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1985 Report of the Auditor General of Canada

Overview

7.1 Customs Canada pre-dates Confederation. It is one of the oldest government programs, based on legislation dating back to 1848. Customs is part of the Department of Customs and Excise; the Deputy Minister reports to the Minister of National Revenue.

7.2 The original objective of Customs was to raise revenue - many years before the concept of income tax was known in Canada. Other tasks have been added. The Department's current program objective is threefold and includes important aspects of protection:

- Ensure that all relevant duties, taxes and other charges are assessed, collected and, where appropriate, refunded.

- Control, for the protection of Canadian industry and society, the movement of people, goods and conveyances entering or leaving Canada.

- Protect Canadian industry from injury caused by unfair foreign competition. This includes the actual or contemplated importation of dumped or subsidized goods.

7.4 In 1984, Customs collected about $5 billion in revenue - nearly 9 per cent of the government's total revenues. To do so, it processed some 12 million cargo control documents. It also processed close to 80 million international travellers that entered Canada. About half of these were returning Canadians. The others were predominantly visitors, with 3 per cent of them coming from overseas. The bulk of Customs activities occurs at inland ports and along our 9,000 km border with the United States. People and commercial goods enter Canada at highway crossings and airports and by rail and water. Many small shipments of goods are handled through Canada Post.

7.5 There are over 300 Customs Ports in Canada, including 120 highway border crossings, 17 international airports and 145 marine ports. In addition, Customs deals with nearly 1,500 warehouses where commercial goods can be unloaded and cleared or kept in bond.

7.6 Customs is expected to respond quickly and effectively to changes in its environment, to preferences and new practices on the part of the public, and to changes in legislation and government direction. Some issues are technological, such as the introduction of automated office procedures by importers and brokers. Others are economic, such as the tendency of business to keep small inventories and import goods rapidly on demand. Still other issues are socio-economic, such as attempted traffic in prohibited drugs and the importation of pornography.

7.7 While Customs must be rigorous in enforcing the various Acts it administers, it must also be sensitive and responsive to the legitimate needs and expectations of travellers and business people. It would be intolerable - and prohibitively expensive - to have Customs hold up travellers or commercial goods by intensive inspection of every person and shipment that crosses the border. Intelligent selection, prudent examination and the facilitation of voluntary compliance to the greatest extent possible as well as monitoring of results are therefore key aspects of successful Customs operations.

7.8 To carry out its varied and complex tasks, Customs had a budget of $281 million in 1984-85. Almost nine-tenths of it was used to pay a staff of about 7,800 people. Of these, nearly 4,750 are uniformed Customs Officers. The rest are specialists in anti-dumping and adjudication matters, managers and supervisors, technicians, instructors and other support staff.

Audit Scope

7.10 In 1978, our audit of Customs focused on the status of revenue control systems. It examined whether existing procedures were sufficient to ensure an effective check on the assessment, collection and proper allocation of revenue.

7.11 The current audit expanded on that scope. It included a review of Customs' delivery of its mandate, particularly with respect to operational activities in Customs Ports. It also included a review of those systems and procedures that are in direct support of Customs' operational activities. Finally we looked at some of those departmental management principles and practices that affect overall operations.

7.12 An important intended effect of Customs' work is the protection of Canadian industry through assessing and collecting duties on imports. However, Customs is not responsible for setting policies on duties, taxes and tariffs. Nor is it responsible for measuring the effect its protective work has on Canadian industry. This rests outside Customs and Excise, and we therefore did not review the procedures to measure overall effectiveness of the Customs program.

7.13 The theme of our audit was "Delivering the Customs Mandate". We posed six sets of broad questions to guide our examinations:

- Departmental management principles and practices: Has the Department articulated and communicated a statement of principles that guide management and staff in carrying out the business of Customs? Does management take into account the changing needs and expectations of its public? What relationship exists between management and the Customs Union?

- Converting legislation and interdepartmental agreements into operating procedures: Does the Department have in place a mechanism that systematically reviews legislation and interdepartmental agreements with a view to producing appropriate operating procedures for use in Customs operations?

- Service to the public: Does Customs make reasonable efforts to inform the public about the need to comply with the law and how to go about it - even before travellers and importers appear at Customs for inspection and processing?

- Facilitating and controlling the entry of international travellers: Is Customs sensitive and responsive to the needs and expectations of travellers, at the same time making reasonable efforts to detect and prevent illegal entries?

- Facilitating and controlling commercial imports: Does Customs have procedures in place to gather information about the needs and expectations of business and commerce? Does it take appropriate measures to collect the correct revenue and to prevent illegal entries?

- Measuring enforcement results in Customs port operations: Does the Department have objective and reliable information about compliance in its port operations, and about its own success in detecting non-compliance?

