9
Export Management: Incoterms, Documentation, Compliance, Operations, and Export Supply Chain Skill Sets
Export documents are import documents. This simple statement is the foundation of a successful export program. Rushing a shipment out of the warehouse door should not undermine the importance of documentation, packing, marking, and labeling. Failing on any one of these elements risks customs delays, monetary penalties, and a dissatisfied customer. There is also the added responsibility of export compliance. Managing an export compliance program requires diligence, recurring training, and senior management support. This chapter offers a guideline of the fundamentals to operate a functional and compliant export program.
OVERVIEW OF INCOTERMS
The internationalcCommercial terms (Incoterms) provide definitions for terms of international trade. These terms are global, as they apply to all trading nations under all circumstances. They transcend language, cultural, and legal issues regardless of country. An exporter can be reasonably assured that an Incoterm used in the United States will have the same meaning in Japan, South Africa, or Brazil. The Incoterms include EXW, FCA, FAS, FOB, CFR, CIF, CPT, CIP, DAT, DAP, and DDP. These acronyms represent terms of sale to process an international transaction and define the costs and risks associated with a sale at a point in time during the transaction.
These terms of sale have significant consequences as to the responsibilities, liabilities, costs, and risks to both the exporter and importer. There are many hidden costs involved in international trade that the Incoterms set out to define. Incoterms advise which party is responsible for arranging transportation services, paying freight charges, remitting duties, obtaining insurance, and so on. The exporter should be aware that the term of sale directly affects landed costs and, therefore, may affect an exporter’s competitive advantage. The more responsibility assumed, the higher the costs involved, which if clearly identified and accounted for will not hold any surprises to the bottom-line profit for the exporter.
NAME THE TERMS AND PLACE
Incoterms take a point in time when the responsibility and liability to the international transaction shift from the exporter to the importer or seller to buyer. When using Incoterms, a named place must be used. A vague place, such as FCA U.S. port, indicates a vague point in time, which can result in confusion, bad assumptions, and unaccounted fees for either party. The exporter may be thinking FCA means freight forwarders warehouse at Newark Airport and the importer is thinking FCA means freight forwarders warehouse at Los Angeles Airport, resulting in both parties not being on the same page and either the exporter or importer incurring additional costs for freight shipping out of a different origin airport than where it initially thought.
FCA seller’s warehouse: The seller packs the goods for export, makes the freight available at its shipping dock, and is responsible for loading.
FCA forwarder’s warehouse Newark Airport: The seller packs the goods for export, makes the freight available at its shipping dock, arranges the inland transportation, loads the goods onto the inland carrier, and delivers the freight to the forwarder’s warehouse, not responsible for unloading the goods.
FCA Virgin Airways Newark Airport: The seller packs the goods for export, makes the freight available at its shipping dock, arranges the inland transportation, loads the goods onto the inland carrier, and delivers the freight to the air carrier, not responsible for unloading the goods.
Terms of Payment and Insurance Considerations
An export sale has been created and is now ready to ship. The terms of sale are free on board (FOB) Port of Miami, net sixty days. The shipment is made with the terms of sale calling for payment by the buyer in Paris in sixty days. The shipment arrives missing three of ten pieces. The missing portion represents $12,000 of the total invoice value, for which the buyer discounts its payment. The seller claims that the goods were delivered to the port with a clean bill of lading and the insuring responsibility was with the buyer at the time the freight was delivered and received on the international conveyance.
The buyer argues that the shipment was short and that if the U.S. exporter wishes to continue to do business with the buyer, the exporter must take full responsibility for the loss. The term of sale and term of payment provided an exposure to the exporter. While the position of the buyer may be unreasonable, it is not uncommon, and in this example the exporter’s customer holds the advantage as it hasn’t yet paid for the goods.
If the exporter did not purchase contingency insurance or unpaid vendor protection, the exporter may have to sue its customer to collect the monies, with the potential consequence of losing a customer, unnecessary aggravation, and incurring legal fees.
In most export situations, the exporter should control the term of sale and the term of payment. Factors into this evaluation should include the following:
Price and payment terms
Competitive pressures
Forwarder and carrier options
Opportunities for loss and damage
Previous experience with the buyer
City and country of destination
Customs clearance requirements in the buyer’s country
Current economic and political situation in the buyer’s country
Controlling the term of sale and term of payment offers the exporter options for maintaining competitiveness. If the exporter chooses to sell on terms where shipping, insurance, and freight choices are in his control, then he is better able to affect the cost, insurance, and freight (CIF) costs. The exporter is not forced to accept a specific insurance company whose marine rates may be higher than could be obtained in the open market but is free to choose shipping lines, having the option to look at options that may provide lower shipping costs. Each variable must be evaluated. The ability to control costing will afford competitive choices, which will work to the exporter’s advantage.
