EXCLUSIVE: Is the complexity of ICS2 hindering cross-border trade in the EU?

“ICS2 is a new and updated customs electronic import system,” explains Michelle De Pasquale, global commercial growth director at Eurora, a cross-border compliance platform that uses artificial intelligence (AI) and machine learning (ML) to manage cross-border VAT, duty amounts and declarations automatically. “Its main goal is to enable customs authorities to identify high-risk consignments better and intervene at the most appropriate point in the supply chain.”

ICS2 rollout

The rollout of ICS2 has three phases. Each release affects different economic operators (EOs) and modes of transportation. These EOs will begin declaring their goods to ICS2 depending on the type of services they provide. Phase 1 applied to express carriers (FedEx, UPS, DHL, etc) and postal operators and came into force in March 2021. Phase 2 extended the rollout to air carriers (Lufthansa, KLM, British Airways, etc) and air freight and was enforced from March 2023. Phase 3 completes the rollout, extending it to all other modes of transportation. It comes into effect in March 2024.

“In short, the first release focused on preloading data for air express carriers and postal operators and the second release focused on the transportation of all goods by air. The third release is aimed at operators carrying goods on maritime and inland waterways and roads and railways,” adds De Pasquale.

“The carrier of the goods via air has the responsibility for reporting the preloading data to ICS2,” adds Martin Palmer, advisor, external affairs at Hurricane Commerce and partner at Supply Chain Compliance. “The carrier needs to ensure that shippers provide them with the right data on the goods being transported.”

In ICS2 the retailer prepares an EU shipment that includes detailed product descriptions and HS codes (ENS data). The forwarder receives the shipment along with its filed shipment details and forms. The freight forwarder then either submits shipment data to ICS2 or passes it to the air carrier with the package. The air carrier confirms it has all the information needed for the shipment, or that the data has already been submitted to ICS2.

Complete data sets

One of the key aspects of ICS2 Release 2 is that it has introduced new data requirements and processes to be complied with, prior to transportation of the goods from a third country before their arrival at the EU’s external border. In Release 1, a subset of the ENS – called pre-loading advance cargo information (PLACI) – was provided before the goods were loaded onto the aircraft bound for the EU.

With ICS2 Release 2, air cargo general consignments are also subject to the PLACI filing and to the complete ENS data set prior to their arrival. A complete ENS can either be a single complete ENS filing, or a set of partial ENS filings (sent by more than one economic operator) that together contain all the data required for the goods to be brought into the EU by air. For short-haul flights, ENS filings need to be provided by the aircraft’s time of departure at the latest, and for long-haul flights, at least four hours before the goods arrive at the customs office of first entry to the EU.

“Failure by affected EOs to obtain the necessary data from their clients and to provide it to ICS2 will lead to actions by customs authorities to enforce compliance prior to and on arrival at the external border,” the EU noted in a statement.

According to Marius Penninks, vice president of clearance operations at FedEx Express Europe, the rollout of ICS2 has meant additional measures were needed to capture the data from the source and submit it to the authorities. “An important part of our preparations was aimed at educating and guiding customers that risk assessment is an essential requirement for the safety and security of everyone involved, including citizens,” he says.

Data quality

Ahead of the rollout of ICS2 Release 2, FedEx worked for four years on building an extensive infrastructure for the processing and handling of the new requirements, referrals for additional information and correcting errors. “One of the main tasks has been a need to drive a change in international shippers’ behavior so they systematically include the data required by the authorities. This meant a global marketing campaign educating shippers from all around the world to significantly increase the data capture rate, in a full, accurate and timely manner,” he adds.

“If we receive data from our customers where we can’t assess the classification, or the goods description is too vague, a specialist team will support and manually assign customs codes, contacting shippers if needed to obtain the required details,” Penninks continues. “This could pose a challenge especially on short-haul shipments, where time to submit the data elements is limited. The ultimate consequence could be a delay in the shipment until we can obtain the details we need to provide to the authorities.”

Hurricane’s Palmer, who previously worked at TNT as customs director, believes that data quality is one of the greatest challenges for ICS2, and like Penninks, he believes education is the key to overcoming this. “It really is all about education – and communication – about what makes a good product description,” he says. “There are a lot of resources available online today, but from a customs perspective you still often see a lot of useless information given in descriptions. Generic descriptions, such as “clothing” or “gift” are completely useless, and they are the goods that get flagged for examination or delay. The description should instead include information on what materials the goods are made of, and where they have come from, along with the value, for example.”

Complexity for posts

Experts from PostEurop’s Customs Working Group note that ICS2 Release 2 has brought major changes to the postal supply chain, including the requirement to provide additional data elements not normally required for postal movements.