Observations and Recommendations

Departmental Management Principles and Practices

7.16 Statement of operating principles. Management makes a clear distinction between Customs' legal mandate, which is governed by legislation, and its approach to doing business, which is an expression of management principles. These principles have been articulated and communicated in a statement of operating principles that guides departmental policies and activities.

7.17 For example, Customs operates on the principle that the vast majority of the public will comply with the law, when they are informed and when the law is applied equitably. Accordingly, Customs facilitates and encourages voluntary compliance. At the same time, it pursues selective enforcement activities to detect individuals who willfully attempt to evade the law for personal gain.

7.18 The Department has also published a code of the conduct and appearance it requires of its employees. The code outlines both expected and unacceptable behaviour, including the responsibilities of employees to the public.

7.19 These publications provide a basis for establishing and maintaining the professional and impartial conduct of Customs' business throughout Canada.

7.20 Accountability contracts. Management has introduced and is sustaining a system of accountability contracts. All management staff are included - from assistant deputy ministers to supervisors in Customs Ports. Accountability contracts are agreements between bosses and the managers who work for them. They are written for a one-year period and form the basis for the managers' activities and efforts during that year.

7.21 The accountability contract contains specific achievement goals to which both parties have agreed. At the time of our audit, some typical statements were:

- Achieve an efficiency improvement of 10 per cent in Cargo processing.

- Increase the efficiency of entries processing by 2 per cent while maintaining the present enforcement rate.

7.23 We recognize that there is an inherent difficulty with specific agreements such as these. Tasks that are not spelled out may get neglected in favour of those that are specified. On balance, however, we find the practice of having annual accountability contracts worthwhile. It enables management to emphasize key areas and change priorities effectively throughout the Department.

7.24 Since our audit, the Department has removed certain quantitative achievement targets from some accountability contracts. It is too early at this time to assess the effects of this change.

7.25 Relationships with the Customs Excise Union. In Customs, the relationship between management and union is particularly significant. The Department is heavily unionized. We interviewed senior managers and members of Staff Relations in this regard, and we talked with the President of the Customs Excise Union.

7.26 At the time of our audit, we noted a professional and objective relationship between management and union. It is characterized by open-mindedness, with a focus on problem resolution on both sides. For example, management and the union consult during the process of developing new policies and practices; they have been fully discussed by the time they are announced.

7.27 Communications with clients and the public. Customs needs to be aware of the needs and expectations of the people it serves. We examined what efforts management makes in this area.

7.28 We found that the Department is following a policy of sensitivity and responsiveness. For example, management has recently commissioned a communications study to determine the views of the public. The Department intends to use the results of the study to review and possibly modify facilities and administrative procedures to make it as convenient as possible for members of the public to comply with the law.

7.29 With respect to recurring clients such as customs brokers, our interviews with brokers and departmental managers indicated that the channels of communications are open and are being used regularly. Brokers appreciate this and, as a result, industry groups can plan better for their responses to and their contacts with Customs.

7.30 Priorities Committee. The Department has a Priorities Committee, and members of the Committee indicated that it fulfils its purpose and functions well. A more detailed review of the Department's committee structure will be undertaken when we audit the corporate management functions.

7.31 The departmental Priorities Committee comprises the four Assistant Deputy Ministers and the Director General of Personnel. It is chaired by the Assistant Deputy Minister, Corporate Management. Its purpose is to review and challenge proposals for new or expanded activities or for additional resources that one of the Branches might put forward. Its outputs are recommendations - unanimous if possible - to the Deputy Minister. In the Priorities Committee, Assistant Deputy Ministers act not so much as Branch heads, but rather as members of the corporate senior management team that determines whether a proposal fits in with the overall direction and management philosophy of the Department.

Converting Legislation and Interdepartmental Agreements into Operating Procedures

7.33 For Customs to administer legislative acts, it must convert them into working procedures that are suitable for application in its operating environment. Also, in cases where Customs administers acts on behalf of other departments, it is preferable that the client departments agree with these procedures. The two departments should come to an understanding of what Customs is expected to do, what the client department will do, how the respective efforts will be monitored, what standards will apply, and who will judge results.

7.34 Accordingly, our audit examined whether Customs has a reasonable mechanism for systematically negotiating interdepartmental agreements and for reviewing legislation with a view to producing appropriate operating procedures for use in Customs operations.

7.35 Interdepartmental agreements. In 1978, Customs had no formal approach to establishing working relationships with client departments. Expectations of clients were not defined clearly and Customs had no formal standards for preparing, reviewing and approving interdepartmental agreements. In 1981, Customs established a formal approach to this activity.

7.36 The Department uses about eight person-years to negotiate agreements with client departments. Typically, one person (usually at a Director level) is assigned responsibility for negotiating with a specific department. The Director may be in contact with many other officials in Customs before the agreement is finalized.

