1. May 13, 2008 Craig J. Pinkerton, Director – PricewaterhouseCoopers
National Conference on SAFE TRADE & AEO “CTPAT Six Years on: A Review of the Private Sector”
May 13, 2008
Craig J. Pinkerton, Director – PricewaterhouseCoopers

2. Level of Security Prior to 9/11
The level of security for importers, carriers, truckers, etc. was determined primarily on:
the value and nature of imported merchandise
the level of theft and shrinkage discovered along the supply chain
whether the product was considered sensitive by the government (e.g., tobacco; pharmaceutical drugs)
whether the product could pose a threat to the public (e.g., firearms; chemicals; hazardous materials) 2

3. Threats to the Supply Chain Changed the Security Landscape
9/11 introduced tighter security into the logistics process
The flow of goods from the manufacturer to the end user is now viewed as needing protection, not just the product
People crossing borders into the U.S. are being monitored to minimize or eliminate the threat of danger
No longer is it only value or dangers intrinsic to imported product, but the logistics function itself is being viewed as a security issue
The conclusion that danger could accompany products throughout the supply chain caused a major refocus on security 3

4. Development of Security Initiatives
ISO (International
Organization for
Standardization)
Container Security
Initiative
WCO
Customs-Trade
Partnership Against
Terrorism (C-TPAT)
10+2 Security
Filing
AEO (Authorized
Economic Operator)
FAST (Free and
Secure Trade)
Canadian PIP (Partners
in Protection)
SAFE
Framework 4

5. What are Customs’ Expectations?
Through this initiative, Customs is asking companies to ensure the integrity of their security practices and communicate their security guidelines to their business partners within the supply chain (i.e., “increased vigilance”)
The primary goals of C-TPAT include:
Increasing security measures, practices and procedures throughout all sectors of the international supply chain
Protecting the public from terrorist activities
Ensuring the flow of legitimate trade
Providing Customs with a means of looking into a company’s supply chain security profile 5

6. WCO Standards Mirror C-TPAT
Business-Customs Cooperation
Conveyance/Container Security
ISO Security Seals Required
Physical Access Security
Personnel Security
Procedural Security
Information Systems Security
Employee Security Training
Continuous Improvement Process
Risk Assessment 6

7. Evolution of C-TPAT
Launched in November 2001, with only seven major importers
C-TPAT currently has more than 10,000 partners, which include United States importers, customs brokers, terminal operators, carriers, truckers and some foreign manufacturers
Initially, voluntary participation and jointly developed security criteria and implementation procedures were the guiding principles
As the program grew, so did the need for more clearly-defined security criteria to establish the minimum, baseline security expectations for membership
In 2005, minimum-security criteria for importers was implemented and companies were required to meet the new criteria within certain timelines 7

8. C-TPAT Benefits
Beyond the essential security benefits, Customs offers the following benefits to C-TPAT members:
A reduced number of inspections (reduced border times)
Priority processing for Customs inspections (Front of the Line processing for inspections when possible)
Assignment of a C-TPAT Supply Chain Security Specialist who will work with the company to validate and enhance security throughout the company’s international supply chain
An emphasis on self-policing, not Customs verifications 8

9. C-TPAT Benefits
Eligible to attend C-TPAT supply chain security training seminars
Access to other C-TPAT members via the Status Verification Interface
Certified C-TPAT importers are eligible for access to the FAST lanes on the Canadian and Mexican borders
Mitigating factor in cases of fines and penalties
Demonstrates good corporate citizenship to Customs 9

10. Security Costs versus Benefits
There have been several logistics studies published since 9/11 that detail the costs and benefits associated with the C-TPAT program, such as:
Stanford Supply Chain Study - October 2003
MIT Supply Chain Study - May 2005
Stanford Innovation in Supply Chain Security - July 2006
University of Virginia Cost Benefit Survey - August 2007 10

11. Benefits from Investment in SAFE Trade
Fewer Customs Inspections (50%)
Reduction in Excess Inventory (14%)
Improved on-time delivery (12%)
Reduction in Theft/Loss/Pilferage (38%)
Access to Shipping Data (50%)
Timely Shipping Data (30%)
Less Customer Attrition (26%)
Increase of New Customers (20%)
(Source: Stanford University Study, July 2006) 11

