Phase-I-PCA-Guidelines-Volume-2-EN-Feb-2104 PDF

GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) VOLUME 2 Restricted - for WCO Members use only WORLD CUSTOMS ORGANIZATION JUNE 2012 TABLE OF CONTENTS 1. IMPLEMENTATION OF PCA....................................................................................................................... 2 1.1. Development of audit programs and standardized audit procedures............................................. 3 1.2. Identification of potential subjects for audits.................................................................................... 5 1.3. Selection process............................................................................................................................... 5 Risk-based selection and risk indicators............................................................................................ 5 Collaboration with other Customs units........................................................................................... 6 2. PREPARATORY PROCESS........................................................................................................................... 7 2.1. Pre-audit research.............................................................................................................................. 7 2.2. Preparatory checklists........................................................................................................................ 8 2.3. Notification of audit......................................................................................................................... 13 3. CONDUCT OF THE FIELD AUDIT.............................................................................................................. 14 3.1. Initial audit meeting......................................................................................................................... 15 3.2. Audit techniques and tools.............................................................................................................. 15 Basic guidelines............................................................................................................................... 15 Interviewing techniques.................................................................................................................. 16 Checklists on specific issues............................................................................................................ 17 3.3. Examination..................................................................................................................................... 31 Inspection of books and records..................................................................................................... 31 Examination of accounting records................................................................................................. 34 Inspection of computer-based accounts systems........................................................................... 35 Physical inspection of the goods and premises............................................................................... 35 Expansion of the audit to third parties............................................................................................ 35 3.4. Recording, review of findings and conclusions................................................................................ 36 3.5. Reporting.......................................................................................................................................... 37 3.6. Evaluation and follow-up................................................................................................................. 39 4. IRREGULARITIES...................................................................................................................................... 40 4.1. Fraud, negligence and errors........................................................................................................... 40 4.2. Indication of serious offense............................................................................................................ 41 ANNEX: CASE STUDIES................................................................................................................................ 42 Copyright © 2012 World Customs Organization. All rights reserved. Requests and inquiries concerning translation, reproduction and adaptation rights should be addressed to [email protected] Checklists on pages 8-13/17-30 of “Guidelines for Post-Clearance Audit - Volume 2” adapted from the original EU Customs Audit Guide, © European Communities, 2006. Responsibility for the adaptation lies entirely with the WCO. 2 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 1. IMPLEMENTATION OF PCA The PCA process as outlined in these guidelines consists of the following steps: 1. Development of audit programs and standardized audit procedures; 2. Identification of potential subjects for audit; 3. Selection process; 4. Planning the audit; 5. Conduct of the field audit; 6. Conclusion of the audit/Reporting 7. Evaluation and follow-up. All of the above steps are closely linked to each other and should be planned and implemented as a single integrated system. For this reason, as shown in the overview chart of the PCA process (see chapter 1.3 in Volume I), the entire procedure should be supported by strategic planning at management level, incorporating a risk based approach. 1.1. Development of audit programs and standardized audit procedures The contents of audit programs may vary depending on the identified scope of PCA; however, they should contain the following essential elements:  Scope of PCA: Business entities that may be subject to PCA - e.g. importer/exporter, broker and carrier manifest (see Volume 1, Chapter 3.2).  Potential risks in the PCA coverage (see Volume 1, Chapter 3.3).  Objectives (see Volume 1, Chapter 3.1) 3 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2  Annual/Monthly working Plan: Audit planning may take place on an annual basis, taking into account resource availability and the work in progress. Each audit area could be assigned standard hours of completion and each available auditor or audit team hour could be calculated in order to estimate how many audits could be performed in a year. Planning could also take place on a monthly basis. It is recommended that each stage of PCA implementation is broken down into time blocks in order to measure productivity against time spent. It should include issues such as number of auditors required to conduct an audit.  Selection of the audit approach What is systems-based audit? This methodology is commonly referred to as a “top- down” approach. The audit starts with an evaluation of the high-level company structure and its business objectives, usually involving a dialogue with a senior company representative. This is followed by an assessment of the company’s systems and accounting records. Poor systems and weak audit trails often indicate low levels of compliance. An examination of individual transactions then follows as the next stage to test the systems and determine the level of compliance. The strength of the systems determines the level of substantive testing and, consequentially, the audit approach. Comprehensive audits This approach looks at the entire business control environment and the impact this might have on Customs compliance. Analytical procedures are used heavily and substantive testing reduced where control environment and corporate governance systems are good. This kind of audit takes place at the premises of the auditee. The amount of information to be examined by auditors is potentially large although it depends on frequency of PCA for one auditee. A complete picture of the business can be captured by the field audit, including its business systems, trading methods and partners Focused audits This approach only concentrates one area of Customs e.g. valuation. Tests on related systems and controls and substantive tests may also be carried out. Criteria will be necessary to decide which type of audit is appropriate in each case, based on the most effective use of resources and the desired objectives.  Standardized PCA procedures/techniques: To ensure that audits are carried out effectively and consistently, Customs should prepare standardized procedures, which may include an ethical code for PCA officers, the audit procedure, and recommended collaboration between the PCA unit and other Customs units. The detailed procedures 4 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 and techniques of PCA may vary from one Customs administration to another, depending on the scope of PCA. It is also recommended that the procedures are set out in written guidelines and made available to Customs audit staff. 1.2. Identification of potential subjects for audits The importer is the principal subject of an audit given that he has the prime knowledge and evidence in support of import declarations. Persons other than the importer may also be audited in certain circumstances. Audits may cover a range of Customs-related issues or focus on one particular area such as valuation, origin or tariff classification, etc. 1.3. Selection process Risk-based selection and risk indicators The selection of potential subjects for audit should be based on risk profiles. The selection criteria for audit candidates should be developed taking into account intelligence, trade trends, and high-risk priority areas. It is highly recommended that a risk database is maintained for this purpose which is regularly updated and accessible only to authorized personnel. Depending on the risk profile of the auditee and its business (e.g. type of business, goods, revenue involved, etc.) the audit may be conducted on a continuous, cyclical or occasional basis. The audit frequency should also take into account the legal time limit for recovering or refunding revenue. Depending on the results of the audit, the frequency can be increased or decreased. At this time, third-party audits may also be considered as part of the audit cycle for a specific trader. Given that the main objective of the PCA is to assess the compliance levels of the auditee and verify the accuracy of declarations via traders’ commercial data, the following risk indicators may be used for the assessment of risk and the targeting of traders for PCA: 5 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 Profile of importers e.g.  Capital  Company structure  Business partners (suppliers, agents, customers etc.)  Type of transaction  Method of payment, etc. Trade data e.g.  Volume of importations  Amount of duties paid  Tariff classification of imported goods and duty rates  Valuation declarations  Country of Origin of imported goods  Ports of loading  Transportation type, etc. Past records of the auditee e.g.  