7.37 We noted that difficulties typically arise in the negotiating process. There is sometimes an inability on the part of client departments to specify what levels of performance they expect Customs to provide. The Departments of Agriculture and National Health and Welfare, for example, were reluctant to identify a minimum acceptable rate of success for preventing the entry into Canada of infected products or people. The reason for this reluctance is understandable. The entry of even one infected product or person could lead to an epidemic with serious consequences for the country. Therefore, a standard of detection of even 99 per cent may not be adequate. On the other hand, it would be prohibitively expensive - not to mention unacceptable for other reasons - to try to inspect 80 million international travellers annually to the level of intensity that would guarantee 100 per cent detection.

7.38 This leads to another problem. Since the level of performance is not specified, the required resources cannot be determined. Further, setting standards and measuring performance can be expensive in terms of the cost of the activity being measured. Finally, there is a reluctance to set performance indicators because they can easily be interpreted as "quotas".

7.39 Toward the end of our audit, the Department, in conjunction with its client departments, changed to a different approach. Instead of going through the lengthy process of establishing and negotiating performance standards in terms of results achieved, it has negotiated a set of "essential activities" that will be performed by Customs on behalf of its various client departments. Customs has now completed such essential activities agreements with 15 of its 17 client departments, including Agriculture and National Health and Welfare. Because of the complexity of this issue, and because the change was made toward the end of our audit, we did not have the opportunity to evaluate this approach.

7.40 Legislative acts. At the beginning of 1983, the Department formalized its system for preparing and disseminating procedures and directives. The process was designed to ensure that the requirements in legislation pertaining to Customs and its client departments are appropriately converted into operating procedures and directives. The series of revised D-Memoranda, R-Memoranda and other manuals resulting from this process represents a comprehensive set of operating directives for the use of Customs Officers throughout Canada.

7.41 Our field interviews indicated that the application of directives is not always uniform. Customs Officers have discretion in applying procedures and in determining the level of responsiveness in any particular situation. This discretion is essential for intelligent facilitation, detection and enforcement work. But it should not lead to different applications of directives at different places, at different times and with different Officers.

7.42 One example of inconsistency is in the area of commercial importations. When importers request clearing of goods after normal working hours, Customs levies a special service charge because an Inspector has to be called out. The service charge is also levied at ports that are routinely staffed 24 hours a day, 7 days a week.

7.43 We found that not every examination outside regular dayshift hours in these 24-hour ports results in the special service charge being levied. The decision to levy the charge is made by the inspecting Officer, but not every Officer levies it consistently. The result for the importer or broker is that charges are not predictable - not only from port to port, but also within the same port.

7.44 The Department should intensify its review of the consistency with which directives are being applied in the field, and it should take corrective action where indicated.

Department's response: One of the objectives of the Department's directives revision activity of 1978 was to ensure that all directives are written so as to permit uniform interpretation and application. The Department believes that it has met this objective.

If a policy or procedure is developed which allows for discretionary application by Customs Officers, the extent of that discretion is described in the Directive. In the absence of a specific reference to discretionary application, no discretion is permitted.

To reinforce current policy a monitoring program will be established by February, 1986 to verify consistency of application of directives.

Service to the Public

7.46 Management direction. Our review focused on the directions given by departmental management. We found that Customs recognizes service to the public as an important aspect of mandate delivery. The Minister has stated that the departmental enforcement mandate is being balanced with efforts to improve service to the public, and that service to the public is a major element in departmental strategy.

7.47 This direction is reflected in the Department's statement of operating principles. The statement requires that departmental staff be aware of changing public attitudes, taxpayers' concerns, new technology and commercial practices, and social changes in general if program delivery is to be responsive.

7.48 Beyond looking at management direction, we reviewed the Department's practices of communicating information to the public. We also reviewed the facilities through which Customs services are provided, and we reviewed the interaction of Customs Officers with the public.

7.49 Communicating with the public. Customs operates on the principle that the vast majority of the public is willing to comply with the law when people are informed about it and when it is applied equitably. Customs has therefore established channels to disseminate information and to communicate with the public.

7.50 Every Customs Port acts as such a channel. Information is displayed, inquiries are answered and in some cases courses are offered to explain Customs practices, changes in legislation and new procedures.

7.51 Another channel of communication is the departmental Public Relations Branch. Its Director is a member of the Management Committee, which indicates the importance attached to this work. The Branch has prepared information packages and disseminated them to the general public. It has successfully negotiated with motor league magazines to include a reproduction of the Customs publication "I Declare". It has also launched, in collaboration with TV Ontario, a program for use in schools that furthers the understanding of Customs operations.

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7.52 A third channel for communicating Customs information is the Canadian Association of Customs Brokers. The Association comprises about 400 customs brokerage firms which handle over 90 per cent of commercial importations into Canada. The Department has made it a practice to discuss proposed changes in Customs procedures with the Association to facilitate implementation and encourage compliance.

