WAREHOUSE SECURITY: A COST-BENEFIT ANALYSIS FOR ‘BONDED’ GOODS

Global businesses undertaking their own international distribution are likely at some point to consider whether they should license some of their distribution centres to hold imported products on which customs duties and taxes have not yet been paid. While there are added costs associated with licensing fees payable to local customs agencies, and further compliance costs to ensure adherence to local customs laws, there can be substantial savings from being able to defer potentially large import duty and tax payments until closer to the time that the goods are on-sold.

A business seeking a licence for a warehouse or distribution centre as a bonded facility generally must meet certain legal requirements. These cover areas such as record keeping and integrity of management and key warehouse staff, as well as the physical security of the site itself.

In light of these requirements, an interesting question arose recently with regard to the distribution centre of a multinational company that had decided to have it bonded under local customs laws to hold imported products until duty and taxes were paid.

An external consultant had advised that the facility in question was not secure. A handful of CCTV cameras that were still operational did not record properly, several employees who had left the company did not return access key cards, the contact name for the “back to base” alarm had resigned two years earlier, and several gaps in the exterior wire fence were large enough for a person carrying a box to easily get through.

The manager of the centre commented that it was more expensive to fix these security issues than it was to cover the losses of some staff stealing a few boxes each day. He added that customs agencies should think more like businesses and look at keeping costs down and let them make their own risk decisions in relation to the costs of security versus the cost of theft.

The cost-benefit analysis of the site manager, however, does not take into account just what the concept of “bonded” means, and why physical security, staff integrity and strong record keeping are required.

Imported goods that are bonded have not yet been cleared from customs control; in some respects they haven’t yet formerly entered the country. As the role of customs agencies is to intercept imports of prohibited and dangerous goods, they have a significant interest in ensuring that any goods arriving in the country can be stopped, searched and seized before they are formerly allowed to enter.

In support of this, local customs laws will often provide for significant penalties for any unauthorised access to bonded goods, as well as any unauthorised release of those goods, which of course includes theft.

Although rare, it is not unheard of for the supply chain of a global distributor to be compromised, and so even with the lowest-risk large multinational distributors, customs agencies need powers to ensure that they can identify and examine any individual imports they deem “high-risk”.

If a bonded distribution centre undermines these customs powers by not controlling its premises, staff and visitors, and cargo is opened and goods stolen, then the legal consequences can be harsh.

Although what is stolen may be harmless or of little value, customs agencies initially have to respond as if something more sinister has occurred. In other words, might there have been a plan to smuggle in something such as narcotics or firearms and remove it from the bonded site?

Generally, penalties for a licensee unable to account for all bonded goods will range from a formal admonishment to administrative financial penalties. For serious or recurring breaches, prosecution through the courts is likely, with subsequent loss of the bonded warehouse licence itself.

The loss of the licence in many cases would be the worst outcome for a business, as that means the end of the opportunity to defer duties and taxes, pushing this cost forward for the business to when the goods first arrive at the border from overseas.

So returning to the cost-benefit analysis question raised by the warehouse manager seeking to have his site licensed, the cost of providing adequate physical security for a bonded distribution centre seems more like a good investment than an overhead.

Although the cost of a security upgrade could well exceed losses through petty theft over a number of years, it does not exceed the cost of potential fines, the wrath of customs and the potential loss of the business that is conducted at the bonded site.

Rob Preece is course director of excise studies and the Southeast Asian representative for the Centre for Customs & Excise Studies at Charles Sturt University in Canberra, Australia. The Link is coordinated by Barry Elliott and Chris Catto-Smith as an interactive forum for industry professionals. We welcome all input, questions, feedback and news at: BJElliott@ABf1Consulting.com, cattoc@freshport.asia