Audit records  Customs entry errors  Offense records  Tax, VAT compliance information, if available Related information/Intelligence e.g. - Common irregularities in the same business sectors - High-risk countries of origin - High-risk goods, etc. Collaboration with other Customs units It is essential that the PCA structure facilitates close contact and cooperation with other Customs units, in particular units dealing with topics such as valuation, cargo clearance, investigation and intelligence in order to maintain an effective exchange of information during this stage. These units could provide information which can complement the data already available for the identification and selection of subjects to audit. 6 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 2. PREPARATORY PROCESS High-quality preparation is a fundamental key to success in any audit. As well as ensuring an effective audit, good preparation can also minimize the amount of time spent at a trader’s premises1. The objectives of the preparatory process are to obtain a comprehensive overview of the auditee’s business structure and, on this basis, identify and analyze specific risk areas of the auditee’s systems and to draft a specific audit plan that includes the audit objectives, scope, methodologies and assignment of auditor/team members. 2.1. Pre-audit research Pre-audit research is a preliminary examination which serves two main purposes:  to focus on specific risk areas of an auditee's systems and import declarations, through analysis of available data; and  to draft an audit plan that includes the audit objectives, scope, methodologies and assignment of auditor/team members.. As a general starting point, before undertaking the site visit, the auditor should:  Study any specific points to be scrutinized;  Study selected declarations and supporting documents carefully. Note any features which may require further attention;  Obtain the following information concerning the importer: - Past importation statistics - Prior Customs rulings related to the importer, e.g. on classification or valuation - Similar rulings which may be applicable to the case under review - Previous visit reports concerning the importer and details of irregularities detected - Information from other sources, e.g. internal taxation - Ongoing legal proceedings - etc. 1 As a good practice, health and safety conditions at the premises of the auditee should be assessed. 7 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 2.2. Preparatory checklists As a part of the preparatory process, checklists could be used as a practical tool to assist Customs in carrying out an audit. These checklists will facilitate recording of the key questions to be considered during the audit. It aims to ensure that all significant risk areas are being taken into account. The preparatory checklists can be filled in as far as possible on the basis of information available during the preparation phase and then be verified and completed during the audit itself. A. INFORMATION GATHERING ABOUT THE SUBJECT OF THE AUDIT (AUDITEE) 1. Why was the person / company selected? 2. State the suspected risks. B. CHECKLIST ON THE ORGANIZATIONAL CHARACTERISTICS 1. Identification: name, national company’s registration number, fiscal identification (e.g. VAT number), head-office address, warehouses’ or plants’ address. 2. What is its legal structure (e.g. limited liability, partnership, etc.)? 3. Have there been any changes in legal structure lately (e.g. merger, split, etc.)? 4. Information about ownership, directors and managers in the operator’s enterprise. 5. Volume of turnover, profits and losses. 6. Who has legal power to act on behalf of the operator? 7. Amount of capital stock. 8. Have the operator, its managers or stockholders any relationship with others? 8.1. If yes, who are these others? (name, fiscal number, address). 8.2. What is the nature of the relationship? 9. How is the operator’s accounting system organized? 9.1. Is it internal or bought in? 9.2. Is there prior information on the type of system in use? 8 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 10. Does the operator have a system for training the employees on Customs matters? If so, what are the details? 11. What is the internal organization structure of the operator? List the departments or functions relevant to the Customs audit. 12. What, if any, are the Customs authorizations granted, refused or revoked to the operator? 13. Does the operator use simplified procedures in import, export or operate Customs procedures? 14. Is the operator a producer, trader or both? 15. What are the operator’s main business activities? 16. Has the operator storage facilities and, if so, what is their capacity? C. LEVEL OF COMPLIANCE 1. Has the operator been previously audited? 1.1. If so, what were the results? 2. Are there any suspicions of fraud or irregularities concerning the operator or stockholders, partners or managers? 2.1. If yes, what are they? 2.2. Where did the alert come from? 3. Have the operator, stockholders, partners or managers been convicted of fraud or irregularities? 3.1. If yes, what are the details? 4. Has the operator already been audited by Customs or other authorities? 4.1. Have there been controls relevant to this audit? 4.2. If so, what are the results? 5. Do the available financial/fiscal indicators concerning the operator indicate a healthy business? 6. Have there been or are there ongoing recovery procedures concerning debts incurred by the operator? 9 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 D. AUDITEE’S INTERNAL PROCEDURES/CONTROL SYSTEMS 1. Does the operator have an internal section or person responsible for Customs matters? 1.1. Which persons are responsible for the different areas, for example tariff classification, Customs procedures, valuation, and contact with the suppliers, etc.? 1.2. What is the nature of the communication between the person doing the declaration and other sections within the operator (accounting, product specialists, incoming goods, etc.)? 1.3. How does the operator keep up with changes in the legislation? 1.4. What are the routines when the competent employee is on leave, either temporary or permanent? 1.5. What is the procedure in case of discrepancies, for example differences in quantities supplied, damaged goods, returned goods, price differences, incorrect entries in stock, and who is in charge of this procedure? 1.6. Are the key operator’s personnel aware of the contact points within Customs that they can use for support in meeting the operator’s Customs obligations? 2. Does the operator have a Customs broker? 2.1. If so, who is the broker? 2.2. What is the broker’s history with Customs? 2.3. What is the kind of mandate given to the broker, i.e. direct or indirect representation? 3. Does the operator utilize forwarding/shipping agents to prepare and present import declarations on their behalf? If so, list parties. 4. Have there been any changes in persons mentioned in questions 1 or 2 lately? 5. What is the payment method for the Customs duty, for example cash, guarantee, etc.? 6. Does the operator have an internal control system (including regular checking) to ensure also the correctness of Customs declarations? 6.1. Are there internal written guidelines concerning the operator’s Customs routines / procedures? 6.2. Are there any flaws or errors in them? 6.3. Were errors in routines or lack of routines found when testing (walk-through)? 6.4. What is the nature of these errors or omissions? 6.5. What are the manual routines in case of computer failure? 7. Describe how corrections are made to declarations and how often? 10 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 8. Does the operator store the accompanying documents to the declaration? 9. Does the operator have auditors, internal or external, and are the reports available? 9.1. Is the operator ISO-certified? 9.2. Does the operator still have the ISO handbook? 10. What are the procedures for receiving and registering the goods in the operator’s accounts? 10.1. How does the operator ensure that all goods received are declared? 11. Where are the accounting records physically kept? 12. Does the operator have an internal or external accountant/bookkeeper? 13. Does the operator have stock records? 13.1. Do the records contain information that can be used for the audit? 13.2. How is stock management undertaken? 14. Is it possible to make a direct link between the accounts and the Customs declarations and vice versa? 15. What accounting system does the operator use? 15.1. What is the fiscal year? 15.2. Has the chart of accounts been checked by the Customs auditor? 15.3. What accounts are used for import/export transactions? 15.4. Does the operator use subsidiary ledgers? 15.5. Are any of the parts of the accounting system integrated? Which parts? 15.6. Specify which software package the operator uses. 16. List the main points of the organization of the operator’s computerized environment of significance to this audit. 17. What are the procedures regarding backup and recovery of data? 17.1. How long are records kept online? 11 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 E. OPERATOR TRANSACTIONS 1. Number of Customs declaration presented to Customs during the period of control. 2. How are the Customs declarations presented to Customs (manually, by file transfer, etc.)? 3. Type of declarations presented to Customs during the period of control (Customs procedures, import, export, release for free circulation, etc.). What are the most important procedures used in terms of value and quantity? 4. Types of goods — tariff classification 4.1. Ascertain if there are tariff classification related risks. 4.2. What are the main commodity codes used? 4.3. Are there variations over time? 4.4. Has binding tariff information (BTI) been given to the operator? 4.5. Are there separate files or lists made by operators in which each product number is linked with a commodity code? 5. Are the declared procedure codes consistent with the operator’s type of business? 6. Customs value declared for the goods 6.1. Ascertain if there are valuation related risks. 6.2. What is the total value declared by the operator during the audit period? 6.3. Are there significant variations in value declared for the same kind of goods from the same or other operators during the period? 6.4. What are the general terms of payment for imported goods? (e.g. prepaid, payment after approval, letter of credit, etc.). 7. Origin declared 7.1. Ascertain if there are origin related risks. 7.2. What are the main origin countries declared? 7.3. Are there variations over time? 8. Who are the main suppliers? 9. Are there any changes in the pattern of trade detected (e.g. changes of declaration place, suppliers, etc.)? 10. In case of an exporter, who are the clients? 12 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 11. What means of transport is normally used by the operator (e.g. by sea, air, road, etc.)? 11.1. Who are the transporters involved? F. CONCLUSION 1. Is it necessary to have a preparatory meeting with the operator? 