7.53 Service facilities. The Department operates over 300 Customs Ports whose sizes vary strikingly. There are large ports such as Windsor, Ontario, where over 12 million travellers crossed into Canada last year. There are also small, one-Officer stations that process only a few entries each day.

7.54 We reviewed the facilities at a dozen ports from Vancouver to Halifax from a service-to-the-public point of view. We found that signs and directions were adequate. In ports that have many travellers whose mother tongue is other than English or French, there are signs in other languages. We also found that Customs employs interpreters in such ports. At Vancouver International Airport, for example, interpreters are available to communicate with travellers arriving from the Far East.

7.55 Service process. We reviewed the actual process of Customs Officers being in contact with members of the public. In their work, Customs Officers must on the one hand facilitate compliance with the law and on the other enforce that compliance, depending on the situation at hand. In both cases, however, Customs Officers must be sensitive and responsive to the needs and expectations of the public. Our observations indicate that Customs Officers are generally treating the public with courtesy and are following the published code of conduct.

Facilitating and Controlling the Entry of International Travellers

7.57 Travellers are obliged to report to Canadian Customs Officers for questioning and for examination of accompanying baggage. The cost of the Customs passenger program in 1984 was about one dollar per traveller, or $80 million.

7.58 The Customs passenger program is designed to ensure that travellers comply with the legislative acts that Customs administers. The underlying purpose is protection. Canada seeks to protect its economy and the health and social well-being of its residents by controlling the movement of people, goods and vehicles across its borders.

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7.59 Detecting items such as firearms, narcotics, pornography and agricultural hazards, as well as terrorists and other illegal migrants is a major part of Customs' work and part of its protection function.

7.60 This purpose is not widely recognized by the public. Many people perceive that Customs acts mainly as a collector of revenue. This was indeed the case until income tax was introduced early this century. Today, the revenue collected by Customs from international travellers is small in comparison to total revenue.

7.61 Resulting from our audit of the Customs passenger program, we are reporting on its two major aspects: processing travellers who enter Canada by commercial airlines, and processing those who arrive by motor vehicle.

7.62 Traveller processing at international airports. Airline passengers are asked to complete the Customs Declaration Card before disembarking in Canada. The card asks questions about the trip, goods brought back, and the value of the goods. The traveller can claim a personal exemption and then signs the card. When completed, the card is in effect a written Customs declaration.

7.63 After travellers disembark from the aircraft, they go through the Primary Inspection Line. A Customs Inspector reviews the disembarkation card and conducts a brief interview which on the average takes about half a minute. This interview is designed to provide the traveller with an opportunity to comply with Canada's entry requirements. It is also designed to identify those travellers and goods that require a more detailed or Secondary examination for Customs, Immigration, Agriculture or Health purposes. Customs Inspectors have discretion to ask any questions they consider necessary in cases where suspicion arises, especially if the traveller fits a profile of a non-declarer, drug smuggler or terrorist.

7.64 The speed with which travellers can be processed in the Primary Inspection area depends on the number of travellers and on the number of Officers and booths available. The Department's objective is that no traveller should have to wait more than 30 minutes to complete Primary Inspection. We noted that this objective is met in most cases. There are circumstances, however, such as the unexpected simultaneous arrival of several aircraft, that affect processing time. In such cases, several hundred travellers may be waiting for Primary Inspection in the Customs reception area. The waiting time for some of them will then exceed the objective of 30 minutes maximum.

7.65 In most cases, the Primary Inspection process does not cost travellers any time at all, because it takes place during the time they would normally wait until baggage is unloaded from the aircraft.

7.66 If there are reasonable grounds to assume that travellers do not comply with the law, they are asked to undergo some form of Secondary Inspection. The secondary examination is designed to verify compliance and to detect and rectify non-compliance by travellers.

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7.67 When a Primary Inspector refers a traveller for detailed examination to the Secondary Inspection process, it is not always the case that an infraction is detected by the Secondary Inspector. During our interviews, Customs Officers indicated that they could probably improve their performance if they received prompt feedback about the results of their referrals. We noted that in some locations Inspectors were telling each other informally about how "successful" their referrals are. This was also identified by a departmental study. The Department has indicated that it will institute a systematic feedback mechanism about "success" rates from Secondary to Primary Inspectors.

7.68 A Secondary Inspection varies from a cursory check of a selected piece of luggage to a complete search of all goods and effects. The intensity of the examination may increase as a result of initial findings. For example, undeclared goods found in one piece of baggage may indicate that additional goods are concealed elsewhere. In a small number of cases, where there is reasonable cause, there may be a body search.

7.69 If an examination reveals undeclared goods, the Customs Officer may invoke one of the penalties detailed in the Customs Act. Not all offences are of equal gravity and they therefore do not attract equal penalties. The most severe penalty, usually applied when smuggled goods are detected, results in the traveller having to pay not only duty and taxes, but also the value of the goods in Canada.

7.70 When illicit narcotics are found, or when prosecution is warranted, the Customs Officer will place the traveller under arrest and call in the appropriate police agency to assist in further action.

