Conducting post-clearance audit (PCA) is a means to measure and improve trader compliance. The PCA process itself consists of a structured examination, after Customs has released the cargo, of the relevant commercial data, sales contracts, financial and non-financial records, physical stock and other trader assets. A well-conceived process, PCA is recognized as the best method to recover revenues lost through under-declaration, misclassification and misdeclaration of origin. Implementing a robust PCA process also helps enhance risk management processes by providing a true assessment of trader compliance levels. Furthermore, it enables a Customs administration to develop a trader segmentation programme to distinguish between traders based on their respective compliance levels, thus contributing to effective risk management and reducing the need for Customs intervention at the border for compliant traders. In addition, it increases the transparency of the administration’s taxation process, which significantly contributes to increased trust in the Customs administration from the business sector.

In 1996, the Mongolian Customs General Administration (MCGA) established a PCA department, making PCA an essential part of its Customs declaration control process. As foreign trade turnover increased significantly over the decades that followed, the Administration reformulated its strategic goals for the period 2021 to 2024 and decided to review its processes to determine the best way to reach those goals.

After reviewing the international standards that Mongolia had ratified, such as the WCO Revised Kyoto Convention (RKC) and the WTO Trade Facilitation Agreement (TFA), the Administration recognized the need for substantial improvements to the PCA system. Aligning the PCA with the WCO PCA Guidelines and Article 7.5 of the WTO TFA was deemed crucial for achieving fair and efficient revenue collection.

As a result, in March 2022, the Administration sought support from the WCO Secretariat. With funding provided by the Customs Cooperation Fund of Japan, a multi-year project was initiated to enhance the competence of the MCGA’s PCA department.

The WCO Secretariat made available a team of experts to carry out a diagnostic assessment in August 2022. The experts assessed the existing legal framework, and human resource and institutional arrangements, as well as the PCA methodologies and techniques in use. They then identified a number of gaps and made several recommendations aimed at helping the MCGA to strengthen its PCA capacity in line with WCO guidelines and international best practices. Based on their findings, the MCGA developed a work plan to implement capacity-building activities over a multi-year period, which was subsequently approved by the Deputy Director of the MCGA in December 2022.

The MCGA ensured that the initiative was given the necessary attention and resources by designating a main point of contact to liaise with the WCO experts and by establishing a PCA team to work with those experts on implementing their recommendations. The contact person was able to facilitate seamless communication and collaboration with the WCO experts, while the dedicated work team focused on implementing the reform measures effectively.

Auditing is a specialist process. In addition to in-depth Customs knowledge, a number of specific skills are required, such as accounting, data analysis and audit techniques. MCGA PCA officers needed to strengthen their knowledge and know-how in certain areas, particularly in transfer pricing, which is important for auditing multinational companies. They also had some limitations in their knowledge and experience of using an automated processing system for selecting auditees and tended to focus more on transaction-based rather than system-based controls (PCA involves examining trader systems and records, and not just historical declaration data and information).

To improve this situation, the WCO experts organized a training course in April 2023 for officers in charge of PCA operations, senior management and heads of relevant departments to ensure that they all had a good understanding of key concepts such as the audit cycle, a risk-based compliance approach or trader segmentation. They discussed techniques for data analysis and explained how risk indicators used for controlling the clearance process differ from those used for PCA. They also insisted on the need to develop effective cooperation and exchange of information mechanisms with other government agencies, in particular with the tax authority.

Another training course conducted in September 2023 initiated the development of standard operating procedures (SOPs). Additionally, participants discussed the development of engagement and communication strategies with external stakeholders and the tax authorities, including for the exchange of information in PCA operations.

Based on the work plan, the MCGA created a working group to draft proposals for amendments to the Mongolian Customs Law. Together with all Customs staff involved in the legal reform, the WCO experts examined procedures related to the execution of an audit through its different phases (targeting, planning, notification, meetings, reporting), as well as techniques and methods to conduct an audit (desk audits, on-site audits) and different types of audit (transaction-based audit, comprehensive audit, system-based audit).

They identified several changes to be made in the national legislation, including with regard to the way the auditor’s powers should be exercised in order not to restrict traders’ freedom of economic activity. The experts also recommended separating the audit and prosecution functions. The primary objective of post-clearance audits is to improve importer compliance. When auditors are also responsible for prosecuting and imposing penalties, it creates the potential for conflicts of interest and reinforces the perception that post-clearance audits are solely punitive. This can hinder importer cooperation. By separating post-clearance audits from penalty processing, Customs can promote trader cooperation and compliance.

It was also observed that the Mongolian Customs Law currently lacks provisions that facilitate compliance, such as providing traders with the opportunity to self-amend their declarations without incurring penalties, or applying penalties according to the seriousness of the fault or misdemeanour. The WCO experts therefore recommended to review the penalty scheme and implement measures encouraging compliance such as a voluntary disclosure programme enabling declarants to correct their declaration once the goods have been released without incurring penalties, in line with Chapter 3 Standards 3.27[1], 3.28[2] and 3.39[3] of the WCO Revised Kyoto Convention and the provisions of paragraph 3.6 of Article 6[4] and paragraph 1.1 of Article 12[5] of the WTO Trade Facilitation Agreement.

The WCO experts worked with the MCGA’s staff on developing standard operating procedures (SOPs). Here again, training was organized to introduce best practices in this field and provide auditors with practical guidance, including an SOP model. The SOPs which were developed are all in accordance with international standards and WCO PCA tools.

They also took into account concerns raised and suggestions made by staff thanks to a feedback mechanism set up by the Administration. This input was regularly reviewed and evaluated to ensure that it addressed the challenges and needs of staff appropriately, and it was then used to make any necessary adjustments to the SOPs.

