Focus

CADENA, a blockchain enabled solution for the implementation of Mutual Recognition Arrangements/Agreements

By Sandra Corcuera Santamaria, Inter-American Development Bank

The Inter-American Development Bank (IADB) has been supporting the development of a blockchain solution to enable automated, secure and efficient information sharing on Authorized Economic Operators (AEOs) among the Customs administrations of Mexico, Peru and Costa Rica to ensure the efficient implementation of Mutual Recognition Arrangements/Agreements (MRAs).

Almost 80 countries have developed AEO programmes worldwide, and some of them have signed or are in the process of signing MRAs. To date, a record number of 60 MRAs have been signed and up to 40 more are currently being negotiated.

Besides “traditional” bilateral agreements, multilateral or plurilateral agreements have also emerged. The most recent MRA of this nature was concluded in 2018 by the Customs administrations of Colombia, Chile, Mexico and Peru, the four countries which form the Pacific Alliance trade bloc, the most recent regional integration initiative in Latin America.

In the Latin American and Caribbean region, three more multilateral MRAs are being negotiated among Central American countries (Costa Rica, El Salvador, Guatemala and Panama, with Honduras as an observer), the Andean Community countries (Bolivia, Colombia, Ecuador and Peru), and the countries of the Mercosur trade bloc (Argentina, Brazil, Paraguay and Uruguay). In other regions of the world, countries are also actively engaged in AEO regional initiatives (the East African Community, for example) and/or negotiating multilateral MRAs (the Greater Tumen Initiative, in Northeast Asia).

Challenges

The deployment of AEO programmes and the propagation of MRAs around the world are positive developments as they contribute to securing the international trade supply chain, whilst enhancing trade facilitation. However, can MRAs be effectively implemented and offer traders the benefits they were promised?

In theory, when Customs administrations sign an MRA, AEO certified companies receive benefits in all the countries which are parties to the MRA. These benefits are listed in the MRA and can take the form of a reduction in physical and documentary Customs inspections as the Customs risk management system of a Customs administration recognizes the shipment as AEO certified from another Customs administration or that it should be given priority treatment if it is selected for inspection. These measures, which are not exhaustive, have a positive impact on commercial profits as they reduce the time and costs needed to complete a transaction.

In practice, however, implementing such measures in a secure manner is still problematic – a situation which limits the capacity to provide benefits in a secure and timely manner. The MRAs are premised on the principle of seamless exchange of information on AEO certified companies among the countries participating in the MRA, in order for them to be able to identify each other’s AEO certified companies and extend mutually agreed benefits.

To inform each other, designated Customs officers in each administration send, by email, an excel file containing the data elements that the countries agreed to exchange on their respective AEOs. Customs administrations engaged in an MRA also determine the period during which data should be exchanged, which is usually monthly. These data elements are incorporated by each of the officers into their risk management system so that import operations associated with a foreign AEO from a country with which an MRA has been signed are graded more trustworthy in the Customs risk management system.

There are, at this time, very few mechanisms enabling the conduct of an automated, secure and real time exchange of data on AEO certificates. Although some initiatives have been undertaken to automate the exchange of AEO master data, many countries still use emails.

This raises several problems:

  • The current method to exchange data entails risks. When you send an email, the message leaves your email provider’s server and travels across the Internet. You have no idea how many servers the message will pass through between the moment you send it and the moment the recipient actually receives it, and you don’t know who has access to those servers. While you can encrypt your email server connection and use encryption protocols to send it, it’s not always possible to ensure that the recipient has the same set of security practices in place. In other words, you might have securely sent your documents, but that does not mean they were delivered securely. The AEO programme is all about the security of the supply chain. Records and data related to these companies should be exchanged risk free.   

 

  • As data is not exchanged in real time, but monthly or periodically, benefits cannot be granted immediately. Firms can lose profits during a monthly cycle depending on when they are granted AEO certification and when the exchange of data is conducted between Customs administrations participating in the MRA.