2. Does the operator appear to be suitable for an audit? 3. What are the conclusion concerning the risk areas? 4. Were the results of risk analysis for selecting the enterprise verified? If not, why not? 5. Were there additional risks detected? 6. Extent of the audit, i.e. period to be audited, transactions to be checked, etc. 7. Make a list of outstanding questions to be clarified during the execution phase. An internal peer review of the pre-audit preparation is an example of a useful quality assurance control. Peers may highlight risks that might have been overlooked, experiences from similar audits, appropriate and more effective audit procedures. 2.3. Notification of audit Reflecting the compliance-based approach to PCA, the trader should be contacted in advance to arrange a convenient date for the audit. The auditee should also be advised of the following:  The general procedure for the visit and its objectives  Details of the documentation to be made available (specifying the period to be examined, if known)  Names of personnel who will carry out the audit  Facilities to be made available for the auditor/s (e.g. adequate working area) 13 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 3. CONDUCT OF THE FIELD AUDIT The general procedure for the conduct of a field audit is summarized in the following chart: Physical Third-party inspection/control audit (if necessary) (if necessary) Where the auditee refuses or appears reluctant to accept the audit, auditors are recommended to: - Contact a senior official of the business to explain that under the relevant legal framework, Customs is entitled to enter the premises and receive the trader’s cooperation; and - Ask for a specific reason for the refusal to cooperate and attempt to resolve any issues raised. If the obstruction persists auditors are recommended to consider whether the lack of cooperation suggests fraudulent activities and consider reporting to the Customs enforcement section. 14 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 3.1. Initial audit meeting The first step of the field audit is the initial meeting. Auditors should first meet with a senior representative of the audited company who has the authority to facilitate the needs of the auditors and to ensure a high level of cooperation. Occasionally, an auditee may request the attendance of consultants, accountants, or lawyers at the meeting which would normally be acceptable to Customs. On arrival at the trader’s premises the auditor should:  Introduce and identify themselves to the relevant personnel;  Explain the broad method of the audit (i.e. a combination of statistical and selected transaction verification aimed at identifying the overall degree of compliance with revenue requirements);  Refer to the estimated duration of the audit. Note that this is only an estimate and is subject to change if obstacles, discrepancies or irregularities are identified;  Request that an official from the company be made available at all times to facilitate the audit;  Mention the fact that the financial controller/company accountant may be required to answer certain questions; and  Verify that the trader is in possession of all the supporting documents requested in the letter of notification. 3.2. Audit techniques and tools Basic guidelines When conducting the PCA, auditors should observe some basic guidelines, which can help to achieve a successful audit. 1) Foster a cooperative relationship, recognizing that coordination and cooperation with the auditee is essential to a successful audit. From the initial contact until the completion and report finalization, open communication through continuous dialogue with the auditee ensures that all findings and other issues pertinent to the audit should be fully shared and discussed. 2) Auditors should critically examine and assess the auditee’s records and supporting documentation. Auditors should remember that discovering contradictory information and abnormality is a possible indication of an irregularity. 15 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 3) Auditors should positively guide the auditee regarding declaration errors caused by a lack of understanding of laws and regulations which help to improve degree of compliance. When the auditee raises a question for which the auditor does not immediately know the answer, the auditor should refer such question to the audit team leader or supervisor / specialist for a response. 4) Auditors must refrain from revealing their provisional impressions to the auditee during the course of the audit, especially any tentative assessment of findings, until the whole process is concluded. This may cause problems, for example, if a negative assessment is reached after the auditee was given a more positive assessment beforehand. 5) Maintain a professional and courteous attitude towards the auditee. Interviewing techniques The following good practices are recommended for conducting a successful interview:  Stay in control of the interview  Follow a pre-arranged path of questioning but be flexible where necessary  Explain questions clearly and check that the question has been understood  Avoid leaving questions unfinished or unresolved  Listen carefully and observe reactions  Don’t interrupt unless the interviewee appears to be deliberately changing the subject  Avoid ambiguous and leading questions  Display confidence and put the auditee at ease  Summarize the interview at the end and seek clarification, where necessary The auditor may obtain useful and relevant information from a casual line of questioning. In general conversation, the auditee may reveal important facts concerning his business operations which have implications, for example, to Customs valuation issues such as relationships with suppliers, supply of components to a foreign manufacturer/seller, etc. When the auditee tries to avoid answering questions directly, the auditor should persist in order to obtain the necessary information. Repeat visits are commonly necessary where all relevant information has not been examined during the first visit or where longer more complex systems exist. 16 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 Checklists on specific issues These checklists on specific issues are of practical use to the auditor in carrying out his/her tasks. Depending on the risks detected and the extent of the audit, specific checklists can be chosen as applicable. A. CUSTOMS VALUE 1. What knowledge does the importer have of Customs valuation methodology (in particular, the elements to be included in the transaction value in accordance with the WTO Valuation Agreement)? 2. Does the operator have adequate internal controls and accounting systems which ensure all payments made in relation to imported goods are recorded and identified in order to facilitate reconciliation with Customs value declarations? 3. Is the declared value supported by purchase orders, sales contracts, invoices, etc.? Bank statements and proof of payment may also be checked. 4. Is the importer related to any of his suppliers (as defined in Article 15.4 of the WTO Valuation Agreement? If so, has the relationship influenced the price for Customs purposes (Article 1 of the WTO Valuation Agreement refers)? 5. Where a CIF value system is used, have freight and insurance costs been properly included? Do the delivery terms on invoices and freight contracts (INCOTERMS) match freight charges declared? Is the freight prepaid by the operator (risk of omission from the Customs value)? 6. Where an FOB value system is used (i.e. the country has made such a decision under Article 8.2 of the WTO Valuation Agreement), have freight and insurance charges been properly excluded from the Customs value? 7. Have commissions been properly declared and accounted for? (Buying commissions may be omitted and selling commissions should be included in the transaction value.) 8. Has a correct exchange rate for a foreign currency been applied? 9. If a Customs value declaration form has been completed (in addition to the Customs declaration), is it supported by the importer’s records? 17 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 10. Where discounted prices have been declared, are they genuine discounts which have been earned? Are the discounts freely available to all potential buyers? 11. Are any payments made in advance for imported goods which have not been included in the declared value? 12. Is the Customs value declared very low in comparison with an onward sale of the goods to a third party? (This is not conclusive, but an unusually large profit margin for the goods concerned may indicate that the import value was under declared). 13. Is payment for the imported goods transferred through a third company? If yes, have the appropriate amounts been included in the Customs value? 14. Have any materials, components, etc. been provided free of charge or at a reduced price to the manufacturer/seller for incorporation into the imported goods? (possible “assist” under Article 8.1(b) of the WTO Valuation Agreement) 15. Is the importer party to any royalty or license agreement relevant to the imported goods? (possible inclusion of royalties or license fees in the transaction value under Article 8.1 (c) of the WTO Valuation Agreement). 16. Did the importer use a valuation method other than transaction value? If so, confirm that a transaction value cannot be determined. If no sale has taken place, this will be evident. Importers should be encouraged to consult with Customs before using an alternative method of value. 17. Are the annual payments made by the buyer to a particular seller higher than the value of annual sales made by the seller? (if available) B. COUNTRY OF ORIGIN 1. Are there any imports of products in which the country of origin declared has changed in the last year? Does the operator always use the same suppliers for the same origins or are there any changes? 2. Is the country of origin declared close to countries for which an anti-dumping duty or a countervailing duty has been introduced for identical goods or where a license is needed to import the goods? 18 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 3. Are the goods imported from geographically risky areas in terms of trade measures (e.g. anti-dumping duties, quotas, etc.)? 4. Is the same product imported from different countries? 5. Does a proof of origin exist? Has the appropriate proof been properly filled in? Is it valid? Are the proofs original documents (and not just photocopies)? Is the proof recorded in the Customs declaration? 6. Do the nature and quantity of the imported goods match the information in the proof of origin? 7. Have proofs of origin of goods imported by the operator systematically been issued retrospectively? 8. Does the seal or stamp on the proof of origin match the available list? 9. If the exporter is an approved one, is the approval number given? 