Another important consideration in determining the term of sale is to understand the pitfalls of attempting a “door to door” sale. In a delivered duty paid (DDP) sale, all costs from the exporter’s door to the importer’s door are included, except for unloading at the importer’s door. In the event that there is any delay in clearing customs at the destination port or a customs penalty is incurred, these charges will all be to the account of the exporter. A DDP sale requires the exporter to become the importer of record in the destination country, which may not be feasible depending on local customs legislation. DDP sales are not advisable for most exporters unless the exporter is selling to a related subsidiary, sending samples, or is trying to make amends to a customer for an order that was poorly handled.
Controlling the term of payment may require reaching a middle ground where the exporter and her customer cannot agree on full payment in advance of shipment or full payment once the shipment has reached the customer. For these circumstances, the exporter may want to speak with an insurance company that specializes in international transactions and receivables insurance.
A REVIEW OF THE STANDARD INCOTERMS
EXW: Ex-works (insert named place of delivery). May be used for any mode of transport. The seller makes the goods available to the buyer at the seller’s premises or other location, not cleared for export and not loaded on any collecting vehicle. The buyer bears all risks and costs involved in taking the goods from the seller’s premises and all actions thereafter.
FCA: Free carrier (insert named place of delivery). May be used for any mode of transport. The seller delivers the goods, cleared for export to the carrier name by the buyer at the specified place. If delivery occurs at the seller’s premises, the seller is responsible for loading. If delivery occurs elsewhere, the seller must load the conveyance but is not responsible for unloading. The seller is responsible to clear the goods for export.
FAS: Free alongside ship (insert named port of shipment). May be used for sea or inland waterway only. The seller delivers when the goods are placed alongside the vessel at the named port shipment. The seller also clears the goods for export.
FOB: Free on board (insert named port of shipment). May be used for sea or inland waterway only. The seller delivers when the goods are loaded on board the vessel at the named port. The seller clears the goods for export.
CFR: Cost and freight (insert named port of destination). May be used for sea or inland waterway only. The seller delivers when the goods are loaded on board the vessel. The seller pays for bringing the goods to the foreign port and clears the goods for export. However, the risk passes from the seller to the buyer at the point of delivery to the carrier at the port of shipment.
CIF: Cost, insurance, and freight (insert named port of destination). May be used for sea or inland waterway only. The seller delivers when the goods are loaded on board the vessel. The seller pays the cost and freight for bringing the goods to the foreign port and obtains insurance against the buyer’s risk of loss or damage. The seller clears the goods for export. However, the risk passes from the seller to the buyer at the point of delivery to the carrier at the port of shipment.
CIP: Carriage and insurance paid to (insert named place of destination). May be used for any mode of transport. The seller delivers the goods to the carrier at an agreed place and pays the cost of bringing the goods to the named destination. The seller also obtains insurance against the buyer’s risk of loss or damage during carriage. The seller clears the goods for export. The risk passes from the seller to the buyer at the point of delivery to the carrier.
CPT: Carriage paid to (insert named place of destination). May be used for any mode of transport. The seller delivers the goods to the carrier at an agreed place and pays the costs of bringing the goods to the named destination. The seller also clears the goods for export. The risk passes at the point of delivery to the carrier.
DAT: Delivered at terminal (insert named terminal at port or place of destination). May be used for any mode of transport. The seller delivers the tools once unloaded from the arriving means of transport and places the goods at the disposal of the buyer at a named terminal at the named port or place of destination. The seller clears the goods for export. The buyer is responsible for the import clearance.
DAP: Delivered at place (insert named place of destination). May be used for any mode of transport. The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the name place of destination. The seller clears the goods for export. The buyer is responsible for the import clearance.
DDP: Delivered duty paid (insert named place of destination). May be used for any mode of transport. The seller delivers the goods to the buyer, cleared for import, including all duties, taxes, import licenses, and so on, but not unloaded from the means of arriving transport.
Export Documentation
The number one reason export problems occur is incorrect documentation. A missing certificate of origin, an error in spelling, or a deleted required statement on the invoice will cause substantial delays in obtaining customs clearance and require additional costs to complete the process. Wasted time and money cut into profits, annoy customers, and frustrate the export staff.
In addition to knowing the required documents at destination, the exporter will also need to know the correct language, number of companies, required signatures, appropriate format, consularization stamps, notary seals, shipping instructions, and any specific documentary requirements due to the nature of the commodity being shipped.