Christophe Pereira, customs and international supply chain manager, at France’s Groupe La Poste, says, “ICS2 Release 2 brings an additional layer of complexity and goes far beyond the current UPU provisions in terms of electronic advance data. While postal operators are still implementing Release 1 requirements in conjunction with EU customs authorities, they are preparing Release 2 provisions. In this context, it is very difficult for postal operators to get fully ready for the changes and the expectations from EU customs authorities. It is also interesting to note that not all EU customs authorities are ready to start Release 2.”

Pereira is referring to the fact that 12 member countries were not able to connect to ICS2 Release 2 on March 1, 2023. They were granted legal derogation by the EU. The countries are Austria, Belgium, Denmark, Estonia, France, Greece, Croatia, Luxembourg, Netherlands, Poland, Romania and Sweden. The derogation enables them to connect to ICS2 more gradually until the end of certain deployment windows – the latest being October 2023. PostEurop’s experts also believe that the complexity of ICS2 has hampered cross-border trade in the EU.

David Pilkington, director of customs and international policy at Royal Mail, says, “ICS2 is an additional layer of security in the postal supply chain. However, it has put new demands on the exchange of data and messages between postal operators, stakeholders and EU customs. Many of these exchanges need further testing and engagement between partners to prove their viability.” Returns are also a key challenge. “Under the Union Customs Code (UCC) legislation, returned items must be declared into the ICS2 system,” Pereira says.

“However, this is one of the gaps identified by the postal community as the UCC is not fully compatible with the UN Treaty under the UPU. The UPU rules do not require the returning postal operator to provide data on returns, so EU postal operators are obliged to treat them manually.” Adding more pressure on posts and carriers is a new package of customs reforms recently proposed by the EU (see EU Customs Union reform, page 46).

“These reforms will have huge impacts in the postal supply chain by making it more difficult to import goods into the EU,” says Pilkington. “We have already seen this under ICS2 Release 1, which has reduced trade within the postal channel and increased the costs of goods for all EU citizens. The complexity has reduced the volume of exports to the EU, with suppliers choosing other destinations.

“It is highly recommended that the EU works in very close cooperation with the postal sector to set up a legal framework compatible with postal constraints and postal technical capabilities and aligned to international standards,” Pilkington adds.

Tech investments

To avoid disruption in the supply chain and ensure data quality in ICS2, there are several IT tools available to support carriers, posts and retailers. These range from AI/ML and blockchain-enabled solutions to OCR and simply more people entering data. Eurora and Hurricane Commerce are two firms leading the way in this space.

“We offer AI-driven classification and description enhancement services, which can help companies with ICS2 compliance,” explains Hurricane’s Palmer. “It helps plug the data gap.” The company’s Zephyr solution, for example, ensures that shipments have the right data – including HS6 codes, product descriptions and eight- and 10-digit import and export codes – to pass smoothly through customs.

Hurricane is working with several posts and carriers to support them with ICS2. In March, for example, NZ Post selected Hurricane’s Zephyr solution to meet ICS2 requirements. And late last year Hongkong Post chose Hurricane as the data partner to support its global e-commerce operations.

The post will be accessing Hurricane’s Zephyr and Aura solutions. Eurora, meanwhile, is a cross-border compliance platform that uses AI and ML to manage cross-border VAT, duty amounts and declarations automatically. More than 250 clients use the company’s platform to send millions of parcels daily. Eurora closed a US$40m Series A round in April 2022.

Eurora’s De Pasquale says, “Data is a key facilitator of cross-border trade, and data technologies like ML and AI are uniquely suited to this use case. AI enables accurate automation of HS code allocation, even with very low-quality package data – depending on the sender these might be excessively long, excessively short, or ambiguous descriptions – and it can process and infer context from multimodal sources, including text, images and numerical data.”

According to De Pasquale, the need for real-time, accurate data for cross-border trade will continue to increase worldwide and technology will be critical to meeting demands. “When scoping solutions, carriers should consider not just the requirements of ICS2 but future developments and other customs requirements, such as the US STOP Act, the EU’s VAT in the Digital Age (VIDA), the UK’s Customs Declaration Service (CDS) and Canada’s Assessment and Revenue Management (CARM), as well. The cross-border trade environment experiences catastrophic changes every single year and landmark changes at least every five years. Currently, the EU and US are setting the global trend toward high-quality data, and in a matter of time, others will follow.

“AI is uniquely suited to supporting cross-border compliance as it is easily updated as requirements change and can accurately automate code allocations from a range of data types (of varying quality), removing a lot of the repetitive, time-consuming tasks that are currently overwhelming compliance teams,” De Pasquale adds.

FedEx’s Penninks agrees that a broader approach to meeting customs requirements worldwide should be taken when carriers and posts consider what IT investments to make. “When considering IT systems for ICS2, other elements of the Union Customs Code (UCC) should also be considered as there are numerous changes happening over the next few years. ICS2 is just one.”

This article originally appeared in the September 2023 issue of Parcel and Postal Technology International. To view the magazine in full, click here.