10. Has a binding origin information (BOI) been issued to the operator? Do the products and the origins match the BOI? 11. Verify the transport route to establish if the rule about direct transport is fulfilled and/or if the transport route is suspicious/unexpected. 12. Is the country of dispatch/export inconsistent or in some way incompatible with the country of origin declared? 13. Does it seem likely that the country of origin is capable of producing the specific goods in the quantities imported? 14. Is the supplier/manufacturer entered as a creditor in the accounts? 15. Is the forwarding documentation consistent with the declared country of origin? 16. Have the payments been made to a party in a country that is different from the declared country of origin? Have the payments been made to a party other than the seller of the goods? (If possible, go through the stock and see the declared origin and barcodes on boxes, packing, wrappings and the goods.) 17. Is the supplier a trader or a producer? Is there any information that indicates that the goods have been sold many times before the import or that many different companies have been involved? Is there 19 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 anything that indicates that this has been done to get better treatment by Customs than is correct (preferential treatment, no anti-dumping duties, no restrictions, etc.)? C. TARIFF CLASSIFICATION 1. Has previous investigation concerning tariff classification been made? If so, what was the result of the investigation? 2. What are the routines used for classification of goods (pre-entry stage classification information/ruling, classification at the declaration processing stage, post-entry stage classification or a combination thereof)? 3. What categories of products does the operator import/export (e.g., food/chemicals/textiles/ machinery/etc. or parts/unassembled/incomplete/finished products)? 4. What products have the biggest volume? What products have the biggest value? 5. Are the commodity codes which are used consistent with the operator’s business? 6. Have any pre-entry binding tariff information/BTI/classification rulings been issued to the operator? Does the operator classify the goods in accordance with the BTI? 7. Has the operator been changing the classification pattern? What is the reason for such changes in tariff classification? 8. Is it possible to classify the goods declared under alternative codes? 9. Does the operator import/export products that could be subject to different duty treatment (e.g., higher or anti-dumping or countervailing duty), prohibitions, restrictions, laboratory or physical tests, technical standard certification, origin requirements, etc.? If so, who is the manufacturer? Has a correct certificate been issued? 10. Does the operator use commodity codes with low or zero duty rates? 11. Does the operator use commodity codes with tariff suspension? If so, are all the requirements for the suspension fulfilled? 20 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 12. Does the operator use commodity codes with preferential rate of duty or duty free treatment under trade agreements? 13. Are the operator’s products declared/classified under subheading codes that cover ‘other’ goods? Is this correct? 14. Does the operator declare parts where there are different duty measures/restrictions/etc. on the products assembled/completed/finished by using these parts? 15. Does the operator declare products where there are different duty measures/restrictions/etc. on the parts from which the declared product is assembled/completed/finished? 16. Is a sample taken by the auditor? Are brochures, technical descriptions, etc. requested? What was the result of the investigation? 17. Have the products been tested by a laboratory? Is the test done by Customs or by the operator? What was the result of the test? Are there any correspondences with the suppliers that allow the identification of the goods? D. END-USE 1. Does the end-use authorization exist? Is it valid? Are all the requirements for granting the authorization fulfilled? 2. Check the internal control system 2.1. What records are maintained by the operator? 2.2. Is the end-use record in accordance with the authorization and is it updated? (Check whether production and stock accounts have been kept. Check whether the stocks are present. Check whether the goods are described as end-use goods in the relevant document.) 2.3. Do the nature and quantity of the goods imported match those stated in the end-use authorization? 2.4. Does the operator have exports and/or internal sales of the same products? 2.5. How does the operator ensure the correctness of the Customs declarations? 2.6. Analysis of the transaction chain, i.e. contract order of raw materials confirmation order invoicing payment/reception of goods/entry to stock/Customs declaration for entry into the procedure/production process rate of yield results (including waste and loss) Customs declaration of discharge from the procedure. 21 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 2.7. Is there a quality control system and does it includes all goods? 3. Controls — Reception of the goods 3.1. Check whether there have been purchases of end-use products from other authorization holders within the country. 3.2. How does the operator ensure that all raw materials received are declared to Customs and immediately recorded in the stock account? 4. Controls — Production 4.1. Has the estimated period for assigning the goods to their end-use been met? 4.2. Are the resulting products covered by the authorization? (Check whether, in addition to the manufacture of the main products, other products (including waste) are generated.) 5. Controls — Destination 5.1. If the goods are transferred before the use, is the transferee an authorized holder? Has the operator proof that the receiver has indeed received the goods? 5.2. In case of export or destruction of the goods, have the Customs authorities approved and, if necessary, supervised these operations? E. CUSTOMS WAREHOUSING 1. Does the Customs warehouse authorization exist? Is it valid? Are all the requirements for granting the authorization fulfilled? 2. Is the amount of the security / bond (if required by the national administration) adequate? 3. Are goods under Customs control physically segregated from other goods in the warehouse? 4. Check the internal control system. 4.1. How does the operator to whom the goods are consigned ensure that all goods are declared to Customs? 4.2. When are the goods received entered in the stock records? 4.3. How often does a stock-take take place and which method is used? 4.4. Does the operator ensure the correctness of the Customs declaration? 4.5. How does the warehouse-keeper ensure that all entries/discharges from the procedure are recorded in warehouse stock accounts? 22 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 4.6. In case of a private warehouse, analyze the transaction chain, i.e. contract order order confirmation invoice entry to stocks Customs entry declaration payments Customs discharge declaration/leaving the warehouse/invoicing receiving payment (if relevant). In case of a public warehouse, analyze how the holder controls the entry of the goods (e.g. quantity, weight, description of the goods, etc.), the way out and the payment for the warehouse service. 4.7. Are the purchase and receipt of the goods done by the same people? 4.8. How are the entry and exit of goods in the warehouse linked with the invoicing system? 4.9. Is there an audit trail from the Customs declaration to the operator’s accounts? 4.10. Are usual forms of handling authorized? If yes, check if the conditions are met. 5. Controls — Entry to Customs warehouse and stock records 5.1. Do these facilities comply with the conditions stated in the authorization? 5.2. Are the goods kept in approved facilities, where applicable? (Ask for the warehouse stock list.) (Check whether warehouse accounts are made. Check whether warehouse accounts are kept of the individual consignments of goods.) 5.3. Is the stock record done according to all requirements? 5.4. When was the previous stock record done and by whom? 5.5. Make an inventory of selected goods in the warehouse. Do the results match the entry and discharge Customs declarations and the stock record presented to Customs? 5.6. Is there any processing of goods being undertaken that is not allowed? 5.7. Do the stock records match buyers’ and/or suppliers’ accounts? 5.8. Is there a link between stock records and the stock account? Do they match? 5.9. Does the authorization cover all the goods that are entered? (Some private Customs warehouse are only allowed to store some types of goods.) 6. Controls — Discharges from the warehouse 6.1. Is the correct procedure code for entry and discharge used? 6.2. Is it possible to backward trace goods from discharge to entry? 6.3. Do the quantity and quality of goods in the warehouse match those declared in Customs declarations that are not yet discharged? 6.4. In case of a private warehouse, does the discharge of the Customs declaration (in terms of quantity, quality, value and origin of the goods) match the relevant account files concerning suppliers, clients and payments? In case of public warehouses, does the discharge of the Customs declaration match the delivery note issued when the goods are delivered to the owner? 6.5. Are the procedures for the destruction of goods in the Customs warehouse carried out correctly? 6.6. Are there records concerning the destruction of such goods? 23 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 F. INWARD PROCESSING PROCEDURE 1. Does the inward processing authorization exist? Is it valid? 2. Are all the requirements for granting the authorization fulfilled, including the economic conditions? (An authorization is not needed when the imported goods have a Customs rate of zero, have preferential origin or are under tariff suspension, as those goods can be declared for ‘other inward processing’.) (Check whether the quarterly/monthly closing balances are submitted correctly.) 3. Is the amount of the security adequate? 4. Check the internal control system. 4.1. What records are maintained by the operator? 4.2. Is the inward procedure record in accordance with the authorization and is it updated? (Check whether the stocks are present. Check whether the goods are described as inward processing goods in the relevant document.) 4.3. Analysis of the transaction chain, i.e. contract order of raw materials confirmation order invoicing payment reception of goods entry to stock Customs declaration for entry into the procedure/production process rate of yield results, i.e. compensating products, secondary products, waste and loss Customs declaration of discharge from the procedure export or sales invoices receipt of payment. 4.4. How does the operator ensure that all received raw materials are declared to Customs and immediately recorded in the stock account? 4.5. How does the operator ensure the correctness of the Customs declarations? 4.6. Is there a quality control system and does it include all goods? 