12. Benefits from Investment in SAFE Trade
The primary motivation for importers to join C-TPAT is to reduce the risk of supply chain disruptions due to a terrorist attack
Four out of every ten members did not have a formal supply chain security plan prior to joining the program
C-TPAT moved thousands of companies to give closer scrutiny to the security of the goods they handle and review the supply chain to ensure that their overseas suppliers have implemented sound security practices
Greater Supply Chain integrity (stronger seal controls)
Stronger brand equity 12

13. Benefits from Investment in SAFE Trade
The vast majority (81.3 percent) of members indicated that their ability to assess and manage supply chain risk had been strengthened as a result of joining C-TPAT
C-TPAT certification requires that companies meet an extensive checklist of verifiable conditions. Nevertheless, minimum security criteria were generally viewed as very easy or somewhat easy to implement across the various sectors
More than half (56.8 percent) of the members indicated that C-TPAT benefits either outweighed the costs or were about the same
(Source: University of Virginia Study 2007) 13

14. Costs from Investment in SAFE Trade
Typical implementation costs (listed from highest to lowest):
Improving or implementing physical security costs (doors, windows, electronic access, cameras, fences, gates, lighting, etc.)
Salaries and expenses of personnel
Improving IT systems and databases
Improving cargo security
Improving or implementing in-house education, training, and awareness
Improving personnel security procedures 14

15. Example of Security Procedures to be reviewed
Physical Access Controls
Employees, Visitors and Deliveries – identification and badge process is key; and removing unauthorized individuals
Personnel Security
Pre-employment verification, background checks, and termination procedures for prospective and current employees
Procedural Security
Documentation processing, shipping and receiving, and cargo discrepancies
Container and Trailer Security
Seal integrity, inspection and storage 15

16. Example of Security Procedures to be reviewed
Physical Security
Fencing, guardhouses, parking, locking devices, key controls, lighting, alarms, and video cameras
Information Technology Security
IT security procedures, password protection, system accountability (firewall, virus protection, monitoring service)
Security training and threat awareness
Focus on what types of training offered to employees and whether supply chain security training (C-TPAT specific) given 16

17. Business Partner Requirements
Importers must have written, verifiable processes for the selection of business partners including manufacturers, product suppliers, and vendors
They should also have documentation substantiating that partners throughout their supply chain are meeting C-TPAT security standards - or equivalent supply chain security program criteria
e.g., supply chain assessment questionnaire, on-site audit report, written confirmation, etc.
Where a company outsources or contracts elements of its supply chain, such as a foreign facility, warehouse, or conveyance, it must work with these business partners to ensure that pertinent security measures are in place and adhered to 17

18. Business Partner Requirements
Companies now leverage their business relationships and ensure that business partners develop security processes and procedures consistent with the C-TPAT criteria
Build C-TPAT/security language directly into contract
Narrowing universe of business partners
Periodic reviews of business partner’s processes and facilities should be conducted based on risk 18

19. Business Partner – Example of Risk
Foreign inland freight carrier - may be the weakest link in the supply chain
In certain countries, local trucking companies must be used. Additional processes may need to be set up to deal with risk 19

20. Common Security Shortfalls
Cargo seals not used by foreign inland carriers and policy not documented
Less than full truck load
Air shipments
No C-TPAT security-based training provided to employees, especially those with cargo handling responsibilities (warehouse, shipping, receiving, etc.)
Procedures at foreign facility are commonly “patched” together from various departments, rarely mention C-TPAT related policies and procedures, and usually consist of random screen shots and dusty binders 20

21. Common Security Shortfalls
Employees inconsistent in displaying badges, especially in cargo handling areas
C-TPAT web portal not updated to reflect changes in company’s program
From security standpoint, other weak areas noted included:
Mail room deliveries
Use of temporary agencies for labor
No one actually monitoring video cameras (or, for example, 32 cameras all feeding into a 13” monitor)
Collecting badges and terminating access when employees leave company 21

22. Common Security Shortfalls
Responses received from foreign vendor during questionnaire process do not match reality. Examples:
“fence around perimeter” vs. fence rusted and fell down in 1998
“pan and zoom cameras throughout facility” vs. inoperable cameras dangling from wires
“truck drivers sign in/out” vs. drivers waved on through because same drivers every day
Customs not asked for identification upon arrival
(Note: A company is not required to implement all best practices, however, CBP may ask why certain procedures cannot be implemented) 22

