Customs Risk Categorization of Traders in Russia

June 8, 2024

BRACE Law Firm ©

Amidst the growing flow of goods and vehicles crossing the border, customs authorities face a complex challenge: ensuring the movement of goods with minimal time and cost for foreign trade participants (the "Traders") while minimizing damage to the state resulting from violations of customs legislation. One way to balance state and business interests is the use of the Risk Management System (the "RMS") in customs affairs. This system reduces the volume of customs control — and consequently the resources expended—by identifying objects where violations of customs legislation are most likely to be detected.

Customs control is based on the principle of selectivity, which is ensured by the RMS. The categorization of Traders is one of the mechanisms of the RMS. The Federal Customs Service of Russia (the "FCS") thoroughly analyzes the activities of Traders using a risk categorization procedure. Risk categorization involves distributing Traders into three categories based on risk level: high, medium, and low. Each category is subject to a specific volume of customs control.

Based on the results of the categorization of Traders for the first quarter of 2024, the distribution included 120,562 Traders (1,104 fewer than in the fourth quarter of 2023). Following the categorization, the number of low-risk organizations totaled 12,527 (compared to 12,931 in the fourth quarter of 2023). These companies account for approximately 69% of all shipments and about 77% of customs duties paid. A total of 101,013 (101,872) companies were assigned to the medium-risk category, while 7,022 (6,863) were assigned to the high-risk category. [1]

In this way, a mutually beneficial agreement is reached, approaching the desired balance of private and public interests: the Trader complies with the prescribed conditions to satisfy state interests and, in return, receives a reduction in administrative barriers when moving goods across the EAEU customs border. For instance, in 2022, customs inspections were conducted for only 0.5% of shipments moved by low-risk Traders; additional documents and information were requested in 1.6% of cases, and customs expertise was ordered in 0.1% of cases. Meanwhile, medium- and high-risk Traders had indicators more than three times higher: customs inspections at 3.1% and 6.5%, requests for additional documents at 9.4% and 33.1%, and customs expertise at 0.2%. [2]

Regulatory Framework for Risk Categorization of Traders

The categorization of Traders is regulated by Article 377 of the Customs Code of the Eurasian Economic Union (the "EAEU Customs Code"). Under this article, customs authorities may categorize persons performing customs operations by assigning them to low, medium, or high risk levels for the purpose of differentiated risk mitigation measures. Furthermore, according to Article 316 of Federal Law No. 289-FZ dated August 3, 2018, On Customs Regulation in the Russian Federation and on Amending Certain Legislative Acts of the Russian Federation (the "Federal Law No. 289-FZ"), the federal executive body responsible for state policy and legal regulation in customs matters establishes the procedure, frequency, and forms of categorization, as well as the criteria, evaluation methodology, and conditions for risk level assignment and differentiated risk mitigation.

While the FCS previously handled the regulatory aspects of categorization, the Ministry of Finance of Russia now holds this responsibility. Pursuant to these norms, the Ministry of Finance issued Order No. 29n dated February 21, 2020 (the "Order No. 29n"), which defines the rules for categorizing persons performing customs operations, the frequency and form of categorization, conditions for risk level assignment, and conditions for the differentiated application of risk mitigation measures.

Notably, this Order does not establish a methodology for evaluating the criteria of categorized persons, as such information is confidential and restricted, and may not be disclosed to third parties. Publicly disclosing this information would allow unscrupulous Traders to adjust their activities to meet low-risk criteria and, by abusing such status, harm state interests. [3] At the same time, this circumstance makes it difficult to challenge customs authorities' actions regarding risk level assignments. Such cases are not found in judicial practice.

Categorization is carried out through automated information analysis using the Unified Automated Information System of the customs authorities. This applies to persons performing customs operations as declarants of goods placed under the customs procedures of release for domestic consumption and (or) export.

Categorization specifically applies to Traders acting as declarants of goods. The risk level is not determined under Order No. 29n for other persons acting exclusively as recipients, shippers, or those responsible for financial settlement, or for those performing customs operations as customs representatives.