4.7. Are the entry and exit of the goods from the operator’s premises/production process linked with the invoicing system? 4.8. How does the operator control the goods that leave the storage premises to enter the production process? (Ascertain if there is an audit trail between Customs declaration and the accounts.) 5. Controls — Reception of the goods (Draw up an inventory of goods selected to be controlled.) 5.1. Are the goods entered to the procedure immediately recorded in the accounting system? 5.2. Are the goods recorded separately from the other products not being entered for the inward processing procedure? 5.3. Do the import invoices match the buyer’s and suppliers’ accounts? Check also the money movements for the payment of the invoices. 5.4. Do the suppliers’ accounts match the records entered in the inward processing account (e.g. warehouse inventory, entries in the productive process, etc.)? 24 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 5.5. Make a selection of goods received by the operator. Are they declared to Customs for entry in the procedure? 6. Controls — Production 6.1. Do the technical specifications of the products match the specifications declared to Customs? (Check whether the declared goods/product codes stated in connection with import and export are covered by the authorization.) 6.2. (Follow the production process based on technical specifications.) Are all the raw materials totally consumed? (If not, refer to discharge phase of the procedure.) 6.3. What is the true rate of yield? Does it match that declared to Customs? 6.4. Are production orders and production sheets used? 6.5. Verify the composition of the products through physical and/or laboratory analysis. 6.6. In relation to the goods entered to the procedure, do they match the compensating products produced, with regard to loss and waste? 6.7. Determine if the operator’s administrative systems allow the raw materials incorporated into the compensating products to be traced. 6.8. Are the operations done in the production process authorized by Customs? 6.9. If the operator imports or obtains similar goods that can be substituted for the declared goods, verify the suppliers and make cross-checks. 6.10. If equivalent goods are used, check also whether: 6.10.1. their use is authorized by Customs; 6.10.2. the goods belong under the same eight-digit code of the Customs tariff; 6.10.3. the goods have the same commercial quality; 6.10.4. the goods have the same technical properties as the imported goods; 6.10.5. the operator considers the materials as interchangeable, and if they are stored together. 7. Controls — Discharge from the procedure 7.1. How does the operator record their discharge from the procedure? 7.2. Do the export invoices match the records in sales and buyer’s accounts? 7.3. Do the export and other sales invoices match the Customs declarations of discharge? 7.4. Do the sales and buyer clients’ accounts match the inward processing records? 7.5. Do the results match the operator’s inventory and discharge records? 7.6. Analyze the inventory of compensating products. How does the operator record the entry of these products in the commercial area prior to their sale, where available? 7.7. Verify, through a check of the operator’s stock account, regularization or/and loss account records for possible losses. Are the scrap and waste recorded? Verify possible sales of scrap and waste. Was a Customs destination given in relation to the scrap and waste? 25 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 7.8. Check the time between the entry of goods for the procedure and the discharge from the procedure of the compensating products. Was the ‘first-in-first-out’ system used? Were compensating duties due and paid? If goods have been released for free circulation, has equalization interest been collected? G. OUTWARD PROCESSING PROCEDURE 1. Does the outward processing authorization exist? Is it valid? Are all the requirements for granting the authorization fulfilled? (An authorization is not needed when the imported goods have a Customs rate of zero, have preferential origin or are under tariff suspension, as those goods can be declared for ‘other outward processing’.) 2. Check the internal control system. 2.1. What records are maintained by the operator? 2.2. Is the outward procedure record in accordance with the authorization and is it updated? 2.3. Analyze the transaction chain, i.e. contract order reception of goods entry to stocks invoice payment Customs declaration production process processed goods sales invoices receipt of payments Customs declaration release for free circulation. 2.4. How does the operator ensure that all exported raw materials are declared to Customs? 2.5. How does the operator ensure the correctness of the Customs declarations? 2.6. Are the declared products — both exported and imported goods — (commodity codes) in line with the authorization? (Check whether the goods stated are covered by the authorization.) 3. Controls — Export of the goods 3.1. Has a sufficient amount of material been exported for the procedure? 3.2. Is there a match between the export and the transportation of the goods (quantities, weight)? 3.3. Has the exported material been previously imported at a zero duty rate? 4. Controls — Production of the goods 4.1. Has the procedure been completed within the time limit? 4.2. Are the goods being repaired free of charge? Are there invoices for repair cost? (Verify payments and correspondence.) 4.3. Is the replaced product exported (standard exchange system)? 5. Controls — Discharges from the procedure 5.1. What method is to be used (e.g. value added method or differential duty relief)? 26 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 5.2. Are there additional material costs or labor costs that should be added, for example production wages, all materials, freight, commissions, value of means of production, etc.? (If more operators are involved, remember to add materials and work delivered from the other operators.) 5.3. Is the value of the exported product correct? 5.4. Is the value of the imported product correct? 5.5. Is the calculation of duty correct (differential duty relief)? 5.6. Check whether there is specific export documentation for the re-imported goods. Is it possible to identify the exported goods in the re-imported goods? Is it possible to match the export and import documents? 5.7. When the goods are exported with preferential declaration (and re-imported as preferential goods; for example, cloth is exported and shirts are re-imported), check compliance with the rules concerning origin in accordance with the process list. H. PROCESSING UNDER CUSTOMS CONTROL 1. Does the processing under Customs control authorization exist? Is it valid? Are all the requirements for granting the authorization fulfilled? 2. Check the operator’s internal control system (for example, determine what records are maintained by the operator). 2.1. Analyze the transaction chain, i.e. contract order reception of goods entry to stocks invoice payment Customs declaration production process processed goods sales invoices receipt of payments Customs declaration release for free circulation. 2.2. How does the operator ensure that all the imported goods are declared to Customs and recorded in the processing under Customs control account? 2.3. How does the operator ensure the correctness of Customs declarations? 2.4. Is there a quality control system and does it include all goods? 2.5. How does the operator control the goods that enter the production process? 2.6. How is the movement of goods linked with the invoicing system? 3. Controls 3.1. Ask for an inventory of the goods. 3.2. Make a selection of goods received by the operator. Are they declared to Customs for entry in the procedure? 3.3. Do the imported goods match in quantity and quality those declared to Customs (analyze the suppliers’ and purchases’ account, invoices, etc.)? 27 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 3.4. Analyze the production process. Verify if the processing under Customs control is only used in relation to authorized goods and production processes. 3.5. Does the production process match that mentioned in the Customs authorization? 3.6. Is it possible to trace the imported goods in the processed products? 3.7. Are the imported goods and processed goods the same (quantity and quality) as those declared in the relevant Customs declaration? (To ascertain this, use technical information in production orders, suppliers and/or buyers or in laboratory analysis.) 3.8. Are the goods entered for the procedure immediately recorded in the accounting system? Are they recorded separately from the other goods that are processed but are not part of the procedure? 3.9. Do the import invoices match the purchases’ and suppliers’ account? Check also money movements for the payment of the import invoices. 3.10. Do the suppliers’ accounts match the records done in processing under the Customs control account? 3.11. Are the imported goods submitted to special commercial policies linked to origin or prohibition measures? 3.12. Check in the sales account, client account and payments if the Customs value of the processed goods is correctly declared. 3.13. Match supplies, sales and stock to verify if all the processed goods were released for free circulation. I. TEMPORARY IMPORTATION 1. Does the temporary importation authorization exist, if it is needed? Is it valid? Are all the requirements for granting the authorization fulfilled? Is the security / bond sufficient? 2. If goods were accompanied by an ATA Carnet, was this valid? 3. Controls of procedure 3.1. Have the temporary imported goods been re-exported? Are they exported under the same commodity codes as the imported goods? Were the goods used in accordance with the authorization? 3.2. Is the procedure completed within the time limit? 3.3. Check if there are transport documents covering the import and re-export. Are the imported quantity and weight being exported? Verify if the transport has taken place. 3.4. Is it possible to verify the identity of the goods under temporary importation? 3.5. When the goods are transferred to another operator, does this new operator meet the terms/requirements of the temporary importation? 28 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 3.6. Ascertain if duty is due. If so, check if it has been properly calculated. 4. Controls in account 4.1. Have the goods been entered in the accounts of the operator as a normal purchase of goods? Are there other transactions in the accounts relating to the goods such as services, loan of machines, leases, etc.? Is there a pro forma invoice or a possible sale contract which proves that the products are temporarily imported and will be re-exported? 4.2. Is there an application form for the receiver of the goods, in which is mentioned the temporary import of the goods and stating the purpose, the time period, the place of storage, etc.? J. DUAL-USE GOODS 1. Does the operator have an authorization (not necessarily from Customs) for dual-use goods when it is needed? 