7.71 The existence of the Secondary Inspection process may constitute a significant incentive for travellers to comply with the law. We noted a departmental evaluation, however, that found that about one-quarter of air travellers were not aware of the Secondary Inspection process. The disembarkation card, for example, does not warn the traveller of the possibility that there may be a detailed secondary examination. The Department has developed an action plan that outlines steps designed to increase public awareness of the Secondary Inspection process.

7.72 Traveller processing at highway border points. The majority of travellers to Canada arrive by highway in their own vehicles and are entering from the United States. In contrast to the sometimes crowded and stressful arrival patterns of air travellers, highway travellers typically arrive in a more steady pattern. Peak travel periods can normally be predicted in advance. Examples are the daily return of commuters to Windsor from Detroit, or the traffic between Seattle and Vancouver during the July 1/July 4 long weekend. Knowledge of these traffic patterns allows Customs managers at highway border points to assign more staff, if available, to cope with high volumes.

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7.73 This is not to say that delays and extreme fluctuations do not occur at land borders. Staff and facilities are allocated to each location on the basis of average annual traffic flows, with additional seasonal staff during peak periods. But there is a limit to which traffic can be processed without delays. For example, at the Peace Bridge in Fort Erie, Ontario, opposite Buffalo, New York, no more than two or three Primary Inspection booths are required to process the traffic during off season periods. On the other hand, during peak periods, even if all 23 Primary Inspection booths are staffed, the volume of traffic can cause vehicles to be backed up right across the bridge.

7.74 Travellers approaching the Customs inspection point simply stop at a booth. They normally remain in their vehicle while the Customs Officer conducts the primary interview. In contrast to the primary interview at airports, which is aided by the disembarkation card, the highway interview is entirely oral. Travellers who require further examination or completion of documents are given a secondary referral slip and are directed to report to a Customs Officer in the Customs building. A Secondary Inspector then determines what documents are required, what duties and taxes must be paid, and whether the vehicle and its contents are to be examined.

7.75 The principle of Primary and Secondary Inspections is the same for all modes of traffic. All travellers are given the opportunity to declare voluntarily the goods in their possession at the Primary Inspection point. Secondary Inspections and searches are carried out when a Customs Officer has reasonable grounds to believe that a traveller is concealing goods or has otherwise not complied voluntarily with the law.

7.76 During our audit, and particularly during our interviews with about 200 Customs Officers, we noted a certain amount of uncertainty on their part. This related to their perception of what the balance should be between facilitating the movement of travellers - both air and highway - and taking enforcement action. In other words, should Inspectors primarily concentrate on sensitivity and responsiveness to travellers, or should they concentrate on detection, deterrent and enforcement? Both principles must coexist in the inspection process, yet the uncertainty of Inspectors suggested that some clarification was in order.

7.77 Customs has recognized this problem. In March 1985, the Department issued instructions that were designed to clarify to all its Officers the roles of enforcement and of facilitation. We are unable to report whether the instructions have achieved the desired effect because our interviews were, for the most part, completed before the instructions were issued.

7.78 The Department should monitor the application of instructions on the roles of enforcement and facilitation to determine if the intended results are being achieved.

Department's response: The Department will commence an annual review of the application of these instructions in 1986-87.

Facilitating and Controlling Commercial Imports

7.80 The Customs commercial program is designed to facilitate the entry of permitted goods into Canada, together with assessing and collecting the correct amounts of duties and taxes. It is also designed to detect and deter prohibited entries and to verify that importers comply with requirements of the law.

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7.81 In 1978, our audit focused primarily on this commercial importations program, and we described it in detail at that time. In our current audit, we were therefore able to refer to our 1978 findings in reviewing the Department's operations.

7.82 We were also able to refer to the results of a number of studies and internal audits the Department has conducted in this area since 1978. We did so whenever we could, substantiating those points during visits to headquarters and the field that were relevant to our audit.

7.83 Our findings are set out in four sections, corresponding to the main areas of Customs activities in the commercial program: control over cargo; inspection of goods; assessment of duties and taxes; and collection of revenue. In a fifth section, we report briefly on recent developments of Customs' computerized Cargo Entry Processing and Collection System (CEPACS), which is an integral part of the commercial program. We did not audit CEPACS in detail, as it will be reviewed during the third year of our current audit, together with the Department's other corporate management and support systems.

7.84 Control over cargo. When a shipment of goods arrives at a Customs port, the carrier must file a Cargo Control Document with Customs. It describes the quantity, type and destination of the goods. With this document, Customs establishes an inventory record that becomes the basis for inspection, payment of taxes and duties, and ultimate release to the importer.

7.85 Our 1978 audit noted fundamental weaknesses in the manual procedures for establishing control over the receipt, matching, disposition and physical security of documents.