The best sources for information are the customer, the customer’s local agent, and the freight forwarder being used to move the shipment. An exporter may ship once a month to Brazil, but the freight forwarder may be moving shipments to Brazil daily. Relying on the forwarder’s experience and expertise can eliminate many export headaches. Additional resources for documentation and customs requirements may be found in the appendix.
While the documentation may be complicated to master, the right approach together with support from several resources can simplify the process and remove most obstacles. Many of the necessary documents required for an export transaction include the following:
Invoice
Packing list
Electronic export information (EEI)
Bill of lading
Certificate of origin
Payment instrument (letter of credit, sight draft)
Health/sanitary certificate
Export/import license
Free Trade Agreement (FTA) affirmation/certificate
Inspection certificate
Carnet
Certificate of insurance
Certificate of quality
Helpful Hints
1. Check with several sources for documentation requirements. This double-check will assure correct compliance.
2. Documentation files should be set up for each country to facilitate continuity on repeat or future sales. These files should be updated regularly as laws, custom practices, and regulations change.
3. Forward a copy of all documentation to the customer prior to shipping. If changes are necessary, this permits sufficient time to manage any required modifications.
4. Develop a system to check and recheck documents prior to documents leaving the premises.
5. Make sure at least one complete and legible set of documents is retained on file and accessible in the unlikely event that the original set is lost.
Sample Export Document Checklist
EXPORT DOCUMENT CHECKLIST |
|
1 |
Sales order |
2 |
Commercial/proforma invoice |
3 |
Airbill/bill of lading |
4 |
Shipper’s letter of instructions |
5 |
EEI copy |
6 |
EEI data elements from freight forwarder (routed) |
7 |
Proof of delivery |
8 |
Packing list |
9 |
Certificate of origin (if requested) |
10 |
Export license (if applicable) |
11 |
Free trade affirmation (if eligible and applicable) |
Documentation and Letters of Credit
An important function of export documentation is to assure that the exporter receives payment per the agreed-upon terms of sale and payment. One form of payment used is a letter of credit (LC). Under a letter of credit transaction, the exporter anticipates receiving funds once the goods are shipped and documentary requirements have been received and approved by the confirming bank. This can be a difficult process if errors are found, documents are incomplete, or documents are presented outside the agreed-upon timeframe.
The bank never sees the freight and therefore scrutinizes the documents to ensure the letter of credit requirements are being met. Discrepancies in documentation create extra expense, payment delays, and aggravation.
The following steps can help to minimize LC problems:
Select banks with which you have a good working relationship.
Construct LC checklists that detail the necessary documents, including format and other required information on the documentation. This list should be reviewed and managed as part of the export process to ensure accuracy and conformity with the LC requirements.
Prior to concluding the deal, make sure all requirements of the LC can be met, such as last ship dates and production demands; make sure all costs have been taken into consideration and responsibility has been assigned regarding changes or discrepancies within the LC.
Utilize a freight forwarder or partner who has experience and knowledge in handling LC shipments. Do not rely on the customer’s forwarder to handle your LC paperwork.
Ensure the terms of sale conform to the Incoterm and Uniform Customs and Practices for Documentary Credits.
Electronic Export Information
The Department of Commerce, Bureau of Census requires the exporter to report information on its exports. This information is used to compile official trade statistics and is called the electronic export information (EEI). The EEI serves an additional purpose, as it is also used as a compliance tool by other government agencies, such as the Bureau of Industry & Security (BIS), the Bureau of Customs and Border Protection (CBP), and Defense Trade Controls (DTC).
An EEI is required when merchandise is shipped from one USPPI to one consignee on the same flight/vessel to the same country on the same day and where the shipment is valued over $2,500 per Schedule B or Harmonized Tariff Number or any dollar amount if a license is required.
The EEI may be filed by the exporter, or the exporter may choose to have its freight forwarder file the EEI on its behalf. The transmission of information is done through the Automated Commercial Environment (ACE), which is the same platform used for processing import entries.
An EEI must be filed for exports of physical goods when shipped as follows: to foreign countries, between the United States and Puerto Rico, from Puerto Rico to foreign countries, from Puerto Rico to U.S. Virgin Islands, and from the United States to U.S. Virgin Islands. An EEI is not required for shipments to Canada unless they are under an export license.
If an EEI is not required due to low value or because it is going to Canada or for any other reason, the shipment may be exempt from filing the EEI; an EEI exemption must be cited on the transportation bill of lading as to why the EEI is not required. Other exemptions to filing the EEI include hand-carried tools of the trade not for sale, temporary exports (carnets), and intangible exports of software and technology. EEI exemptions do not apply to Commerce BIS licenses, State Department licenses, licensed shipments from other government agencies, or shipments covered by the Office of Foreign Asset Control Sanctions Program List.
