC) and the Metro Police.
In addition, Enforcement Auditors and Investigators raided 5 pre-selected clearing agents and seized specific shipping files. These files were identified by the Customs Risk Management Component where high risk imports were isolated. In one instance, R 0.03 (three cents) was declared per kilogram of jeans as the landed cost in South Africa!
We are also making headway in curbing other illicit goods. During the past financial year SARS has made over 20 000 seizures of goods with a projected value of almost R1 billion including:
- Almost R100 million worth of contraband cigarettes
- Almost one million counterfeit CDs and DVDs
- Over two tons of hard drugs taken off the streets by SARS in joint operations with other agencies.
Conclusion
Ladies and gentlemen, progress has been made and more is expected as we continue to modernise the entire Customs process.
But we cannot fight this fight alone. Only by working together as partners in the supply chain can we ensure access to international markets for South African
products and at the same time better protect our country from unwanted goods – and in so doing help create jobs and economic growth for our people.
The challenges faced by the textile industry are complex and require multifaceted solutions. Curbing the threat posed by undervalued, counterfeit, dumped and second hand clothing and textiles is one part of this solution. But breathing new life into the industry will also require commitments from retailers to support local industry.
Non-compliant trader behaviour negatively impacts Customs’ ability to effectively deal with illegal imports in clothing and textiles despite increased detentions, including confiscation. For example, traders produce reams of documentary evidence to support the values declared and/or deliberately misclassify goods to lower risk goods in an attempt to bypass the risk engine and further scrutiny.
The success of Customs valuation based targeting will be augmented by a change in the compliance behaviour in the industry which will require industry support and initiative to dissuade traders from buying potentially illegal imports and making valid declaration. At the same time we need your help and support to develop and maintain a reference pricing guide to help detect under-valuations.
We also need the help of industry in our drive for 100% electronic interaction. While huge strides have been made in this area, our land borders remain constrained by the reliance on paper-based processes by traders and intermediaries. Capturing this data at the point of entry is the only way we can subject these declarations to our risk engine – but this capturing is time consuming and, if not handled properly, can quickly gridlock a border post as was witnessed with one of our neighbours recently.
In designing a systemic solution, a holistic approach to analysing the behaviour of suspected offenders’ holds great potential for identifying non-compliance and higher risk individuals and companies.
It stands to reason that those abusing the customs process are also more likely to be non-compliant in areas such as VAT, CIT and PAYE – and visa versa. Our modernisation allows for a single, holistic view of trader and taxpayers interactions with SARS which will greatly enhance our ability to detect broader non-compliance.
At the same time, greater effort is required to generate civil and criminal prosecution cases from Customs’ detentions and should include more severe sanctions such as revocation of trader’s licenses. The Proclamation of the Accreditation legal amendment last week will open the way for introduction of more detailed compliance measures, standards and methods of testing and provides more explicitly, by providing procedures, for the revocation of an importers registration.
As partners in and beneficiaries of this process, it is up to us in both the public and private sector to work together to reach these shared objectives.
Like any chain, the supply chain is only as strong as its weakest link. With your help we are embarking on a journey to secure and strengthen the supply chain for all our benefit. We look forward to working with you in developing and implementing improvements to the customs process in the coming months and years.
I thank you.