7.86 With the national introduction of Core CEPACS, discussed later beginning at paragraph 7.107, about 85 per cent of Cargo Control Documents are now processed electronically. This has eliminated the manual processes of controlling, matching, distributing and physical storage of documents.

7.87 However, a departmental study has found that there are problems in the present system with unsupervised acquittal and deletion of unmatched cargo control documents. Because adequate control over documents is fundamental to the system, we are concerned about this area.

7.88 The Department should ensure that unmatched Cargo Control Documents are properly acquitted, and that proper supervision is maintained over the process.

Department's response: The Department agrees with this recommendation and has planned several short and long-term systems changes which will significantly reduce the incidence of unmatched Cargo Control Documents in the future.

7.89 Where duties and taxes are not paid at the port of entry, shipments are sealed and then transported by the carrier in bond to an inland clearance point. At that point, Customs inspects the seals to verify that they are intact. Carriers that meet certain criteria are designated as Post-Audit Carriers. They are permitted to move goods inland under their own guard without the formal sealing process.

7.90 A recent departmental study indicated that 40 per cent of air cargo imported into Vancouver International Airport by Post-Audit Carriers was not being reported to Customs at the time of entry as required by law.

7.91 Such non-declaration could be significant. If goods are not declared, Customs cannot inspect for health hazards and dangerous products. Also, revenue could be lost.

7.92 The Department has conducted further investigations and determined that the air carriers in question did report the imported goods - but at the point of final destination, and that this is permitted under departmental regulations. Nevertheless, the Department is making efforts to have air carriers declare all goods at the point of first entry, as is already the case for the highway, rail and marine modes of traffic. To that end, the Department is contacting the airlines involved and their agents to ensure proper reporting. Also, it is planning consultations with the International Air Transport Association to have all airlines report imported goods at the point of first landing.

7.93 The Department should regularly verify, for all modes of transport, compliance with the requirement to declare goods being imported.

Department's response: The Department verifies the compliance of the declaration of goods carried in all modes of traffic by conducting off-load examinations on a selective basis both at border locations and inland destinations. The Commercial Enforcement Reporting System, more commonly referred to as the A28 program, is in place for the highway, rail and marine modes. Negotiations are under way between the Department and the transportation companies to establish procedures that will foster compliance in the air mode.

The Department will continue to ensure that compliance checks are maintained and that existing programs are enhanced.

7.94 In 1978, one of the weaknesses we noted in the post-audit procedures was that a team of 7 auditors cannot adequately audit the records of approximately 120 Post-Audit Carriers.

7.95 The number of Post-Audit Carriers has increased from 120 to 170, and the present audit staff is 5 persons. Thus, the audit cycle is longer now than in 1978, and therefore even less adequate.

7.96 The Department should ensure that an adequate level of audit coverage of Post-Audit Carriers is maintained.

Department's response: Since 1978, the Department has implemented improvements to its methods of selection for the audit of Post-Audit Carriers. Through these and future planned improvements, the Department will ensure an adequate level of audit coverage is maintained.

7.97 Inspection of goods. Goods are inspected to prevent entry of prohibited or restricted products into Canada and to ensure that the proper rate of duty and tax is paid. An effective inspection function detects and deters unlawful importations and verifies the quantity and description of goods. To verify compliance and detect non-compliance efficiently, a system has to identify high risk shipments and potential non-compliers. To deter unlawful importation, an adequate number of shipments must be examined so that importers feel their goods could be selected for examination. To assist in improving information about compliance, results of all examinations should be monitored.

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7.98 Our 1978 audit indicated that there were no formal processes in place to select high risk shipments. Nor was there a statistically valid selection system for monitoring the compliance rate.

7.99 During the current audit we found that commercial importations have increased by 26 per cent since 1978 while the number of examinations has decreased by 48 per cent. Therefore, fewer examinations are being conducted relative to importations. We also noted that the ratio of forced payments and seizures to examinations has more than doubled. This could be the result either of an increase in non-compliance or of improved inspection techniques.

7.100 The Department has conducted various studies in these areas. However, Customs does not yet have a formal system in place to identify high-risk shipments, or a statistically valid selection system to monitor the rate of compliance. In an environment of increasing importations and limited resources, it is important that the Department be able to identify high-risk importations. As well, without monitoring compliance rates, it will continue to be difficult for the Department to determine whether its efforts to improve inspection methods and procedures are successful in detecting non-compliance.

7.101 The Department should as soon as practical establish a formal system to identify and select high-risk shipments, and a statistically valid selection system to measure the compliance rate of importers.