The data elements required for the EEI include the following:
USPPI & USPPI Identification Date of export
Ultimate consignee
U.S. state of origin
Country of ultimate destination
Method of transportation
Conveyance/carrier name
Carrier identification
Port of export
Related party indicator
Domestic or foreign indicator
Commodity classification number
Commodity description
Primary unit of measure
Primary quantity
Shipping weight
Value
Export information code
Shipment reference number
Hazardous material indicator
In bond code
License code/license exemption code
Routed export transaction indicator
Conditional data elements
Information contained on the EEI must be true, accurate, and complete. Late EEI filings and/or incorrect information (false statements) may lead to penalties. Any EEI record filed later than ten calendar days after the due date will be considered failure to file. Failure to file could result in a penalty of up to $10,000. Late filing penalties can be $1,100 per day up to $10,000. Filing false/misleading information carries a penalty of up to $10,000 per violation. In addition to the listed penalties, any property involved in a violation is subject to forfeiture.
If the USPPI chooses to delegate the filing of the EEI to a freight forwarder, the USPPI will be held liable for these penalties in addition to the freight forwarder.
This is one of the most important reasons to purposefully manage freight forwarders and for exporters to take the time to train their personnel if the exporter is filing their own EEI.
U.S. PRINCIPAL PARTY IN INTEREST
The Foreign Trade Regulations defines the USPPI as the person or legal entity in the United States that receives the primary benefit, monetary or otherwise, from the export transaction. USPPI is the party that is responsible for filing the EEI and for complying with export regulations. The USPPI is generally the U.S. selling party, manufacturer, or order party. A foreign entity may only be the USPPI if it was in the United States when purchasing or obtaining the goods for export.
While the Incoterms note where risk and costs, responsibility, and liabilities shift from the seller to the buyer, it is important to keep in mind that the Foreign Trade Regulations apply to the USPPI, the FPPI, and the authorized agent in the U.S. regardless of the Incoterm.
Under the Foreign Trade Regulations, there are two types of export transactions: Standard Export Transactions and Routed Export Transactions.
In a Standard Export Transaction, the USPPI files the EEI record or authorizes an agent to file the EEI. In a Standard Export Transaction, the USPPI is responsible for the following:
Preparing and filing the EEI and providing proof of filing citation
Authorizing a U.S. agent to file EEI via power of attorney (POA) or written authority
Providing the agent with accurate and timely export information
Assuming responsibility for license determination under EAR
If filing the EEI, responding to AES fatal errors or compliance alerts
Retaining documentation
If an authorized agent (freight forwarder) is filing the EEI, it is responsible for the following:
Obtaining written authority or POA from USPPI
Accurately preparing export information via ACE based on information provided by the USPPI
Responding to fatal errors or compliance alerts
Providing Internal Transaction Number (ITN) to carrier based on required filing timeframes
Providing USPPI with a copy of information filed on its behalf
In a Routed Export Transaction, the Foreign Principal Party in Interest (FPPI) authorizes an agent or the USPPI to file the EEI on its behalf. Even though the FPPI is authorizing and paying for the filing of the EEI, the USPPI still has responsibilities under the Foreign Trade Regulations.
The USPPI is responsible for the following:
Providing FPPI’s agent with commodity data and licensing information
Requesting a copy of the authorized agent’s POA or written authorization from the FPPI, if needed
If filing, obtaining POA from FPPI to complete and file the EEI record
Obtaining in writing from the FPPI if the FPPI assumes responsibility for licensing functions
Retaining documentation
The Foreign Principal Party in Interest (FPPI) is responsible for the following:
Authorizing a U.S. agent or USPPI to file the EEI record
Providing the POA or written authorization to the U.S. agent or USPPI
If an authorized agent (freight forwarder) is filing the EEI, it is responsible for the following:
Obtaining a POA or written authorization from the FPPI
Preparing and filing EEI record
Upon request, providing the USPPI with data elements filed on its behalf
Upon request, providing the USPPI with a copy of the POA or written authorization from the FPPI
Providing filing citation or exemption legend
Maintaining documentation
Sample Electronic Export Information
AES DIRECT SHIPMENT RECORD: KR111816
Schedule B Number/Harmonized Tariff Number
One of the key data elements required in the reporting of the EEI is the Schedule B Number or Harmonized Tariff Number. The Schedule B Numbers are based on the same numbering system as the Harmonized Tariff Schedule issued by the U.S. International Trade Commission. The Harmonized Tariff Schedule identifies commodities by a ten-digit number. Globally, the first six digits are shared but the last four digits can be different.
