INTRODUCTION

'TORONTO, October 10, 1996….Speaking in Toronto today, Revenue Minister Jane Stewart today announced a series of measures that will streamline the customs commercial clearance process. These measures, developed as part of the department's Smart Border strategy, will use modern risk management techniques, state-of-the-art technology, and tailored processing options to help business be more competitive in a global economy". So read the first paragraph of the press release which introduced the importing community to the NEW BUSINESS RELATIONSHIP (NBR). Since then we have heard much of this initiative. Perhaps the most obvious impact of the NBR was the requirement to convert importer numbers to the new Business Number (BN) format. The NBR is much like an iceberg, with much of the process massed below the surface. Periodic Verification (since re-named Multi-Program Verification) is a major component of the NBR. Why was it necessary to streamline the customs commercial clearance process in the first place?

EVOLUTION OF CUSTOMS

The traditional activities and processes associated with border protection and revenue collection had to be redefined and re-engineered to reflect the changes triggered by NAFTA, WTO (formerly GATT), increasing volumes and the requirements to reduce administrative costs. The emergence of the Trade Administration Services structure, targeting the areas of Appeals, Client Services, and Compliance Verification has had a dramatic impact on the public role of Customs. Border protection, drug and illicit goods interdiction remain key components of the Customs mandate while revenue collection is now relegated to a less significant role.

"What does this all mean to you?" I will now attempt to provide an answer to that question. My goal is to assist you to prepare for this new environment and, when the time comes for your audit, to provide guidance and support throughout the process.

WHY THIS INITIATIVE?

Multi-Program Verification (MPV) is the result of a proposal to change from a process based on transactional review to one based on audit. It is the key component of Customs re-engineering initiative. Audit has been proven to be an effective tool in establishing levels of compliance.

MPV is the primary method chosen by Customs to ensure compliance with the various aspects of Customs activity. What will be verified?

· Valuation
· Origin - NAFTA and other Preferential Tariff Treatments
· Tariff Classification
· Documentation
· GST and Excise Tax on imported goods
· End Use; Diversions
· Marking
· Permits
· Anti-dumping and countervailing duties under the Special Import Measures Act (SIMA)
· Statistics Canada requirements for Trade Data
· Internal links between:
- purchasing
- receiving
- accounts payable
- data processing
- other departments

MPV is a compliance audit consisting of two main components: Systems Review (to examine your accounting systems and procedures related to Customs activities); and Program Compliance (to test your level of compliance with various customs related requirements).

AUDIT OBJECTIVES

In the former environment, Customs review of commodities on a transactional basis did not consider other aspects of a business organization. In the new environment, they intend to treat businesses as complete entities to be evaluated as a whole. The systems and controls in place within your company will be assessed and verified. Customs will compile profiles of both you and your industry sector. The creation of these profiles is a main objective of MPV. Once established they will provide a picture of you as importers in terms of your size, importing activity, and reporting patterns. Compliance with Customs programs will be assessed and levels of assistance necessary to promote compliance will be combined to illustrate the standing of you as an individual importer and also compared with other importers in your industry sector. If you compare favourably with others in your sector you may qualify for certain options not otherwise available. If you do not measure up, you will be provided with recommendations and, if warranted, requirements aimed at improving your profile.

This process will improve the ability of Customs to assess and manage risk. Risk management tools will be created from this environment and will be used to establish standards for your individual business in addition to your industry sector. Customs will conduct their business based on analysis of industries by sector and specific importing history. High-risk industry sectors and importers will be identified. Businesses and individuals bent on beating the system will be targeted and the full force of the law applied against such organizations. The balance of the importing community will enjoy a more relaxed environment with fewer audits and other potential benefits, some of which are still being developed.

The audit environment will provide the opportunity to review potential liabilities in areas where your procedures and systems indicate weakness. The same process will help identify the potential for entitlement to other benefits and entitlements. Your level of compliance with the laws and regulations governing imports in general and any specific requirements for your specific operation and/or industry will be assessed. This will include your procedures for voluntary disclosure of goods received in excess of those covered by the import entry; validity of NAFTA Certificates of Origin; and the voluntary disclosure of incorrect valuation, among other things.

PRIMARY FOCUS OF AUDIT

It was necessary to ascertain the potential workload impact of this process. To accomplish this Customs completed an analysis of Canadian importers. A diversified importer base was anticipated and the initial analysis targeted value for duty and frequency of imports. This approach confirmed the assumption and also highlighted the extremes of this diversity.

From this analysis it was determined that an audit of 10 companies would result in 27% coverage; an audit of 1000 importers would achieve 68% coverage; 12,000 would accomplish 93%. If the desired coverage were set at 46% they would only need to audit the top 100 importers. Clearly this analysis had a profound impact on Customs ability to target audits and manage risk.