2. Has the operator applied and not been granted an authorization? 3. Does the operator have export to prohibited or risky destinations? 4. Do the operator’s goods contain possibly restricted products? If necessary, consult an expert. 5. Are these products being exported? 6. Are these products exported to prohibited (or risky) destinations or end-users? 7. Can the operator present an end-user certificate? 8. Does the invoice indicate different buyers and consignees? 9. Do the transport documents indicate a prohibited or risky destination or end-user? 10. Do other documents (e.g. orders, correspondence, etc.) indicate a prohibited or risky destination or end-user? 11. Do any documents indicate changes over time in the quality, performance, etc. of the product? Do these changes turn the product into a restricted item? 29 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 K. EXPORT VAT 1. Check the operator’s internal control system. 1.1. Analyze the transaction chain, i.e. contract order production (if relevant) sales invoice stock record reduction export transport or shipment payments received. 1.2. How is the sales order implemented? Does the customer get an order confirmation? 1.3. How does the operator ensure the correctness of Customs declarations? 1.4. How does the operator ensure that all goods exported are declared to Customs? 1.5. How is the exit from the operator’s premises recorded in the accounting/stock system? 1.6. Examine the operator’s procedures concerning exports and transportation. 2. Controls 2.1. Draw a flow chart of the operator’s procedures for export. 2.2. Compare export declarations with the operator’s account records. 2.3. Analyze the operator’s account records, select some exports and backwards match them to the relevant Customs declarations. 2.4. Is the declared value for export reasonable compared with prices of similar goods? 2.5. Do the exported goods have the same quality, quantity and value as those declared for export (i.e. check suppliers and/or buyers) orders, invoices or production orders, results of quality controls, etc.)? 2.6. Are the exported goods paid for? Does the amount of bank transfers in buyer accounts match the Customs declared value? Are the payments recorded in the operator’s accounting system? 2.7. Are the exported goods likely to fit in the containers or other packages declared to Customs? Does the weight of the goods declared to Customs match what is given in transport documentation? 2.8. If the exporter is also a manufacturer, was there sufficient stock available at the time of the export? 2.9. Has the transport really taken place? (Check databases, records of the transport operator, tachograph, shipment lists, transport contracts, bill of lading, etc. Check if the transport is paid and if the payment is accounted for.) 2.10. Make cross-checks, if necessary, with transport companies. 2.11. In cases where an exit certificate is issued, check its validity and authenticity. 2.12. Ask for mutual assistance from the country of destination. 30 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 3.3. Examination The audit of traders’ systems aims to provide assurance that a particular activity or process is being carried out in accordance with Customs rules and regulations. A systems audit, as the name implies, involves an examination of the entire business cycle rather than just the transactions themselves. Weaknesses in the systems are good indicators of possible non- compliance and can then be followed up with examination of specific transactions to test the system and establish the actual level of compliance. Verification of supporting documents is one of the core PCA procedures in order to determine the completeness, correctness, accuracy and authenticity of Customs declarations. This examination will include paper documents and electronic data, depending on the auditee’s record system, as well as related material from business partners and third parties involved in the transactions. In addition to accounting books, slips, worksheets and source documents being kept by the auditee, records could also include background information and internal audits information. If, during the course of an audit, the auditor suspects that a Customs offense has been committed, the audit team should communicate to the appropriate enforcement unit and provide relevant information needed to decide whether a formal investigation should be launched. It is important not to alert the importer of any such suspicions. All commercial and related information which is deemed confidential or which is provided on a confidential basis for the purposes of PCA shall be treated as such. Inspection of books and records Books and records to be inspected may be grouped as follows:  Business-related books and records - e.g., sales and purchase contracts, technical assistance contracts, commission contract, order sheets, processing instruction, manufacturing report, correspondences and other records relevant to Customs, including Customs declarations, commercial invoices, packing lists, bills of lading, product specification sheets, product brochures and other information needed to verify the accuracy of Customs declarations.  Account-related books and records – e.g., sets of account books, and all source documents such as L/Cs, bank statements, overseas remittance applications, and debit/credit notes. 31 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 The formalities of recordkeeping depend on national legal provisions on recordkeeping and will vary between businesses. Therefore, it is necessary to develop an understanding of the specific systems maintained by the auditee via information acquired during the pre-audit preparation and the audit itself, which can then be verified and tested accordingly. When books and records which are normally maintained by business entities are said to be not maintained or not available, the auditee should be asked for an explanation. Regarding the appearance of presented books and records, the auditor should note the following points:  As for books and records of the loose-leaf type, check page numbers or other sequential numbers in order to identify replacements and extraction of pages.  As for business-related documents, check whether all records of requested period are presented without omission.  The following general guidelines are recommended to be observed in the inspection of business-related books and records:  Pay attention to the order of filing. Extreme interval of date on sequential pages and a missing number of pages or other sequential numbers indicate extraction of documents;  Pay attention to differences in types and quality of paper used, styles, and signature. The quality and type of paper, form and signatures used for documents relating to intentional misconduct may be different to those of legitimate/genuine documents;  Pay attention to the source of documents. It should be noted that external documents, which are created by unrelated third parties, provide higher a higher level of reliability;  Pay attention to notes that are handwritten in a margin and inserted paper; matters relating to fraud and errors are often written in this way;  Pay attention to peculiar appearances on a page, such as an abnormally broad blank, an unusual crease, and unnecessary punch holes;  Examine the original document. Copies and duplicates have high risk of falsification;  Start the examination from documents which are for daily use, in case the auditee denies existence of records, or refuses them to present. Verification of the Customs value Note: Customs valuation is a complicated subject and it is highly recommended that Customs valuation experts are consulted in cases of doubt or in more complex situations. Customs is required to provide an opportunity to the importer to respond to doubts concerning the declared Customs value and provide the importer with written explanation regarding final determination of the value.2 2 WTO Valuation Agreement, Article 17 and Decision 6.1 of the WTO Committee on Customs Valuation 32 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 Books and relevant business records retained by the auditee are of major importance for the verification of Customs value. These books and records should indicate all business transactions. Through the examination of records, auditors are able to capture a comprehensive picture of a transaction which may indicate, for example, incorrect invoice price, undeclared separate/indirect payments and other omitted dutiable costs. As a result, auditors will be able to verify the Customs value. Price negotiations and discounts In cases where the buyer and seller are not related, there is an assumption that the price of imported goods was freely negotiated in order achieve the most favorable terms for the parties. The main driver will be the normal rules of supply and demand. Additionally, other pricing practices may be commonly used as part of a sales transaction. Discounts, for example, may be extended by the seller to the buyer under certain situations, including: - purchase of a certain quantity - prompt payment - cash payment - discount pricing for end of line/discontinued items - promotional pricing for new products Such discounts are normal commercial practice and may be allowed when determining the Customs value. The audit gives the opportunity to verify the legitimacy of the discount. The importer can be asked to produce information, often contained in the sales contract, which sets out the discount terms and conditions. Commercial literature may also be available which confirms the discount in question was freely available to any potential buyer who fulfills the criteria. The auditor can also confirm whether a discount has been taken up by the buyer, for example, where a prompt payment discount was offered, did the importer pay within the specified time and thus qualify for the discount? Where buyer and seller are related within the meaning of Article 1 of the WTO Valuation Agreement, there may be grounds for examining whether the price has been influenced by the relationship. Typically, it is difficult to prove price influence and it is recommended that Customs valuation specialists are consulted in such cases. Commercial price lists and related literature During the audit, the sellers’ pricing information may be obtained, including price lists, advertising literature or details of special offers. Although such information cannot be used to conclusively disprove a declared value, it may give an indication that an under declaration has occurred and the importer can be asked for an explanation. Payment terms Terms of payment should be verified through the examination of contracts, shipping documents, and payment records. Terms of payment may include advance payments, payment on delivery, 33 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 