The Schedule B Numbers tend to be a bit broader in their description than the Harmonized Tariff Numbers, which are very specific. For example, under the Schedule B Numbers, other cattle are broken down into two categories, “other” and “buffalo,” but under similar Harmonized Tariff Numbers, other cattle are broken down into several categories based primarily on weight.
Schedule B Numbers may only be used for EEI reporting, while Harmonized Tariff Numbers may be used for both EEI reporting and import entries. However, not all Harmonized Tariff Numbers may be used for EEI reporting.
Valuation
In capturing statistical data through the EEI reporting, the value must be accurately reported. For EEI reporting purposes, the value is the selling price (or the cost if the goods are not sold) in U.S. dollars, plus inland or domestic freight, insurance, and other charges to the U.S. seaport, airport, or land border port of export. The cost of goods is the sum of expenses incurred in the USPPI’s acquisition or production of the goods.
Many exporters and their authorized agents fail to report the FOB/FCA value on the EEI, as they generally take the bottom line of the export invoice as the value of the shipment. For those exporters shipping samples or company material, values tend to be underreported and a minimum value declared that does not reflect the actual value.
The final area where value is incorrectly reported is the value of repair work performed in the United States. The actual cost of repair should be reported, and if the repair was performed under warranty, then the value of what the repair cost would have been should be the value reported.
In the event that a company determines the value was incorrectly reported on the EEI, the value should be updated to reflect the proper value. If a company determines that there was an error made over a long period, it may be necessary to file a voluntary disclosure with Census advising the extent of the error, that the correct information has been reported, and any changes to process and training to prevent such errors from reoccurring.
Power of Attorney
Service providers, including freight forwarders, customhouse brokers, and agents, all submit documentation and/or electronic submissions on behalf of the exporter.
In order for these service providers to sign “as agent” for the exporter, the service provider must have written authorization from the exporter. This is generally done as a power of attorney, signed shipper letter of instruction (SLI), or a written authority letter.
It should be noted that a customhouse broker may only accept a power of attorney to remain in compliance with customs regulations. Many broker power of attorney forms contain export language that allows them to handle both export and import. If an exporter signs a shipper’s letter of instruction, that will count as a one-time authorization only.
Power of attorney forms may only be signed by a corporate officer or a company employee who has received signing authority from the corporate officer. A compliant freight forwarder will carefully review the power of attorney form and ask for supporting documentation, including corporate certifications.
Exporters should create a process to supervise and control their service providers through managing power of attorney forms, shipper’s letter of instructions, and written authorizations by only permitting designated employees to issue the same and to maintain copies of all authorizations offered to service providers.
Record-Keeping Requirements
Export shipments are subject to a record-keeping requirement of five years from the date of export. Records to be retained include notes, correspondence, contracts, memoranda, invitations to bid, books of account, financial records, restrictive trade practice reports and boycott documents, and documents created in support of shipment, including bills of lading, commercial invoices, packing lists, and EEI transaction copies.
Exporters are well advised to retain their own documentation and not rely on their service providers.
EXPORT REGULATIONS
The export supply chain is subject to various government agencies regulating the export process. Minimally, exports require reporting to the Bureau of Census, knowing and screening business partners through the Consolidated Screening List, reviewing purchase orders and documentation for boycott language, and understanding to which country the goods will ultimately be shipped.
Additionally, prior government authorization may be required for specific commodities.
Exporters may find themselves working with all or a few of the following government agencies:
Department of State: Defense Trade Controls
Department of Commerce: Bureau of Industry & Security (BIS)
Department of Commerce: Bureau of Census
Department of Treasury: Office of Foreign Asset Controls (OFAC)
Department of Homeland Security: Bureau of Customs and Border Protection (CBP)
The Department of Commerce Bureau of Industry & Security maintains the Export Administration Regulations (EAR). The Department of State maintains the International Traffic in Arms Regulations (ITAR). The goal of Export Control Reform (ECR) was to increase exports and remove some of the regulatory barriers to the export process, specifically by making changes to the EAR and ITAR. Export Control Reform has met both goals, but not without some confusion and bumps in the road for exporters.
International Traffic in Arms Regulations
For those companies whose products fell under the International Traffic in Arms Regulations (ITAR), the navigation of moving items from the U.S. Munitions List (USML) to the jurisdiction of the Export Administration Regulations (EAR) and the Commerce Control List (CCL) has been a slow process of comprehending new phrases such as “order of review,” “600 series,” and “specially designed.”