The MCGA then extended its PCA department and hired new auditors who were recruited based on their experience working in Customs. In order to enable the Administration to train these new auditors in the new SOPs, a tailored training package was developed. This phase of the work plan involved both WCO and MCGA experts.

Both groups of experts also looked at developing communication strategies to engage with internal and external stakeholders. They examined effective collaboration schemes with various units such as those in charge of risk management, Customs clearance and cross-border operations.

Engagement with external stakeholders, including the tax authority and the business community, was also addressed. The WCO Guidelines for Strengthening Cooperation and the Exchanging of Information between Customs and Tax Authorities at the National Level, especially the section related to the PCA, were introduced. It is worth noting that, although Mongolian Customs shares information with the tax authority, the latter does not reciprocate, even though the information it collects is useful for the creation of trader profiles.

The need for awareness programmes for economic operators was highlighted, especially to ensure that they understand PCA processes as well as their rights and obligations, such as record-keeping.

MCGA and WCO representatives encountered several challenges when deploying the PCA work plan, and this enabled them to identify some lessons learned from the experience.

In Mongolia, the senior management team played a pivotal role in both initiating and creating an environment conducive to change. Among other things, the team actively communicated with both internal and external stakeholders to garner support for the reforms. This steadfast support was fundamental to the success of the reform project.

If Customs Administration must take ownership of their reform and modernization programmes, obtaining external assistance can be of great help. The WCO experts’ engagement was deemed essential to the successful implementation of the MCGA’s PCA work plan.

One of the primary challenges faced during the reform was the lack of sufficient personnel to carry out the necessary changes. This shortage of staff posed an obstacle to ensuring that all aspects of the reform were adequately addressed and implemented.

A lack of information and understanding led to resistance among staff in adopting the new approach and working methods It was therefore essential to provide staff with comprehensive training in order to help them understand why they were necessary. The WCO experts held extensive discussions with staff, allowing them to share their views and concerns so as to avoid any misunderstandings or de-escalate any frustration they may have felt. They not only shared their knowledge, but also addressed any doubts and concerns. Open communication helped to build consensus, enhance team cohesion and ensure a unified approach to implementing the reforms.

Inconsistent application of laws and regulations related to PCA presented another major challenge. Extensive consultations were held with the legal staff to modify laws and regulations and ensure that they support the new PCA operations. Aligning the legal framework has not yet been fully completed, and these efforts will continue going forward.

Ongoing training and professional development are essential for keeping Customs officers updated with developments in matters related to PCA, for example the introduction of new methodologies, technologies or practices.

Flexibility and adaptability are crucial skills for individuals responsible for driving reforms. They must foster dialogue and be open to adjusting the reform plan as needed based on staff feedback and changing circumstances.

By embracing openness and transparency, organizations can foster a supportive environment for reform, build a culture of trust and achieve successful outcomes. Holding regular and open discussions with staff and stakeholders is crucial in order to ensure that differing opinions are heard, increase levels of understanding among all parties and ultimately avoid resistance to change.

The successful collaboration between the MCGA staff and WCO experts has been instrumental in transforming the PCA system in Mongolia, marking a significant milestone in aligning Customs operations with international standards.

In early October 2024, both parties reviewed achievements and identified areas for further improvement and actions. The development of new SOPs was seen as the main achievement as well as the training of auditors, including of the new recruits to the PCA department, which where the number of staff has doubled from between 2022 to and 2023.

The MCGA is still working on drafting amendments to the Mongolian Customs Law, including those developed as part of the reform of the PCA process. Once finalized, they will be submitted to the Mongolian Parliament. Following their approval, the new Mongolian Customs Law will reflect the PCA-related provisions of the RKC, which was ratified by Mongolia in 2006.

Mongolian Customs has also reviewed its risk-based compliance strategy and developed an annual audit plan. Moreover, the Risk Management Department of Mongolian Customs is currently introducing a trader segmentation approach. This initiative is based on the research paper drafted several years ago under the WCO’s Career Development Programme by the Professional Associate who became Head of the Risk Management Department in 2023.

The revision of the Memorandum of Understanding (MOU) with the tax authority is currently under way, aiming to improve liaison and information exchange processes in order to enhance the effectiveness and efficiency of PCA implementation. The formulation of strategies related to engagement with external stakeholders is also planned.

More information
bdsh@customs.gov.mn

[1] “The Customs shall permit the declarant to amend the Goods declaration that has already been lodged, provided that when the request is received they have not begun to check the Goods declaration or to examine the goods.” Standard 3.27, Chapter 3, WCO RKC.

[2] “The Customs shall permit the declarant to amend the Goods declaration if a request is received after checking of the Goods declaration has commenced, if the reasons given by the declarant are deemed valid by the Customs.” Standard 3.28, Chapter 3, WCO RKC.

[3] “The Customs shall not impose substantial penalties for errors where they are satisfied that such errors are inadvertent and that there has been no fraudulent intent or gross negligence. Where they consider it necessary to discourage a repetition of such errors, a penalty may be imposed but shall be no greater than is necessary for this purpose.” Standard 3.39, Chapter 3, WCO RKC.

[4] “When a person voluntarily discloses to a Member’s customs administration the circumstances of a breach of a customs law, regulation, or procedural requirement prior to the discovery of the breach by the customs administration, the Member is encouraged to, where appropriate, consider this fact as a potential mitigating factor when establishing a penalty for that person.” Paragraph 3.6 of Article 6, WTO TFA.

[5] “Members agree on the importance of ensuring that traders are aware of their compliance obligations, encouraging voluntary compliance to allow importers to self-correct without penalty in appropriate circumstances, and applying compliance measures to initiate stronger measures for non-compliant traders.” Paragraph 1.1 of Article 12, WTO TFA.