Product trade compliance issues impact company revenues.
From the boardroom to the shipping room, from sales to customer service, trade compliance issues have significant impact on corporate revenues, decisions and processes. When business processes that support trade compliance are inadequately supported by modern technologies, the manpower and resources required to protect the company, its executive and shareholders from the regulatory and business risks of non-compliance can be staggering.
Companies that purchase from or sell to foreign entities face a number of thorny trade compliance issues. Some are a direct consequence of trade regulations governing the goods themselves, or due diligence and corporate governance requirements. Others are a result of the entities and countries involved in the transaction or government import and export reporting requirements.
These same compliance and business issues also affect companies that buy and sell goods (tangible or intangible) exclusively in the domestic market when these goods are controlled by laws and regulations one might suspect would apply only to physical imports or exports.
What are the main product trade compliance issues companies face, and how do they affect your business processes and bottom line?
• Compliance Issues Affecting Business Processes and Revenue
- Screening products and destinations for restricted, sanctioned or embargoed countries. Screening suppliers, purchasers and trade chain partners for inclusion on government watch lists
- Classifying products under the HTS, Schedule B, ITAR and EAR and creating/applying preferential certificates of origin
- Managing licenses, exceptions and exemptions and restricting access to controlled goods
- Creating and/or managing import/export documentation and other customs formalities
- Targeting communication, education and resolution resources
- Managing knowledge, documentation and access across business units or geographical locations
• Ineffective Compliance Systems and Outdated Content
Some companies experience additional compliance and business burdens consequent to their inherited compliance systems. Systems that are not as effective or efficient as they could be pose significant human resource or technical burdens, and often provide inadequate protection from committing violations, and proving due diligence. Some compliance systems generate too many false positives. Some are difficult to learn, and use. Some do not adequately integrate with all necessary ERP, eCommerce and other corporate technologies. Others do not provide a full range of deployment options that include Internet-based, batch and multiple technology integrations. And some do not have adequately current or comprehensive regulatory content.
Exports, Re-exports and Deemed Exports
Since 9/11, the laws, regulations and procedures surrounding the export, re-export and deemed export of goods, technologies and materials have become more complex and rigorous. Perhaps most importantly however, they have become subject to increased government scrutiny and enforcement efforts.
Export compliance violations can see the company facing penalties ranging from $50,000 to $10,000,000 per transaction, denial of export privileges and its executive facing lengthy prison terms. Equally compelling are the consequent damage to corporate reputation and image, and the substantial costs of legal representation, management distraction and business interruption.
For these reasons, top priority export compliance issues generally include:
• Screening Customers, Vendors, Employees, Countries and Trade Chain Partners
Regardless of the product, companies need to be concerned with ensuring compliance with U.S. Treasury Office of Foreign Assets Control (OFAC) embargoes and trade sanctions against specific countries and regimes, as well as having any financial transaction with entities on the OFAC Specially Designated Nationals list (SDN). This list, sometimes referred to as the sanctioned parties list (SPL), is an accumulation of non-country specific targets that includes terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States and its allies. U.S. companies are generally prohibited from having any financial transactions with any SDN party.
When goods are controlled under the Commerce Control List (CCL) or the United States Munitions List (USML), companies also need to be concerned with ensuring that their products are not being sourced from, sold to, or do not come into contact with parties on numerous government watch lists including the Department of Commerce Bureau of Industry and Security (BIS) denied persons, unverified and entity lists, the Department of State Directorate of Defense Trade Controls (DDTC) debarred list and nonproliferation sanctions lists, U.S. Treasury Office of Foreign Assets Control (OFAC) Specially Designated Nationals list (SDN), and a host of other national and international lists including those from the United Nations, the UK, France, Germany, the EU, Japan and so forth.
Securing supply chains, from employees and contractors to freight forwarders, consignees, carriers and vessels, brokers, banks, insurance providers, and other intermediaries means expanding your customer due diligence and screening throughout the transactional environment.
• BIS-controlled Goods
Shippers of military-grade goods are concerned with screening against the BIS entities list consisting of foreign persons (businesses, research institutions, government and private organizations, and individuals) subject to specific license requirements for the export, re-export and/or transfer (in-country) of specified items. As well as with the management of required licenses, agreements and the activities against them.
Companies are also concerned with classification and special reporting requirements for exports of commodities, software and technologies controlled by international export controls such as the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies.
Companies are newly concerned with reclassification of their goods under the new one-list system being created under the President’s export control reforms that will incorporate both the Commerce Control List (CCL) and the United States Munitions List (USML).