deferred payment and the payment by installments. The method of payment may be specified as cash bill of exchange, depending on the means of payment. As for the bill of exchange, it is divided into the Letter of Credit (L/C), the Document against Payment (D/P), and the Document against Acceptance (D/A), depending on the existence of L/C and the time of payment. Terms of Sale Terms of sale should be verified in order to determine whether additional costs are properly included or excluded in/from the declared value. Additional terms Additional conditions obligated to the buyer in the sales contract should be taken into account when verifying the Customs value, for example, where a buyer agrees to offset a seller's debt to him by reducing the price of the imported goods. Through examination of contracts and correspondence, the existence of additional conditions that affect the Customs value should be identified and considered in the context of Article 1 of the WTO Valuation Agreement. Separate payments The existence of separate payments related to the transaction in question, but not reflected in the invoice price, may be identified in the accounting books and records. Such payments may be includable as part of the transaction value and should be examined to check: - The purpose of the separate payment, which may be detailed in books and records such as contracts, correspondence and a payee's bills; and - The involvement of persons/companies other than the exporter in the import transactions such as a buying/selling agent, to whom payments have been made. -It is important not only to take into account payments made by the importer, but also payments made by the importer’s partners and shareholders. Examination of accounting records In the examination of accounts-related books and documents, the following points may indicate a low level of compliance and/or the possible existence of fraud:  Contradictions between figures and descriptions in account books and records  Records that have not been treated in accordance with generally accepted accounting principles. For instance, credit entries of purchase account, which usually has many debit entries, indicate the possibility that a transaction price was discounted or offset after the price was fixed  Related accounts should be examined. Under the double-entry-booking system, the information of one transaction is entered into at least two account titles. A debit entry of an account appears as a credit entry of another account. Therefore, it is important to trace the information from one account to the others to detect possible fraud and errors  The existence of second or “double” invoices for the same consignment 34 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2  Poor recordkeeping, arithmetical errors, untidy bookkeeping  Missing pages in accounts books  The importer is reluctant to respond to enquiries and gives misleading or unclear answers Inspection of computer-based accounts systems Customs personnel are routinely encountering information stored on computers or other electronic media. This media may contain information that may be hidden, protected from discovery or that can be easily destroyed. Specialist skills may be needed to examine data contained on computer systems maintained by the commercial operator. Physical inspection of the goods and premises The level of physical inspection of goods at the time of importation has drastically decreased over recent years in many countries. Selective physical checks can still be useful where based on credible risk intelligence. Physical checks during an audit are not normally a priority; in many cases, the goods will have been resold and are no longer in the possession of the auditee. Nevertheless, if the imported goods are still in the possession of the auditee at the time of the audit, a physical inspection could be considered to test the accuracy of import declarations in connection with such areas as quantity, classification and origin. If a physical inspection is not possible, quantity declarations can also be checked against the warehouse inventory documentation. A survey of the trader’s premises enables the auditor to compare physical operations with the description of the business derived from accounts and prior intelligence. The “life-cycle” of the goods can be followed from arrival through storage/warehousing, production/processing to eventual disposal. The auditor may also note other activities which may be of relevance and interest to Customs, for example, the presence of goods not associated with the company’s normal business or the expansion and development of new facilities which may indicate a diversification or changes to the business. Expansion of the audit to third parties A third-party audit is the examination of the business records kept by persons/companies other than the declarants in order to supplement an audit of the importer. In principle, the audit should achieve its objectives by examination of the importer. However, if the auditor encounters the following indications, a third-party audit should be considered: 35 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2  The importer has not retained sufficient records to secure conclusive evidence;  The auditor is unable to rely on records presented by the importer, because the records are false or manipulated;  The auditor is unable to determine whether the importer has made proper declarations, due to lack of evidence. Possible subjects3 of a third-party audit may include the following persons/companies: - Customs clearing agents - Persons/companies who consign goods to the importer - Persons/companies who acquire goods imported by the importer - Intermediary, broker and other agents involved in import transactions 3.4. Recording, review of findings and conclusions It is essential that the findings of an audit are thoroughly documented. Notes, calculations, and written records of procedures performed during the audit should be adequate to allow a comprehensive report to be written. Auditors should obtain sufficient relevant and reliable evidence to form a sound basis for conclusion. Ensure that any documentation relevant to the audit and any notes taken are maintained safely and securely. Receipts should be issued both in respect of documentation removed and samples taken as an aid to classification. Having concluded the examination of the trader’s books and records, the auditor should summarize the findings to date, considering all aspects of the audit, including the inspection of the premises, results of physical checks and review all the working papers, etc. in preparation for the audit report to the trader. A formal meeting should be held with the auditee to present and discuss the conclusion and findings. Where appropriate, the auditor/audit team explains his/her observations on the causes of problem areas and recommends specific actions to remedy them. It also provides an opportunity for the auditee to give any explanations needed to assist preparation of the final report. 3 Note: the subjects of the third-party audit are likely to exclude overseas persons/companies because of limitations of the legal jurisdiction of the Customs authority. 36 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 The trader should be made aware of the fact that:  The meeting is to convey the results of the audit to the trader, and will be followed by a written report;  The results only apply to the period audited;  Where documents/samples have been taken for verification, the audit may be re-opened;  They may be liable to audit again at any time in the future. The auditor should present a summary of the audit findings to the company officials. Any negligence and errors should be brought to their attention and the necessary action to avoid repetition of these should be discussed. Where errors in relation to a trader’s procedures have been discovered and documented they must be discussed during the final meeting. The auditor should make recommendations to ensure that corrective action is taken. The auditor should also agree an implementation timetable with the trader for the necessary changes. The trader should be requested to reply in writing within the time set by Customs, indicating the action management has taken, or intends to take, as a result of the audit. In most cases, agreement is reached once the auditee accepts the auditor’s conclusion. If formal agreement is not reached, the auditor should respect the auditee’s right to request a review or appeal as provided in national legislation and provide any reasonable assistance requested to facilitate the process. 3.5. Reporting The auditor/audit team should prepare a final report and present a copy to the auditee, if in line with national laws and provisions. A copy should also be sent to the responsible Customs offices and units for the settlement of any issue which has arisen. The documentary form of the audit report may differ in accordance with the manner of official documentation of respective countries. The contents of the audit report may also vary depending on the PCA objectives of respective countries. In general, the report should contain key findings and a conclusion. 37 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 SUGGESTED CHECKLIST FOR THE FINAL REPORT 1) Dates of visit(s); 2) Name and position in company of person(s) interviewed; 3) Company status: -Legal form (e.g. incorporated company, partnership, single ownership, etc) -Capital, held by whom? -List of related persons -List of buyers who import similar goods 4) Confirmation that the signature on the value declaration (if required) was made by a representative of the company, and that the signatory was in full possession of the facts and entitled to sign the forms; 5) Principal types of goods imported (branded articles, raw materials, etc.); 6) Countries from which the goods are imported; 7) Purposes for which the goods are imported, e.g. own use, stock, further manufacture, resale as imported; 8) Importer’s function, e.g. manufacturer, distributor, buying or selling agent, distribution or stock agent, broker; 9) Nature of transaction, e.g. purchase, leasing, hiring or free consignments, etc.; 10) Details of procedures undertaken in auditing records and documents, whether held in the computer or not; 11) Settlement details with respect to the procedure followed by the importer in paying for his goods; 12) Details of any irregularities; 13) Details of any under or overpayments identified during the audit; 14) Any specific action the Customs administration has instructed the trader to take; 15) Disagreement on the conclusions and findings of the audit; 16) Auditee’s right of appeal. 