 

  • The ability to react to a suspension, cancellation or withdrawal of an AEO status is reduced for the same given reason above. There could be a delay between the actual cancellation of the AEO certificate and the actual communication advising the other Customs administration of the development. In this case, this situation poses a security risk since the firm has ceased to be reliable and trusted, but will still be treated as if it was. This may have a negative effect on trust and security in the supply chain, which is shared by the countries participating in the MRA.

Blockchain as a solution

To solve these issues and set up a secure data exchange mechanism, AEO programme officers and information technology (IT) specialists from Mexico, Peru and Costa Rica Customs have been working together with Microsoft and the IADB to develop the business functionalities and the technological architecture of an application called CADENA, which is based on blockchain technology. Currently, the three Customs administrations are in the validation phase and the solution is being tested before going into production.

A blockchain solution offers concrete advantages for the management of the AEO certification process and the implementation of MRAs, making it possible to record and share transactions, according to an agreed protocol among a group of parties, with each transaction being secured and protected by an immutable audit trail.

CADENA enables Customs administrations, which engage in an MRA, to share a single view of the status of an AEO certificate in real time while ensuring that the highest standards of security, traceability, and confidentiality are applied to the data. CADENA also enables the private sector to access information about its certificate, increasing trust and transparency and, ultimately, the active participation of the private sector. Further, it facilitates automated validation of AEOs under an MRA, using smart contracts.

The key imperative in an MRA process is to assign a unique number to each AEO that can be used across the supply chain and which is recognized by all the MRA’s partners. CADENA makes use of WCO standards and the globally unique Trader Identification Number (TIN) format, and its underlying AEO master data which provides a complete set of information relating to the AEO.

Preliminary results obtained during the validation phase point to important benefits for Customs administrations, which will translate into advantages and/or benefits for the private sector as follows:

 

  • CADENA brings efficiency and effectiveness to MRA management. Customs administrations now have a digitalized, automated, secured, reliable mechanism for sharing information on AEO certificates.

 

  • CADENA guarantees the integrity of the data and enables access to the data to be managed by granting different roles and permissions to users.

 

  • CADENA guarantees traders that they will be able to enjoy MRA benefits from the moment they receive their certification.

 

  • CADENA promotes transparency by allowing firms to access information related to their certificate, as well as the list of other AEO certified companies in the countries which are part of the MRA.

 

  • CADENA strengthens the overall security of supply chains by ensuring that information on suspensions and cancellations executed by a Customs administration and withdrawals by companies is registered and shared in real time.

The road ahead

CADENA was developed thanks to the innovative drive of the Mexico, Peru and Costa Rica Customs administrations, supported by the IADB and Microsoft. It illustrates how a transformative technology can help to improve Customs and border management.

Although it addresses a specific challenge, namely MRA implementation, CADENA demonstrated during the proof of concept phase that is could have many other functionalities which are now being considered for further development.

Among other things, it could be expanded to automate and manage the whole AEO certification process, promoting both efficiency and auditing traceability. It could also be integrated with other Customs systems, such as risk management applications, thereby alleviating a range of inefficiencies while spurring change and modernization within Customs.

CADENA can be scaled for other countries to join and can also interoperate with other blockchains and entities, making it possible to leverage the single version of truth about AEO certified operators for insurance, tax and trade finance purposes, for example.

These are just some of the new and exciting additional functionalities that could be added to the solution. Based on the blockchain technology, CADENA aligns smartly with the principles of the AEO programme. Both were brought to life as innovations in the 21st century, and are addressing the much-needed component of trust in the international trade supply chain.

 

More information
sandracs@iadb.org

 

IADB and the AEO programme

In the last decade, the Inter-American Development Bank has supported Latin American and Caribbean (LAC) countries in the design and implementation of AEO programmes and has been facilitating the negotiations of a significant number of MRAs in the region.

In addition, the IADB has conducted research studies on the impact of the AEO programme on trade and exports, and has also developed virtual training products, including a “Massive Open Online Course (MOOC)” to strengthen knowledge on AEOs among Customs officials and other government border agencies as well as among the firms and companies interested in being certified as an AEO.

By supporting the development of CADENA and actively promoting the use of an innovative technology to manage AEO programmes, the IADB’s AEO related assistance reaches a new dimension.