• Goods Capable of Military Use (ITAR)
Companies dealing with goods capable of military use are usually concerned with two classification systems—the CCL and the USML—as well as time-consuming commodity jurisdiction issues between the Department of Commerce Bureau of Industry and Security (BIS) and the Department of State Directorate of Defense Trade Controls (DDTC). With the impending reorganization of controlled goods under the President’s export control reforms, massive re-classification exercises are on the horizon for many.
Many companies in the defense trade arena find themselves with export control restrictions under both jurisdictions, and therefore subject to the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR) of DDTC as well as BIS Export Administration Regulations (EAR). Goods under both jurisdictions may also be subject to special reporting requirements for exports controlled by international control regimes including the Wassenaar Arrangement.
• Schedule B Tariff Classification
To determine export codes required to complete mandatory Electronic Export Information (EEI) and electronically file through the government Automated Export System (AES) or their trade chain partners, companies need to be concerned with classification under U.S. Census Bureau Harmonized Tariff Schedule.
• Manage Export Licenses, Exceptions and Exemptions
When dealing with controlled goods, destinations or entities, companies are concerned with determining the applicable licensing jurisdiction, determining the appropriate classification of the goods or services, establishing the applicability of license exemptions or exceptions, managing the license lifecycle, and ensuring communication of license scope and status to all concerned parties, including “deemed export”—the exposure of U.S. technologies to certain foreign nationals in a domestic or international setting.
All of these issues are compounded when dealing with multiple locations, sales out of foreign locations, and third-party sales.
Imports
The regulatory environment surrounding the import of goods, parts, materials and ingredients has always been complex and subject to frequent change. For most companies, top priority product compliance issues are to:
• Determine and re-determine tariff classifications (HTS)
As one of the key drivers of import complexity, tariff classification has tremendous compliance ramifications and significant impact on profitability, business processes, and strategic sourcing and distribution decisions.
Tariff classification is the foundation for determining import duties, taxes, fees, and countervailing or anti-dumping duties. It directly impacts admissibility criteria, certifications and licensing requirements, and eligibility under USMCA and other trade agreements. And operationally, it is key to customs clearance and other importing formalities including ISF (10+2) and rollover to import documentation and electronic filing.
Documentation, specifications and rulings that support tariff classification are vital for compliance verifications and audits, re-assessments, protests and recordkeeping. As are consistency of application and communication throughout the supply chain.
Companies with multiple national or international locations, or business units, also need to be concerned with managing multiple tariff classifications for the same product, the increased complexity inherent in multinational compliance strategies, as well as in information and resource sharing.
• Screen suppliers, trade chain partners, and countries
Post 9/11 there are heightened security restrictions and companies need to be concerned with the legality of importing from certain vendors and countries, and using certain trade chain partners.
Managing these compliance issues requires screening against government and international watch lists as well as ensuring compliance with U.S. Treasury Office of Foreign Assets Control (OFAC) embargoes and trade sanctions, Department of State International Traffic in Arms Regulations (ITAR) which controls both export and import of defense-related articles, Department of Commerce Bureau of Industry and Security (BIS) Export Administration Regulations (EAR), in addition to other critical statutes and regulations governing particular goods.
Many companies also require of their suppliers C-TPAT, PIP, AEO and other government security designations.
• Identify, manage and report ITAR-controlled goods
When dealing with the importation of ITAR-controlled goods companies need to be concerned with determining USML categories, managing license and reporting lifecycles, and ensuring communication of license scope and status to all concerned parties.
• Manage or oversee customs clearance and other customs formalities
Responsibility for compliance with most regulations lies with the U.S. principal party in interest (generally the importer). This is the case whether the importer performs customs clearance and other import formalities or uses the services of a customs broker.
Companies clearing their own imports need solutions that facilitate using the import programs of their choice (reconciliation, electronic invoice processing, etc.), reduce the risk of compliance violations with current content and intelligent workflows, and maintain easy-to-access records and audit trails for the requisite number of years.
Companies using one or more customs brokers need solutions to help them adequately maintain broker oversight, vet or supply tariff classifications and other customs content, and electronically manage their recordkeeping requirements.
• Manage certificates of origin conferring preferential tariff rates under one or more Free Trade Agreements
Most companies find obtaining, verifying and managing FTA certificates of origin, and ensuring consistent application on all qualifying shipments both onerous and time consuming.
However, this work is essential to ensure goods consistently receive the lowest duty rate, to avert the Merchandise Processing Fees (MPF) CBP assesses on entries into the U.S., and to mitigate against the risk that preferential rates will be revoked, and duties, interest, penalties and other sanctions applied. (Note: MPF has increased from .21% to 0.3464%)