Department's response: The Department recognizes the need to establish a formal risk identification and selection system for the inspection function. As part of the overall development of a new Customs commercial system, the Department has completed development and will pilot test this fall an automated Release Support System (RSS). The RSS will provide Customs Inspectors with access to on-line automated profile information on importers and commodities. This will permit Customs Inspectors to be more selective by focusing their attention on those high risk shipments requiring physical examination or intensive documentation verification, while allowing the large majority of lower risk shipments to be released more quickly. The RSS will also randomly select importers' shipments for data verification or physical examination. The results of these examinations will be input into the system for purposes of generating operational and performance reports. The question of compliance rate is addressed in the response relating to Measurement of Enforcement results in Customs Port Operations. The Department is currently looking at the possibility of accelerating national implementation of the automated RSS in view of both the recognized need for a formal risk identification and selection system and the government's person-year and cost reduction initiatives.

7.102 Assessment of duties and taxes. In the previous section, we noted that the inspection function could be improved through a formal system of identifying and selecting high-risk shipments. A similar system might be applied in the assessment function. It would result in perhaps fewer but almost certainly more effective assessments. That is to say, the process could be more efficient and also more effective. A precondition would be the existence of an adequate risk profiling system of importers and commodities.

7.103 The Department is aware of this. It is planning improvements in the assessment function through testing a high-risk profiling system as part of ALERT (the Automatic Lookout, Enquiry and Report system). ALERT is now operating as a pilot project in Calgary. There is at present no certainty when a profiling system will be introduced operationally.

7.104 The Department should, as soon as practical, provide a profiling system to assist Commodity Specialists and Dominion Customs Appraisers in selecting high-risk entries for assessment.

Department's response: The Department recognizes the potential improvements in efficiency and effectiveness in the assessment function which could be brought about by sampling supported by a profiling system. It will be implementing nationally an ALERT-type entry selection system on January 1, 1988.

7.105 Collection of revenue. Customs collects the bulk of its revenue based on the values declared by importers and brokers. There are two other collection streams. One is based on payment notices generated by the assessment function. The other comprises penalty payments in cases where accounts are not immediately paid in full.

7.106 As a result of our 1978 audit, we noted several weaknesses in this area. They included lack of integrated control over all types of receivables, inadequate segregation of duties, and lack of supervision. Since then, the Department has made numerous changes in its collection procedures. A recent Internal Audit report indicated, however, that some of the concerns we noted in 1978 remain. One of them is a lack of evidence that supervisors review or question work done by their subordinates; for example, ensuring that necessary follow-up calls were made by Collection Officers.

7.107 Cargo Entry Processing and Collection System (CEPACS). CEPACS is the core of the commercial system. This computerized system is an integral part of the cargo control, entry review, cash and receivable collection processes. It was intended also to provide profile information for Inspectors and Commodity Specialists. As noted earlier, CEPACS was not subjected to audit this year. However, its importance within the commercial system, together with the fact that CEPACS development was intended to address many of our audit findings reported in 1978, resulted in our reviewing the current status of the system. When we covered CEPACS during our 1978 audit, it was a pilot for a major automation initiative of the Department. The system was initiated in 1968. It was intended to be implemented by 1975 at an estimated cost of $4.7 million.

7.108 In 1979, the Department completed a detailed evaluation of Core CEPACS and decided to proceed with national implementation. It noted that costs to date were some $25 million. Benefits to be derived from CEPACS were stated to be realizable only on full national implementation of the Core system in addition to subsequent completion and implementation of the rest of the system.

7.109 As originally designed, CEPACS was to have incorporated extensive data-base and data retrieval features to assist Customs Inspectors and Commodity Specialists to select transactions for review. However, the features intended to support the Commodity Specialist were not part of the Core CEPAC system. They were later developed separately as part of the ALERT project, which also incorporates retrieval procedures for use in Customs investigations at the national level.

7.110 In 1981, Cabinet decided that Canada would work toward adopting the "harmonized system" of tariff/commodity identification developed under the auspices of the Customs Co-operation Council in Brussels. In 1983, the Department, on submission to Treasury Board, was given approval to change from existing hardware to IBM-compatible computing equipment. The Department's submission cited problems with the existing hardware and software. It also pointed out that the need to implement the harmonized system presented the opportunity to bring in an integrated automated data processing system.

7.111 By 1984, the Core CEPAC system had been implemented at 33 sites. The Department's 1984 Automation Strategy Report states that extension to an additional 10 ports has been deferred, pending system efficiency improvements.

7.112 The Department states that the Core CEPAC System will remain on the existing computers until the late 1980s when it will be replaced by a system operating on IBM-compatible equipment, and that this will incorporate most of the original design features of CEPACS. Some of the major components of the original CEPACS design are now being developed and tested in the ALERT and RMD (Release on Minimum Documentation) projects.

7.113 In response to our 1978 audit recommendations as they related to weaknesses in the Department's assessment of import entry documents, the Department stated that many of our concerns would be alleviated through the further development of the data-base and data retrieval features of CEPACS. Since only the Core CEPACS was implemented nationally, weaknesses in the areas of selection of entries for examination and assessment, measurement of the rate of non-compliance, evaluation of the assessment function, and retention of information remain unresolved.