Conditions and Criteria for Assigning Traders to Risk Categories

Customs authorities categorize persons by analyzing information about their activities for two calendar years preceding the month of the analysis, using criteria that characterize their activities. Categorization is conducted quarterly no later than the 25th day of the last month of the quarter. During this process, the system automatically performs a sequential calculation of each criterion to determine the final assessment of the person's activities.

Until 2017, the Russian customs system utilized 43 criteria to characterize Traders. Following the entry into force of new customs legislation, the list was reduced to 30. These changes primarily involved consolidating several positions and eliminating others after an FCS working group analyzed their feasibility. Currently, Order No. 29n establishes a list of 31 criteria, which can be divided into four groups:

• Group 1: Organizational criteria, such as the size of charter capital or the total period of activity.
• Group 2: Criteria related to the fulfillment of obligations to pay customs duties. This includes decisions by customs authorities to change customs value and the assessment or additional assessment of customs payments based on post-release controls.
• Group 3: Law enforcement criteria, such as the number of initiated administrative offense cases.
• Group 4: Criteria based on information from other agencies. For example, information from the Federal Tax Service (the "FTS") via information exchange, or information from currency control agents regarding suspicious currency operations.[4]

The high-risk category is assigned if any of the following conditions are met:

• Failure to perform duties provided for by Paragraph 2 of Article 336 of the EAEU Customs Code during a customs audit. Such duties include presenting goods subject to an on-site customs audit, providing requested documents and information within established deadlines (in hard copy or other media), and ensuring unimpeded access for customs officials to the audited person's facilities, including providing a workspace.
• The person is in the stage of liquidation or termination of activities.
• The person has an unfulfilled obligation to pay an administrative fine exceeding 10 calendar days from the expiration of the payment deadline according to a legally effective judgment issued by a customs authority after December 31, 2008.
• The Trader is the shipper, recipient, or declarant of goods for which evasion of customs payments has been confirmed by a legally effective court sentence under Part 1 or 2 of Article 194 of the Criminal Code of the Russian Federation.
• The Trader is classified as having a high tax risk based on FTS categorization results obtained through inter-agency cooperation between the FCS and FTS.

The low-risk category is assigned if all of the following conditions are met simultaneously:

• The registration date of the first declaration for goods placed under the customs procedure for domestic consumption and (or) export precedes the start of the reporting period or is at least six months prior to the end of the reporting period (provided the Trader is classified as low-tax-risk by the FTS).
• The total number of declarations for goods released under domestic consumption and (or) export procedures in the reporting period is at least 70 units, provided that the total number of goods declared therein is at least 100.
• The Trader is a legal entity.
• The final assessment of the Trader's activity corresponds to the control value defined for the low-risk category by the evaluation methodology.
• No unfulfilled obligation exists on the day of categorization for the payment of customs duties, taxes, special, antidumping, or countervailing duties, interest, or penalties exceeding 10 calendar days from the deadline specified in the notice (or amendment to the notice).
• No conditions for high-risk category assignment have been identified.

The medium-risk category is assigned if the Trader does not fall into the high- or low-risk categories.

In addition to the conditions above, the following criteria are considered when assigning a risk level:

