THE MAGAZINE

EU Works to Secure its Supply Chain

By John Barham

Nightmare scenarios of containers packed with dirty bombs flowing unchecked through transportation networks are not a uniquely American fear. The European Union is getting ready to roll out a sophisticated new electronic customs system, inspired by the U.S. Customs-Trade Partnership Against Terrorism (C-TPAT) supply chain security program.

The EU’s European Commission aims to launch a sophisticated computer-based risk-assessment system by July 2009. This program would smooth shipments and improve screening. It would enable computer systems in each of the 27 member states’ customs administrations to communicate with each other and with the commission’s systems in real time.

Officials say the system would save companies money, and these savings would offset the investments those businesses will need to make to comply with the new requirements.

The risk management system would be the culmination of a broader modernization of the EU’s customs procedures that is now being implemented in stages. Starting last July, Europe-based exporters had to begin using the EU’s Export Control System, which enables each country’s customs services to share information electronically.

In addition, the European Commission is developing a prearrival and predeparture notification system. This data will enable authorities to run computerized risk assessments on each shipment almost instantaneously.

These systems are already helping the EU detect a wide range of potential threats. “We are very concerned about seizing items like military aircraft parts going to Iran or dangerous [consumer] products like fake toothpaste coming in,” says John Pulford, an official at the EU Commission’s Directorate General of Taxation and Customs Union. “We are looking beyond security to look at the safety of our citizens.”

The system has already helped avert safety threats. For example, a recent shipment of leather belts from Asia set off nuclear alarms because buckles were contaminated with radioactive cobalt 60, says Pulford.

Officials say that the program will not only help strengthen security controls in the EU’s complex supply chains, but it will also reduce customs’ clearance times. If it works as planned, the faster processing could generate millions of euros in savings for private companies.

The plan is for customs and security officials to fast-track goods shipped by recognized companies, letting them flow unimpeded through customs, while containers from suspect or unknown suppliers will be stopped for detailed inspection.

To facilitate that streamlining, a company must first win EU accreditation as an Authorized Economic Operator (AEO). Companies can apply for AEO status beginning in January 2008. To qualify, they must satisfy criteria that include tax compliance, stringent internal control systems, financial solvency, and a clean security and safety track record.

Will the program work as envisioned? Harald Schönfelder, a Brussels-based managing director at Fedex, has his doubts.

“Conceptually this is a very good plan,” he says, “but the time line is extremely aggressive. We are dealing with 27 member states with 27 computer systems that have to communicate with each other as well as the commission, and as traders, we also have to communicate and connect with each system.” He says the commission has not even announced technical specifications for the system yet.

But Michel de Jong, a Netherlands-based consultant at Ernst & Young Security Advisory Services, says that “there is a considerable expense related to this program, but it should provide significant logistic benefits. Moreover, parties that are AEO-certified will reap the operational rewards of an improved relation with customs authorities as well as the commercial rewards of a solid security profile in the logistic chain. That’s why companies want to do this, to keep their supply chains moving and get a return on their investment. The expense of meeting the AEO requirement will be negligible compared with not being compliant.”

Schönfelder is not so sure: “The benefits of doing this and becoming an AEO are not that mind-boggling and at this time we can’t see great benefits.”

Even if every major import/export company participates, questions remain about how effective the program will be.

One European risk consultant identifies a number of potential problems. For example, checks may not be uniformly rigorous throughout the EU. Compliance in Germany will probably be thorough, but controls could be lax in Mediterranean or east European states, he says. Criminals or terrorists could exploit such inconsistencies.

“If I were bin Laden, I’d be thinking about how I could infiltrate the [controls],” says the consultant. He adds that in the U.S. “C-TPAT program inspectors really go out and check. They travel the world to check on companies, but the EU is going to rely on each nation’s authorities to verify them. Everyone will have to go through a learning curve, and I’m not sure they can all do so at the same rate.”

Strict European privacy rules, especially in the Netherlands and Germany, may also make it hard to adequately screen staff working in sensitive areas, such as the workers handling containers or the express delivery drivers. That would make it easier for a terrorist cell to plant a member in a sensitive position inside a container terminal or airport.

Furthermore, he says, EU inspectors are focused mainly on financial audits, making sure that companies pay customs dues and taxes. Inspectors lack a security background and are unable to enforce counterterrorism compliance adequately.

The EU is aware of these criticisms and is addressing them to ensure that the system can be rolled out smoothly, Pulford says. He adds that the commission is organizing seminars and handing out training kits to local customs authorities.

“The commission has a lot invested in this,” says de Jong, “so there’s no doubt about the project being completed.” Whether it will be completed on time and whether it will make it harder for terrorists to penetrate the supply chain is another question.

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