Laura Pujol Giménez
Director, International Association AEO, Customs and Logistics
Sometimes when you know the answers, the questions change. This is often the case at times when we seek new ideas and/or when a subject calls for the interest of multiple stakeholders. This is a positive sign indeed. This post addresses one of the many questions that could be asked about AEO.
What do multinational firms communicate to the markets on AEO?
The corporate sector offers one of the best views of the AEO landscape in their communications to the market. Annual reports, codes of conduct, conditions of service, are part of this business literature about AEO.
What follows are some of the findings that result from desk research on public communication from top listed companies around the world (350 companies were reviewed). The most salient topics mentioned in relation to AEO are:
-corporate risk management
-faster customs clearance of cargo leading to quicker delivery times for customers
-supply chain security and related requirements to suppliers
-recognition of the company as a reliable international trading partner
Here are some illustrative examples:
“If we were to lose our Authorized Economic Operator certificate, we may be required to modify our current business practices and to incur increased costs, as well as experience shipment delays”.
This quote is an excerpt from Ferrari’s 2017 annual report. Concretely, from the chapter where the company discloses the corporate risks factors it has identified and elaborates on its management approach. The company explains why loosing AEO status would have an impact on its operations and costs.
“Because we ship and sell our cars in numerous countries, the customs regulations of various jurisdictions are important to our business and operations. To expedite customs procedure, we applied for, and currently hold, the European Union’s Authorized Economic Operator (AEO) certificate. The AEO certificate is granted to operators that meet certain requirements regarding supply chain security and the safety and compliance with law of the operator’s customs controls and procedures. Operators are audited periodically for continued compliance with the requirements. The AEO certificate allows us to benefit from special expedited customs treatment, which significantly facilitates the shipment of our cars in the various markets where we operate. The AEO certificate is subject to mandatory audit review by May 1, 2019 according to the new European Customs Legislation and therefore we will need to implement all necessary organization changes in order to comply with the new requirements. If we were to lose the AEO status, including for failure to meet one of the certification’s requirements, we would be required to change our business practices and to adopt standard customs procedures for the shipment of our cars. This could result in increased costs and shipment delays, which, in turn, could negatively affect our results of operations.”
Emirates SkyCargo’s 2017 annual report highlights the positive impact in operations and client service of AEO status.
“We were also awarded the ‘Authorised Economic Operator’ (AEO) certification by the UAE Federal Customs authorities in March 2018. This allows faster customs clearance of cargo travelling on Emirates SkyCargo in the UAE, leading to quicker delivery times for our customers.”
As for AEO as an element of corporate supply chain risk management, the investor analysts from RobecoSAM provide an clear explanation of this in the Dow Jones Sustainability Index Questionnaire of 2018:
“When a company outsources its production, services or business processes, it also outsources corporate responsibilities and reputational risks. Companies and investors increasingly see the importance of supply chain risk management and the negative consequences if it is not managed effectively. Companies that are able to properly identify high risk suppliers will also be able to in a better way focus their risk management measures and early detect issues connected to supply chain characteristics and/or to suppliers’ risk performance. (…) In addition, companies are confronted with the need to minimize costs and time of delivery and increase profitability without negatively impacting product quality or incurring high environmental or social costs.”
Lead firms in global value chains are increasingly including AEO certification (or the national equivalent security standard) as a requirement to supplier firms.
Monsanto’s Supply Chain Integrity Code illustrates this:
“When applicable, suppliers should implement practices and procedures to ensure the security of their supply chains in accordance with Authorized Economic Operator (AEO) standards, the Customs-Trade Partnership Against Terrorism (C-TPAT) initiative of the US Department of Homeland Security, and related global supply chain security programs in the countries where suppliers engage with Monsanto.”
Similarly, Siemen’s General Conditions of Purchase of Goods & Services, state:
“Supplier, its Affiliates and Representatives, when providing Goods/Services to the Customer internationally, shall support the efforts of the Customer regarding security in the supply chain, as directed by the World Customs Organization SAFE Framework of Standards, US Customs & Border Protection C-TPAT standards or any other applicable customs trade security programs (e.g. AEO). Upon request, Supplier agrees to provide Customer’s declaration on security in the supply chain or other documentation recognizing Supplier’s participation in a national customs supply chain security program.
Recognition is an important benefit of AEO status. This is clearly conveyed by Itochu in its 2017 Sustainability report:
“In response to the growing importance of the corporate governance associated with global security risk, we have implemented corporate policies, procedures, and internal reporting structures to ensure that we perform rigorous, security-minded due diligence for global projects and transactions. (…) These measures have led to the director-general of Yokohama Customs certifying Itochu as an Authorized Economic Operator (AEO) (both Authorized Exporter and Authorized Importer), a title given to operators with outstanding compliance systems and security control.”
Far from providing a complete picture of the importance of AEO for large multinational firms and their suppliers, this leads to the following reflection: inclusiveness of the different types of operators in AEO country programs is an important policy issue, with implications for competitiveness and participation in trade, of both goods and services.
“When a company outsources its production, services or business processes, it also outsources corporate responsibilities and reputational risks. Companies and investors increasingly see the importance of supply chain risk management and the negative consequences if it is not managed effectively. Companies that are able to properly identify high risk suppliers will also be able to in a better way focus their risk management measures and early detect issues connected to supply chain characteristics and/or to suppliers’ risk performance. (…) In addition, companies are confronted with the need to minimize costs and time of delivery and increase profitability without negatively impacting product quality or incurring high environmental or social costs.” RobecoSAM, Dow Jones Sustainability Index Questionnaire 2018