The basics of export control remain that a company must identify whether its product is subject to the jurisdiction and classification of either the ITAR/USML or the EAR/CCL. This decision can be made by understanding what the product is, how it will be used, and who will be using it. Specifically, the U.S. Munitions List covers a range of products relating to hardware, technical data, and defense services. If the product or service is specifically listed on the USML, the product will be covered by the ITAR. Unfortunately, it is not always easy to make this determination. For example, an F-16 jet is clearly an item that would be highly controlled for export from the United States. However, what about the component parts that are part of the jet that might be exported individually?
Prior to export control reform, a fuel tank and missile system for the F-16 jet would both require export licenses from the Department of State. However, under export control reform, if the component parts were not providing a critical military capability, those component parts would be subject to the EAR/CCL under a new designation “600 series,” while the critical military parts would remain under the ITAR/USML.
Exports falling under the ITAR require registration with Defense Trade Controls and the prior approval of a license for exports, temporary exports, and temporary import of USML items. If an activity is controlled under the ITAR, it follows that most transactions require a license. This includes furnishing a defense service and proposals to sell significant military equipment.
Defense services include furnishing assistance to foreign persons, whether in the United States or abroad, in the design, development, engineering, manufacture, production, assembly, testing, repair, maintenance, modification, operation, destruction, processing, or use of defense articles. Deemed exports are also subject to the ITAR. A deemed export may be furnishing technical data to a foreign national, such as classified information, software, or information for design, development, or production, including blueprints, drawings, photographs, and plans.
Companies falling under the jurisdiction of the ITAR must have strong compliance programs in place to manage foreign visitors to their facilities and manage company communications such as emails and computer access to ensure they do not mistakenly violate any deemed export regulations. The compliance programs must also define how exports are handled properly by the designated freight forwarder and only by those parties authorized to handle the shipment under the export license.
ITAR shipments imported temporarily, such as a return for repair or testing, require proper reporting to Customs and Border Protection (CBP) on the import entry as well. When those returned items are re-exported from the United States, they will require an ITAR exemption to be reported to the Bureau of Census, which will permit the shipment to leave without having to obtain new authorization.
Licenses expire when the total value authorized has been shipped, the total quantity of items authorized has been shipped, or the date of expiration has been reached. Export licenses can have varying time frames for expiration. Once an export has been authorized under a Department of State license, if there is a change required, an amendment to the license must be applied for and received prior to exporting under that license. Not all changes may be made through an amendment. Only changes such as typographical error, change in freight forwarder or foreign intermediate consignee (transportation wise), source of commodity, and mergers/acquisitions name changes will be considered. Changes outside of those mentioned will require a new license application.
Violations of the ITAR can include policy of denial of export licenses, debarment, criminal fines up to $1 million, imprisonment, as well as civil penalties up to just over $1 million per violation.
Exporters subject to the ITAR should implement the following compliance measures to ensure they are within the guidelines of the regulations and the guidelines of the approved license.
Determine and screen all parties to the export transaction
Confirm the Incoterm and obtain names of all freight forwarders involved in the shipment
Inform all parties that a license approval is required prior to shipping
Review the scope of the license with sales, traffic, logistics and the freight forwarder
Retain a license distribution list as part of the license file
Create a compliance checklist as part of the license file
Implement procedures for handling ITAR shipments
Train key personnel on ITAR requirements and deemed exports
Periodically audit files and electronic export information copies
If necessary, work with senior management to self-report errors through voluntary disclosure
Export Administration Regulations
For most exporters, their commodities will never be subject to the tighter controls of the ITAR but will be subject to the Export Administration Regulations (EAR). The Export Administration Regulations are broad and cover exports from the United States, re-exports of U.S. products, U.S. persons overseas, foreign subsidiaries of a U.S. parent, foreign-made products of U.S. technology and/or U.S. component parts, and the transfer of information to a foreign national. One of the key differences between the EAR and the ITAR is that most transactions under the EAR do not require an export license, provided the commodity is not controlled.
The Export Administration Regulations are fluid and constantly being updated.
The best resource for the most current version of the EAR is the Bureau of Industry & Security (BIS) website. This allows the exporter to find the most current regulation part pertaining to the export. Exporters should register themselves for updates to the EAR to ensure they are being updated in a timely manner of all changes to these all-important regulations.
Commerce Control List
If a product is not controlled under the ITAR, then the product is subject to the Export Administration Regulations (EAR). Subject to the EAR requires the exporter to understand its export transaction, the parties to the transaction, the destination of the product, and how the product will be used. The EAR may define some products as being controlled for export. These items are identified under the Commerce Control List (CCL).