Measuring Enforcement Results in Customs Ports Operations

7.115 We reviewed only those assessments, studies and data produced by the Program Evaluation Division that related to measurement of Port Operations. We did not audit the operations of this Division.

7.116 Passenger Operations. The Department has developed an ongoing system for air passenger operations (Air-PMS) to measure, among other things, the levels of voluntary compliance by travellers and its own success in detecting non-compliance. The Department indicates, however, that the system suffers from problems of data credibility. They have identified as a concern the non-adherence of Inspectors to the random sample selection procedures, and the possibility that random referrals are less thoroughly examined at secondary examination than other referrals. This would result in an over-estimation of compliance levels, and of the Department's success in detecting non-compliance. The Department is studying these problems to correct them.

7.117 In the area of highway passenger operations, which accounts for over 80 percent of traveller volume, the Department conducted a pilot project in the fall of 1982, to measure, among other things, the levels of compliance and the success in detecting non-compliance. However, a decision was made not to implement the system. This was due in part to cost constraints and in part to the concern that such performance information might be confused with setting quotas and thus create operating difficulties for the Department.

7.118 The Department also undertook a program evaluation study to examine a variety of issues related to all areas of passenger operations. Some of the study's recommendations have been implemented. One of the areas of the study the evaluators felt was critical to the departmental mandate and to achieving the compliance objective was the measurement of non-compliance. The study was to assess this and also the Department's effectiveness in detecting and rectifying non-compliance. In keeping with the audit's overall focus on mandate delivery, we audited only these aspects of the study, and our conclusions are restricted to them.

7.119 The study used an estimate of the success of Customs Inspectors in referring non-compliers for Secondary Inspection, relative to the success of a random referral process. This estimate was based on information from two sources: data taken from the Air-PMS (discussed above), and the views of Customs Inspectors. In our opinion, the information from these sources suffered from problems of validity. The estimate of Customs Inspectors' success was then used as a key input to calculations generating the estimate of voluntary compliance reported in the study.

7.120 The Department recognizes that these estimates included the use of "soft" information. It has reported in its 1985-86 Estimates, Part III, that procedures will be conducted to verify the information.

7.121 At present, therefore, the Department does not have sufficient objective and reliable information on the level of compliance and its success in detecting non-compliance for passenger operations.

7.122 Commercial Operations. As mentioned earlier, the Department has made progress toward measuring enforcement results in Port Operations. A program evaluation group has been established that is working toward measuring results of enforcement activities. At this time, however, the Department does not have satisfactory procedures in place to measure and report on the achievement of enforcement results in Commercial Operations.

7.123 The Department recognizes that there is a need for measuring enforcement results in Commercial Operations. It plans to continue its efforts to achieve that end.

7.124 Potential use. Information on enforcement results could be used for a number of purposes. These include: allowing management to consider the level of risk when making resource allocation and policy decisions; assessing the impact of policy or operational changes on the level of compliance; and adjusting responsiveness. The Department recognizes the importance of having valid information on enforcement results for management decisions. It is planning steps to develop appropriate procedures for obtaining this information.

7.125 The Department should ensure that it has sufficient objective and reliable information on the level of compliance in Passenger and Commercial Operations and on its success in detecting non-compliance.

Department's response: The Department fully recognizes the importance of this information and has had for some time, initially as part of its Management Improvement Plan, plans and activities in place to carry out the necessary development work. As noted, the Air Passenger Performance Information System (Air-PMS) is in place and operating. The Department expects to solve the operational problems of the Air-PMS, reported by the Auditor General, presently. In the area of Highway Passenger operations a feasible system has been developed and pilot tested. A final decision on national implementation will not be made until further analysis has been completed. Finally, in the area of Commercial Operations work is in progress to determine the most cost-effective procedures to employ in gathering the necessary data and the frequency with which this should be done.

Overall Summary and Conclusion

7.127 Our present audit focused on Customs' delivery of its mandate, particularly with respect to operational activities in Customs Ports. The Department has responded to the wishes of government and many Canadians to make it easier for importers and travellers to comply with Customs regulations. In some specialized areas such as detection of firearms, narcotics, explosives and pornography, the Department's enforcement activities are more intense than they were some years ago. On the other hand, the Department has fewer resources than it had in earlier years, it is coping with a larger workload, and it has limited information on the public's compliance and on its own success at detecting non-compliance. As a result of our review, including interviews with 200 Customs Officers, we have a concern that the deterrent and enforcement aspects of Customs in some other areas may have diminished. The Department does not have sufficient reliable information to determine to what degree this might be the case.

7.128 We believe a remedy lies in the direction we have mentioned several times in this chapter. Customs needs dependable processes to identify and select for inspection high risk commodities, importers, carriers and travellers. Customs also needs to have objective and reliable information - in addition to experience and intuition, about the level of compliance and about its own success in detecting non-compliance.