23. Benchmarking - Best Practices from Industry
Security measures:
Exceed the C-TPAT Security Criteria
Incorporate management support
Have written policies and procedures that govern their use
Employ a system of checks and balances
C-TPAT is an on-going program!
Companies continually update their supply chain security program (e.g., new factories, business partners)
Periodic assessment is part of corporate manual
Verify procedures to ensure they are being followed and make modifications as necessary
Ownership at each entity level responsible for maintenance 23

24. Benchmarking - Best Practices from Industry
Since C-TPAT is a Customs program, it is typically managed by a company’s global customs compliance group along with legal oversight
C-TPAT “Champion” provides oversight
Importer has sound compliance program in place
Opportunity to provide additional on-site training
Ability to tie into other security initiatives (e.g., requirement)
Senior Management Support and Buy-in
An absolute must
Lack of support at top levels - failure is imminent! 24

25. Benchmarking - Best Practices from Industry
Do not assume business partners will not be visited – especially foreign business partners. Example:
Tier 3 U.S.-based customs broker in Philippines is visited an average of two times per month by CBP SCSS
As a result of numerous visits, virtually every best practice has been implemented (clearly evident)
GPS on all trucks to monitor real-time movements
Security personnel accompany shipment from factory to airport (customs bonded facility)
High security seals and padlocks utilized
Comprehensive policies and procedures 25

26. Recommended Workplan for Security Program
Review global supply chain to verify your business partners, such as foreign manufacturers, carriers and brokers
Conduct analysis based on volume and risk
Identify which business partners are already in the C-TPAT program or other supply chain program such as AEO, and which partners have already participated in a supply chain documentation process or have undergone an on-site audit
Determine best application strategy 26

27. Recommended Workplan for Security Program
Conduct domestic reviews at headquarters and distribution facilities
Conduct comprehensive self-assessment of supply chain security (based on the C-TPAT/AEO security guidelines)
Document current supply chain security procedures
Develop and implement a program to enhance security throughout the supply chain in accordance with guidelines
Communicate supply chain security guidelines to other partners in supply chain 27

28. How has C-TPAT evolved? Already in progress:
Detailed verifications of applications
Revalidations of certified companies
Tighter container seal control
Tighter documentation control
New security criteria - importers now seeking to join the C-TPAT program will need to meet or exceed the new security criteria before they will be certified 28

29. How has C-TPAT evolved? Companies beginning to implement:
Smart containers and tracking systems
Extensive screening (initial & ongoing) of personnel. This includes both foreign and domestic locations
Security/C-TPAT requirements for their entire supplier base and logistics providers
Security audit as part of normal periodic audit of foreign entities
Best Practices to obtain Tier 3 status
As of March 2008, only 243 Tier 3 companies 29

30. Moving Forward: 2008 and Beyond
The SAFE Port ACT signed in 2007 has codified C-TPAT and CSI and calls for mandatory use of ISO compliant seals on all containers by October 2008
Canadian PIP program members will gain reciprocity status with C-TPAT program members
TSA will announce air cargo security guidelines deferring to many C-TPAT guidelines
WCO will expand the AEO program in the European Union, Asia and Latin America
Greater use of electronics in cargo protection 30

31. Moving Forward: 2008 and Beyond
More frequent reviews of company’s security procedures and policies (even after validation/revalidation)
C-TPAT members continue conducting audits of foreign vendors regardless of whether in another program
C-TPAT members are conditioning contractual business relationships with their service providers and vendors based on C-TPAT participation and/or adherence to C- TPAT security guidelines
Mutual Recognition and Reciprocity with other countries
Global buy-in to security
Additional X-ray screening and data mining 31

32. Moving Forward: 2008 and Beyond
Congress pressuring Customs to implement 100% container screening. Customs potentially trying to counter with C-TPAT program and cargo screening software
Customs reducing timeline for validations from 3 years to 1 year, and revalidating each company every 3 years instead of the specified 4-year schedule
Third-party validations: Customs currently accepts only in China. Other AEO programs may allow selected third parties to conduct validations in any country 32

33. CONTACTS
Craig J. Pinkerton – PricewaterhouseCoopers Los Angeles
Tel: (213)
Dennis Caronan – PricewaterhouseCoopers
Manila
Tel: , Ext. 2118
John S. Kwak – PricewaterhouseCoopers
Hong Kong
Tel: (852)