The Commerce Control List (CCL) is a listing of ten categories of products and is a positive list. If the product being exported is on the CCL and positively identified as such, then that product is said to have an Export Control Classification Number (ECCN) designation. The CCL categories are as follows:
Category 0 |
Nuclear & Miscellaneous |
Category 1 |
Materials, Chemicals, Microorganisms, and Toxins |
Category 2 |
Materials Processing |
Category 3 |
Electronics |
Category 4 |
Computers |
Category 5 |
Part 1, Telecommunications; Part 2, Information Security |
Category 6 |
Sensors and Lasers |
Category 7 |
Navigation and Avionics |
Category 8 |
Marine |
Category 9 |
Aerospace and Propulsion |
Exporters must review the Commerce Control List to determine if their products are listed on it. If the exporter determines that the product is subject to an ECCN, then it must take the next step in determining whether government approval in the form of a license is required prior to export. The first step is to review the Reasons for Control, which are indicated at the beginning of the Commerce Control List. Once the Reasons for Control have been determined, the Commerce Country Chart must be examined.
The Commerce Country Chart is a matrix bringing together the Reasons for Control for all commodities listed on the Commerce Control List against all countries. Exporters need only to review the Reasons for Control for their commodity as well as the destination country to which they are shipping. If there is an “x” in the box, the shipment requires export authorization. If there is not an “x” in the box, the shipment does not require export authorization based on the commodity.
License Exceptions
Once it is determined that a product is controlled to a specific country, the next step is to review the License Exceptions listed on the Commerce Control List and review 15CFR740, which contains the requirements and limitations of License Exceptions. A License Exception allows a controlled shipment to move without obtaining an approved license. Exporters must exercise caution when citing License Exceptions in lieu of an export license to make certain they are properly using the License Exception. Failure to do so may result in an export violation.
License Exceptions may be “list based” in that they are based on the actual commodity, and, if applicable, the shipment may be moved without a license due to a low value, destination country, or civilian use. There are additional License Exceptions that are based on circumstances including but not limited to replacement, temporary export, and strategic trade authorization. In each of these circumstances, the parameters of the use of the License Exception must be confirmed. In some instances, additional reporting to the BIS may be a requirement of applying a License Exception.
Export Licenses
If a License Exception is not available, the exporter will have to apply for an export license with the Department of Commerce Bureau of Industry & Security (BIS). This is an electronic process and requires the exporter to be registered to access the system. License applications may be tracked online. Frequently, the BIS may contact an exporter to request additional information to determine if the transaction should be permitted by the U.S. government. If an export license is denied, the exporter will not be permitted to continue with the transaction.
Upon receiving the export license, the exporter will review the license to make sure the information contained is accurate and to review any conditions to using the license. Provisos may require additional legwork such as obtaining a customer list from the foreign end user or arranging site visits to verify the equipment being shipped remains at the end user’s location. If an exporter is not able to meet the provisos contained within the license, the export transaction will not be permitted.
If the exporter is using a freight forwarder, a copy of the export license should be provided to the freight forwarder, along with a Shipper’s Letter of Instructions, which provides detailed information to the freight forwarder on how to handle the shipment. This will also include how to properly file the Electronic Export Information with the Department of Commerce, Bureau of Census.
EAR99
Should an exporter determine its product is not listed on the Commerce Control List, then that product will be designated as EAR99. EAR99 means the product is subject to the Commerce Control List but not specifically controlled for export based on the commodity.
The majority of products exported from the United States are EAR99. However, a product being EAR99 does not mean the product is not subject to additional regulations governing exports. Exporters must be aware of the additional compliance responsibilities they have under the EAR, as well as the Office of Foreign Asset Control Regulations and Foreign Trade Regulations, which also cover EAR99 items.
General Prohibitions
All transactions under the jurisdiction of the Export Administration Regulations are subject to the ten general prohibitions. If any of the prohibitions apply, the exporter may not export without an export license.
Without a license or license exception, you may not
1.Export any item subject to the EAR to another country or re-export any item of U.S. origin if each of the following is true: (i) the item is controlled for a reason indicated in the applicable Export Control Classification Number, and (ii) export to the country of destination requires a license for the control reason as indicated on the Commerce Country Chart.
2.Re-export and export from abroad of a foreign-made item incorporating more than a de minimis amount of controlled U.S. content.
3.Re-export and export from abroad of the foreign-produced direct product of U.S. technology and software.
4.Engage in actions prohibited by a denial order.
5.Export or re-export to prohibited end uses or end users.
6.Export or re-export to embargoed destinations.
7.Support proliferation activities, including financing, servicing, transporting, and contracting of same. The export of Schedule 1 chemicals requires compliance with additional regulations under the EAR. Schedule 3 chemicals require compliance with End-Use Certificates.