38 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 During the field audit and the preparation of the report, the auditor/audit team should formulate opinions as to whether the auditee is conforming to Customs laws and regulations and, if not, what measures should be taken to correct irregularities. If applicable, the auditor/audit team consults with relevant Customs experts on valuation, classification, etc. for their technical advice. The report may also be reviewed by a senior auditor or PCA manager, as appropriate. This process may result in points of clarification being raised or inaccuracies caused by the auditor found which may then be corrected. The PCA report is a prime intelligence source for the PCA management. For this reason it is important to retain and store copies of all reports for future PCA planning and the updating of risk intelligence. 3.6. Evaluation and follow-up It is Customs’ responsibility to take appropriate action based upon the audit findings. Customs administrations should develop a mechanism to assess and evaluate the success of the PCA program. This may include:  An improvement of compliance levels;  Additional revenue collected;  Number of investigation referrals;  Cost/benefit analysis. If the audit report recommends that the auditee or Customs takes specific actions, a follow-up review should be conducted to determine if the corrective action was taken and whether the desired results were obtained. As appropriate, the PCA unit may carry out follow-up checks via a desk audit or a further visit to the auditee's premises. 39 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 4. IRREGULARITIES Irregularity means the breach of laws and regulations, regardless of its cause, such as deliberate intention (fraud), negligence, or simple mistake (error). Awareness of the various types of irregularities is crucial to implement efficient and effective PCA for the following reasons:  It contributes to identifying potential risk areas. Existence of possible fraud, negligence and errors already indicates potential risk areas.  It contributes to clarifying types of information that should constitute the auditee’s profile, which is necessary for appropriate assessment of an auditee’s risk.  It contributes to clarifying types of records that should be examined in field audits. 4.1. Fraud, negligence and errors Fraud means the wilful intent of a taxpayer to evade a tax. More specifically, in terms of fraud against Customs laws and regulations, "commercial fraud" can be described as follows: “Any offense against statutory or regulatory provisions which Customs are responsible for enforcing, committed in order to: (a) Evade, or attempt to evade, payment of duties/levies/taxes on movements of commercial goods; and/or (b) Evade, or attempt to evade, any prohibition or restrictions applicable to commercial goods; and/or (c) Receive, or attempt to receive, any repayments, subsidies or other disbursements to which there is no proper entitlement; and/or (d) Obtain, or attempt to obtain, illicit commercial advantage injurious to the principle and practice of legitimate business competition.” Negligence means a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the given circumstances. The term covers: (a) Omission of something that a reasonable person, guided by the considerations that ordinarily regulate the conduct of human beings, would do, and (b) Doing something that a prudent, reasonable person would not do. The difference between fraud and negligence is that under fraud, there must be intent to commit tax/duty evasion. There may be penalties for negligence according to respective national legislation. In these Guidelines, error means a mistake in a Customs declaration. 40 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 4.2. Indication of serious offense In the course of an audit, an auditor will from time to time encounter strong indicators suggesting a serious offense. Two main types of evidence arise in tax offenses: - i.e. (1) documentary evidence; and (2) statements by the taxpayer. As auditors are not involved in the investigation of cases with a view to criminal prosecution, they should deal with such evidence with a different approach. Subject to the in-house arrangements, documentary evidence of an offense should be immediately referred via the Head of the PCA Unit to the competent investigation authority for consideration whether or not the case is suitable for investigation with a view to prosecution. If the case is considered suitable to be so investigated, the audit is terminated. 41 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 ANNEX: CASE STUDIES Case 1: Misclassification, Romania Following a post-clearance audit in company X, it was noted that the company had imported goods called “lathe centres” from a Canadian manufacturer. The first two deliveries had been correctly classified in tariff subheading 8458.19.40.00 (Customs duty = 2.7%), whereas the subsequent deliveries had been falsely classified in tariff subheadings 8466.93.00.00 (Customs duty = 1.5%) and 8482.99.00.00 (Customs duty = 8%). In addition, according to the audits of the financial/accounting entries, external orders for a value of 6,277,308 USD were identified, but only 5,191,700 USD had been declared to Customs, hence a discrepancy of 1,085,608 USD. This discrepancy stems from the fact that company X had only declared the partial invoices and had not taken the final invoices into account. Case 2: Duty-free shop fraud, Romania During an audit conducted at the duty-free shop at the Bechet border crossing point, the following Customs offenses were discovered: - excess goods (eau de toilette, beverages, rum, tequila, cigarettes, vodka) for which there were no origin documents; these goods were seized with a view to their confiscation; - missing goods (beer, coffee, cognac, gin, liqueurs, perfume, beverages, rum, tequila, cigarettes, whisky, vodka, vermouth), which had been removed while subject to Customs surveillance; as it proved impossible to locate these goods, the company concerned was obliged to pay their value (i.e., Customs value plus import duties); - for violating the Customs law in the aforementioned cases, and for failing to comply with the terms of the warehousing procedure, the economic operator had three fines imposed upon him. Case 3: Use of the imported goods for other than the specified purpose, Romania A Romanian company received unwarranted exemptions from import VAT, for raw materials. An audit on the company, carried out on the basis of a risk analysis, revealed a Customs debt to the state budget of 739,206 RON, because the company had declared in the course of the import formalities that the imported raw materials would be used in the car manufacturing industry, whereas in reality they were used in the furniture-making industry. The company did not comply with the provisions of the Ministry of Finance decree issued for the application of the law on the procedure for granting certificates of exemption from import VAT. Case 4: Misdescription of imported goods, Italy A Customs audit was carried out on a joint stock company, in order to check on the Customs declarations presented and how they matched with the accounting records found, whether mandatory or optional. The official representatives of the company audited were found to have evaded the payment of anti-dumping duties and Value Added Tax on goods (CFL-i lamps of Chinese origin), thus rendering themselves liable for offenses provided for in, and sanctioned by, the penal code. An analysis of the business correspondence and tax documentation obtained from the company revealed discrepancies between the particulars relating to the tariff classification and the origin of the goods traded. The fraudulent Customs declarations uncovered as a result of the audit related to two different methods of tax evasion: a) Evading the payment of anti-dumping duties and VAT on CFL-i lamps of Chinese origin, by presenting a declaration with different goods for inspection (halogen lamps and/or other lighting appliances) than 42 GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) – VOLUME 2 those actually imported (CFL-i lamps). b) Presenting Customs declarations showing an origin different from the true origin of the goods. Case 5: Romania As a result of suspicions aroused during documentary controls or auditing of economic operators, post- clearance controls were requested on the certificates of origin for several products. Following correspondence with the Customs administrations of Germany and Italy concerning the post-clearance controls on evidence of origin presented by the importers of used tires, it was established that the imported goods were not originating, under the terms of the Romania EU Agreement, and could not benefit from the preferential tariff regime. Consequently, offense reports were made out against the companies concerned, establishing the amount of the Customs debt payable to the state budget. Case 6: Ireland A US-based company was supplying plastic bottles on a Delivered Duty Paid basis to an Irish customer. An Irish Customs clearance agent was acting on behalf of the supplier in relation to the payment of Customs duties and was acting on behalf of the purchaser in relation to the VAT payment on the importation. The commercial documentation was supplied by the US company to the Irish Customs clearance agent. During a Customs audit of the importer’s records, officers found the corresponding invoices to contain a higher value (up to 100% higher) than those attached to the Customs declaration. The importer was not aware of the invoices attached to the Customs declaration and had obtained his invoices direct from his supplier. His payment records reflected the higher value. An examination of fax transmission/reception data at the Customs clearance agent’s office confirmed that the lower value invoices had been supplied directly by the US supplier to the clearance agent. Case 7: Ireland An Irish importer purchasing vitamin supplements from a US-based supplier was selected for a Customs audit. Officers suspected that values shown on the supplier’s invoices appeared to be low compared to the sales value of the same product. A detailed examination of the importer’s payment records showed payments considerably higher than the invoices presented for Customs clearance. Scrutiny of the invoices held by the importer showed that some lines on the invoices presented for Customs clearance had been altered in the following manner: Original Invoice: 1000 packages each $11.50 = $11,500.00 Altered Invoice” 1000 packages each $ 1.50 = $1,500.00 Commercial documentation was forwarded by the US company directly to the importer. The importer in turn forwarded the documentation (including the altered invoices) to the Customs clearance agent by fax. These invoices were used for Customs clearance. The practise had been ongoing for two years. Case 8: Sweden An incorrect Customs value was discovered when auditing an importing company. In 2006, some of the importing company’s suppliers began to issue two invoices for each shipment, in most cases an A- invoice and a B-invoice. The first invoice included the actual costs of the goods and the se

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