There are about 150,000 importers in Canada and just 12,000 represent 93% of all imports. The remaining 138,000 import less than once per week and constitute just 7% of the total trade by value. These low volume and, relatively speaking, low risk importers need a distinct focus. An audit process that is practicable for large importers would prove impracticable for small business. This group will continue to be processed in a more traditional manner until MPV is fully implemented and alternative audit procedures are developed.

TOP 15 INDUSTRY SECTORS

There are 500 industry sectors in Canada of which the Motor Vehicle Industry, representing some $37 Billion in value for duty (or 23.84%) is by far the largest. By contrast the next in line is the Electronic Machinery Equipment and Supplies (Wholesale) sector which comes in at a "mere" $7 Billion or 4.56%. By the time you get to number fifteen we have figures of $1 Billion or .93%. It doesn't need a rocket scientist to determine where the highest concentration of audits will be targeted! This doesn't mean that MPV Audits will be exclusive to the Motor Vehicle Industry but it does mean that a higher percentage of audits will be conducted within that sector. Importers within each sector are also ranked individually allowing Customs to zero in on strategic targets. The largest importers in each of these sectors have likely already been exposed to MPV and the list is expanding quite rapidly.

MPV AUDIT FLOW

In the MPV Audit, all aspects of an import transaction can be verified to confirm the presence of linkages between the various processes. Linkages from purchasing, customs release, receiving, payables (including payment of Duty/Taxes and for the goods), accounting and reporting will be examined. When such linkages exist, the audit trail can also work backwards and track financial transactions to foreign suppliers. The audit succeeds in verifying goods actually imported, rather than those simply reported to customs.

It is not the objective of MPV to undertake a complete financial audit and analysis of your internal controls. Only those areas impacted by your international trade activity will be examined. It is necessary to verify the links between your internal accounts receivable and accounts payable and Customs systems in order to determine if the proper amounts of duties and taxes have been paid. It is equally important to demonstrate that the correct volumes, values and types of goods have been reported for Customs and Statistics Canada purposes.

WHAT HAPPENS AFTER MPV?

An Interim Report is produced by the Audit Team. You will be allowed thirty days to respond and it is essential that this document be carefully reviewed during the allotted time. There should be no surprises but the report is highly detailed and errors and omissions can and do occur. Your responses will be considered prior to the issuance of the Final Report. This report will be assessed by Customs Headquarters and compared to industry sector standards. Your Level of Compliance within your industry sector will be determined

The Final Report is distributed to:

· Your team leader or designate
· Customs Headquarters NBR Group
· Statistics Canada

The Audit is confidential and will not be released to any other party. It is excluded from the sharing of information agreement between U.S. and Canadian Customs.
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PREPARING FOR THE CUSTOMS ON SITE MULTI-PROGRAM VERIFICATION AUDIT

How do you ensure compliance and how do you prepare for the arrival of the audit team? I will attempt to answer these two questions while providing some practical advice and recommendations.

The Canada Customs & Revenue Agency Audit Team will be investigating every aspect of your importing systems. The ultimate aim of the audit is to determine whether your processes and controls are in keeping with Canada Customs and other Government Department regulations and expectations.

The first task is to prepare for the depth and scope of the audit. Internal and external communications will be examined and, if found to be adequate, will have a positive impact on the duration and outcome of the audit. In addition to corporate processes relating to the importation of goods, the audit team will attempt to understand the broader internal workings of your company. To facilitate this you should be prepared to provide the team with flow charts and other material that documents your systems and procedures.

Clearly the more information of this nature you have the easier it will be for the team to gain the understanding necessary. In the event that such documentation is not available, the team will work with you to develop other strategies to overcome this deficiency.

The initial meeting between the audit team and your staff is significant. This meeting will set the tone for the audit and it is imperative that you are prepared. Request a copy of the agenda from Customs. Take time to review it and request any additions or clarifications you deem necessary.

During this meeting appropriate members of your staff should be prepared to explain your corporate mandate, import procedures, internal systems, accounting process and organizational charts. You should be prepared to identify key personnel in various departments who will be contacts for the team. For their part, the audit team will advise you of the scope and procedures targeted for audit.

It will be important for you to understand the scope and time frame of the audit. During the audit, you should be prepared to challenge the team if they appear to be losing focus. Commit to staying with the team while they are in your facility. Ensure that only qualified and authorized personnel provide information and answers to the team.

You should designate an internal coordinator to oversee the audit. This should be a senior individual who has the ability and authority to make things happen and, conversely, to make sure that some things don't happen. This person will be your primary contact with the audit team leader acting in the role of facilitator.

Identify all departments involved in the import process. These may include: Accounts Payable, Customs, Finance, Information Systems / Information Technology, Inventory Control, Operations, Purchasing, Receiving, Sales, Traffic. Although there are many common areas, all companies have differences. The key is to ensure that all appropriate departments are adequately represented at this meeting. (Eg: Accounts Payable Manager, possibly accompanied by an Accounts Payable Clerk but not the latter on their own).

It is important that your personnel do not make commitments on behalf of other departments not under their jurisdiction. (Eg: Receiving Manager committing to a report that is not available puts pressure on the I/T. Department and the audit team).