• Size of the Trader’s charter capital. However, no minimum charter capital requirement is established.
• Total period of the person's foreign trade activity. The evaluation considers the entire period regardless of its length. To achieve low-risk status, the minimum period must be two years (or six months for Traders categorized as low-tax-risk by the FTS).
• The ratio of the value of goods imported from countries included in the List of states and territories providing preferential tax treatment and (or) not requiring the disclosure of information during financial operations (offshore zones) to the total value of released goods.
• The ratio of the value of goods placed under the re-import procedure to the total value of released exported goods.
• The ratio of the value of imported goods released with a statistical value per 1 kg of net weight below the FCS average for similar goods to the total value of released imported goods.
• The ratio of the value of exported goods subject to export duties released with a statistical value per 1 kg of net weight below the FCS average for similar goods to the total value of released exported goods.
• The ratio of the value of exported goods not subject to export duties released with a statistical value per 1 kg of net weight above the FCS average for similar goods to the total value of released exported goods.
• The ratio of the number of goods for which a customs value adjustment decision was made to the total number of released goods.
• The ratio of the amount by which the customs value increased due to adjustments to the total customs value of adjusted goods, considering the total number of released declarations.
• The ratio of the value of goods for which risk mitigation measures were successful (resulting in additional assessments, fines, or customs decisions) to the total value of released goods.
• The ratio of the value of goods placed under the re-export procedure (not for the purpose of completing a previous procedure) to the total value of released imported goods.
• The ratio of the number of import declarations for which release was refused or withdrawn to the total number of released import declarations.
• The ratio of the total amount of assessed customs duties, taxes, and other payments to the total amount of such payments assessed by the FCS as a whole.
• Commodity nomenclature specialization. This evaluates the concentration of the Trader on moving specific groups of goods over a certain period. This concentration indicates stability in a market segment and a minimal risk of errors due to professional experience.
• The ratio of additional customs payments resulting from decisions on the classification of goods under the Commodity Nomenclature of Foreign Economic Activity (the "TN VED") to the total amount of assessed customs payments for such goods.
• Information from currency control authorities regarding suspicious currency operations that are unusual, lack clear economic sense or obvious legal goals, and may be used for capital flight, financing "gray" imports, or money laundering.
• The ratio of initiated administrative offense cases (with effective penalty orders) to the total number of released declarations.
• The ratio of administrative penalties and fines imposed under Chapter 16 and Articles 7.12 and 14.10 of the CAO RF to the total value of released goods.
• Violations of currency legislation subject to liability under Article 15.25 of the CAO RF.
• The initiation of a criminal case by customs authorities (that has not been terminated or was terminated on non-rehabilitating grounds) regarding a crime involving the movement of goods for which the person was the shipper, recipient, or declarant.
• Presence of debt (arrears) under Russian tax and levy legislation. This evaluates debt specifically to the FTS. The exchange of such information is provided for by the cooperation agreement between the FCS and FTS. No minimum debt threshold is set; its mere presence or absence is factored into the categorization.
• Categorization as low-tax-risk by the FTS.
• The amount of customs payments, penalties, and fines additionally assessed based on post-release customs controls.
• Export orientation, which reflects the organization's interest in distributing trade flows and indicates a long-term strategy for business development and partnership. However, the absence of export operations does not indicate a risk of violating customs legislation and does not negatively impact the final categorization score.
• Whether the person is registered by tax authorities as a major taxpayer.

Please note that categorization considers the fact of violations detected during post-release audits. The evaluation is differentiated based on the amount of customs duties and taxes additionally assessed as a result of the audit.

Risk Mitigation Measures

The risk mitigation measures applied by customs authorities depend on the assigned risk category. These measures include forms of customs control, measures ensuring customs control, and other measures established by the EAEU Customs Code and national legislation. Under Article 322 of the EAEU Customs Code, forms of customs control include:

• Obtaining explanations;
• Checking customs and other documents and (or) information;
• Customs inspection (external);
• Customs examination (detailed);
• Personal customs search;
• Customs inspection of premises and territories;
• Customs audit.

Measures ensuring customs control are listed in Article 338 of the EAEU Customs Code. These include requesting documents and information, ordering customs expertise, and taking samples or specimens of goods.

For goods declared by low-risk Traders, risk mitigation measures apply only when necessary as specified by a mandatory risk profile. A risk profile is a set of information regarding a risk area (description of the risk and conditions for its occurrence), risk indicators (signs used to select a control object), and risk mitigation measures (Article 377 of the EAEU Customs Code).

For low-risk persons, risk mitigation measures are applied based on a random number generator with values set in the range of 1:100 to 1:50.

For goods declared by medium-risk persons, risk mitigation measures apply when their necessity is determined by a detected risk profile.