Assign staff in each affected department to retrieve information as necessary for the team. I recommend that you don't show the team where the filing cabinet is and leave them to it. Retain control of all information given to the team, whether it be on diskette, paper or verbally.

Communicate internally by informing staff that the audit is under way and advising the names of the authorized contacts in each department. Don't let a shift worker answer a question that should be addressed by an engineer! You retain control of this situation by always having authorized staff in the company of the audit team while on your premises.

Following is a check list of information / documentation requirements:

· Corporate Organization Chart showing Structure, Ownership, Affiliates, Divisions, and Key Personnel
· Most Recent Trial Balance and General Ledger
· Location of Head Office and Books & Records
· Most Recently Available Annual Report; Audited Financial Statements; and Corresponding Trial Balances
· Copies of License, Royalty, Distribution Agreements
· Copies of Discount Agreements/Contracts
· Copies of Patents, Trademarks, Copyrights and Quota & Profit Sharing Agreements
· List of Foreign Vendors
· List of Duties Relief or any other Customs Related Programs your company is utilizing
· Information on any Issue Outstanding with Revenue Canada

During the course of the audit a representative sampling of the following will be examined:

· Commercial Invoices
· B3 Entries and Recap Sheets
· Cancelled Cheques
· Certificates of Origin
· Bill of Lading/Waybill
· Receiving Reports
· Payment Entry in the Books
· Purchase Order
· Freight Invoice
· Quantity Ordered / Received
· List of all Product Numbers; catalogs; brochures
· Freight Contracts
· Internal Controls used to ensure goods are not exported to restricted countries

FREQUENTLY ASKED QUESTIONS FOR THE CUSTOMS ON SITE MPV AUDIT

What questions should you be asking yourselves in preparation? What questions might the Audit Team ask? The following examples are typical, however the list is not exhaustive. Any issues specific to your company or your type of business should also be considered.

ACCOUNTS PAYABLE

· Do you take all discounts?
· Who is advised when such discounts are NOT taken?
· Do you compare and verify receiving reports / invoices / Customs entries?
· What do you do when discrepancies are identified?
· Do you pay your suppliers on the basis of purchase orders, packing slips, invoices or other document?

CUSTOMS

· Do you maintain a list of suppliers and shipping terms?
· Do you review Customs Entries and verify information against Receiving and Accounts Payable records?
· Do you have any different process for duty free entries?
· Do you review brokerage invoices for accuracy?
· Are discounts deducted at time of entry?
· If they are, do you verify that they were earned and taken?
· Do you have any drawback or duty deferral issues?
· Do you have current and valid NAFTA Certificates of Origin on file for all goods on which NAFTA preferential treatment is claimed?
· Are NAFTA Certificates specific to product(s) imported?
· Does tariff classification on the NAFTA match the import entry?
· Do you ensure tariff classification for accuracy and consistency?
· What process is in place to ensure appropriate tariff classification by Russell A. Farrow Limited?
· Do we request product literature or other supporting information on new products being imported?
· Have you received any National Customs Rulings? Are they being followed?
· Are you aware that we maintain a data base of your imports, including vendor, product, NAFTA and classification elements?
· Are you aware that our data base includes vendor part numbers where available?
· Are you aware that we review NAFTA Certificates for completeness and accuracy?
· Do you have all Customs records available for review?
· How long do you keep records?
· Do you have any outstanding issues with Customs?

FINANCE

· Do any royalty situations exist?
· If so, are you aware that they may be subject to duty?
· Are you aware that your General Ledger will be audited by the Customs Audit Team?
· Minutes of Executive Meetings may be required during the audit, do you have these available?

INFORMATION SYSTEMS/TECHNOLOGY

· Do you have the capability to generate reports linking Purchasing, Receiving and Accounts Payable information?
· If not can such reports be created?
· What is the level of integration of your computer systems between each department?

INVENTORY CONTROL

· Do you maintain inventory discrepancy reports and are they available?
· Do you have a system in place to ensure inventory gains are investigated?
· Are you aware that such gains may be due to overshipment and, subject to duty and/or GST?
· Are you aware that all overs and unders on import shipments should be reported to Customs?

PURCHASING

· What are the transportation terms of your purchasing contracts or purchase orders?
· Do you verify any freight amounts deducted from the value for duty?
· Do you retain copies of purchase orders?
· How are purchase order numbers assigned?
· Do you distinguish domestic purchases from imports?

RECEIVING

· Are packing lists filed and available?
· How do you track overs and unders?
· Do you match receiving reports to Customs entries?

SALES

· Do you offer any discounts for end use certificates?
· If end use is an issue, do you have a system to communicate diversions (Eg: From Automotive OEM to Service)?
· If you provide K32A Drawback Forms to your customers do you note your import files?

TRAFFIC

· Do you have any freight contracts in place?
· How do you document exports?
· Is drawback or duty deferral an issue?