Note that for persons categorized as low-tax-risk by the FTS, risk mitigation measures are applied no more frequently than to 1 in 10 cases. Measures requiring a decision by a superior customs authority during declaration review before release apply no more frequently than to 1 in 20 declarations.

For goods declared by high-risk persons, risk mitigation measures contained in risk profiles apply in all cases where the necessity of their application is determined by the detected risk profile.

Additionally, under Part 2 of Article 313 of Federal Law No. 289-FZ, other measures may apply to persons in any risk category:

• Measures involving the transfer of decision-making authority to a superior official or customs authority;
• Measures requiring the reconciliation of data in the customs declaration with data in documents presented to the customs authority where the goods are located.

If a person fails to meet low-risk conditions, they may still be assigned to the low-risk category if a federal executive body submits a petition as part of state support measures. This aims to maintain the financial stability of systemically important organizations amidst unfriendly actions by foreign states. The petition must be sent by the relevant industry ministry to the FCS as a formal letter or in electronic form.

Customs authorities monitor compliance with the criteria through automated information analysis. This allows them to cover the maximum number of Traders quickly while eliminating subjective human factors. Automated categorization also enables regular assessment and rapid category changes, making it the most promising form of categorization. [5]

Monitoring for low-risk criteria occurs monthly no later than the 25th day of each month. However, monitoring for unpaid customs duties, taxes, interest, or penalties, as well as high-risk conditions, occurs daily.

If such violations are detected during daily monitoring, the Trader is assigned to the medium-risk category until the causes are eliminated. If a Trader fails to meet low-risk conditions during monthly monitoring, they are assigned to the medium- or high-risk category until the end of the quarter in which the non-compliance was detected.

Experts highlight several key problems regarding the regulation and application of categorization:

• Lack of public methodology: Neither general customs legislation nor Order No. 29n discloses the evaluation methodology for the criteria.
• Overlapping criteria: Multiple criteria may be triggered by the same circumstances, increasing the likelihood that a single cause will push a person into the medium-risk category.
• Subjectivity: For example, the criterion regarding duties during a customs audit means that a simple mistake—such as accidentally providing the wrong document—can be treated as a failure to perform duties, leading to a category change. There are cases where the RMS triggers a category change without substantial reasons.
• Unknown FTS criteria: Order No. 29n frequently refers to criteria that are unknown to the Traders, such as the confidential FTS tax categorization.
• Disproportionality of "penalty" criteria: The criterion based on the "number of cases" relative to total declarations can be unfair. While the "amount of fines" is relatively objective, a company may have many minor administrative cases (e.g., for missing documents or minor inaccuracies) that are not worth challenging but significantly impact its risk category.
• Lack of feedback: Traders often only learn of a category change through indirect signs, such as more frequent inspections and document requests. This information is not immediately updated in the Trader's personal account. Furthermore, while a category change due to unpaid duties can be reversed by making the payment, a change due to non-compliance with low-risk criteria remains in effect until the end of the quarter, even if the issue is corrected. [6]

The categorization procedure discussed in this article allows the customs service to use its resources more effectively amidst Russia's growing foreign trade volume by concentrating control on the most high-risk shipments. Categorization provides a differentiated approach that can reduce the time required for customs operations and lower the administrative burden on customs authorities.

_____________________________

References

[1] FCS of Russia presented results of the categorization of foreign trade participants for the 1st quarter of 2024, Jan. 15, 2024. Alta-Soft Website.

[2] Kleymenova A.N. Legal Incentives in Customs Law. Administrative and Municipal Law Journal, 2024-1.

[3] Information from the FCS of Russia, Answers to Current Questions on Automated Categorization of Foreign Trade Participants.

[4] Aleksey Sizov. Categorization of Foreign Trade Participants, Nov. 30, 2022. Alta-Soft Website.

[5] Verbina V.V. Subject-Oriented Approach to Risk Management in the Customs Service of the Russian Federation. Bulletin of the Russian Customs Academy Journal, 2020, No. 4.

[6] Aleksey Sizov. Categorization of Foreign Trade Participants, Nov. 30, 2022. Alta-Soft Website.