8.Export or re-export an item through or transit any of the following countries unless a license is not required for that commodity to that country: Armenia, Azerbaijan, Belarus, Cambodia, Cuba, Georgia, Kazakhstan, Kyrgyzstan, Laos, Mongolia, North Korea, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, and Vietnam.
9.Violate any terms or conditions of a license or license exception.
10.Proceed with knowledge that a violation has occurred or is about to occur.
Deemed Exports
An export is the physical movement of a product from Point A to Point B. An export can also be the transfer of information to a foreign national through phone, fax, email, company systems, conference, or plant tour. If the information being transferred to the foreign national is controlled by the Commerce Control List, the ability to transfer that information to a foreign national may require an export license or prior export authorization.
If a company is dealing with controlled technology, it will have a compliance program addressing foreign nationals visiting its facility. This should begin with sales, customer service, and senior management understanding that while they want to show off their products they must also exercise restraint in the information imparted to a visiting foreign national.
Many companies will begin determining for what countries their products are controlled. Once this has been established, the company can determine which countries are of a concern. All visitors may be asked to provide proof of citizenship upon arrival at the facility, and the better step is to require this information prior to the meeting. In this way, the process can be smoothed out for the foreign visitor’s arrival, as it will be understood if this particular foreign visitor presents a potential deemed export or not.
If foreign visitors are touring the facility, access should be limited only to those areas that the person requires. Access to computer systems, plans, and drawings should be removed. In the event the company wishes to share information with a foreign visitor, an export license should be applied for prior to the arrival of the foreign visitor at the facility. A deemed export license should also be applied for if there is information being shared with any foreign visitor that is deemed controlled for that destination.
Denied Party Screening
Many exporters make the incorrect assumption that if their product is not specifically controlled for export then that product can be exported anywhere and doesn’t require any further compliance measures. This mistake can lead to a costly export violation.
While a product may not be specifically controlled for export, there may be other factors that come into play that must be addressed. Who is receiving, handling, or buying my product? Where is my product transiting? What is the destination country for my product?
The Bureau of Industry & Security maintains an electronic tool called the Consolidated Screening List on its website. This list should be consulted for all export transactions for all parties to the transaction, including service providers, carriers, vessels, customers, end users, foreign freight forwarders, financial institutions, and distributors. The names of the companies as well as individuals should be screened.
The Consolidated Screening List currently brings together eleven lists maintained for diverse reasons by assorted government agencies. This can be tricky for exporters, as the information provided on the list can be vague. Therefore, if a “match” to a name is found, there is usually a follow-up to find the specific regulatory citation to determine if the match is a true match or a false positive. It is also necessary to determine if the export transaction is forbidden to that company or individual. This can only be decided by reviewing the specific regulatory citation to understand the reason why this name is listed.
For example, Blue Cow Services wishes to sell a set of Harry Potter novels to Kendall S. George. Upon the customer service group’s screening for denied parties, it is found that Kendall S. George is a positive match to the Debarment List. Customer service immediately halts the order. Upon review by Blue Cow’s compliance manager it is determined that Kendall S. George is excluded from participating directly or indirectly in the export of defense articles. A decision is made to proceed with this customer’s order, and the file is noted with the review notations and the reason for proceeding with the transaction.
Based on a company’s business, screening may be done several times throughout a transaction. If there are long lead times on processing an order, screening should be done prior to the order being submitted, upon completion of the order, and prior to shipment. While there is not a specific requirement to screen for denied parties, there are specific penalties for dealing with denied parties.
Therefore, screening should be a part of every company’s compliance program.
Exporters should not rely on their freight forwarder to perform the screening on their behalf. In the event that the forwarder does not screen and there is a violation, the penalty will be applied to both the exporter and the forwarder. Forwarders should always screen but unfortunately not all do, so it should be the expectation of the exporter to perform its own screening and work with a forwarder who also screens to ensure there are no violations of shipping to a denied party.
While the Consolidated Screening List covers eleven lists and is free of charge, there are additional lists that companies choose to screen due to the scope of their business, such as General Services Administration Excluded Parties, European Union Consolidated List, and Canadian Debarred List, to name a few. When determining the best option for managing Denied Party Screening, companies should review their supply chain, review risks to their supply chain, and consult with some of the technology companies that focus on screening options.
BREAKDOWN OF THE CONSOLIDATED SCREENING LIST
Department of Commerce—Bureau of Industry and Security.
Denied Persons List—Individuals and entities that have been denied export privileges. Any dealings with a party on this list that would violate the terms of its denial order are prohibited.
Unverified List—End users whose BIS has been unable to verify in prior transactions. The presence of a party on this list in a transaction is a red flag that should be resolved before proceeding with the transaction.
Entity List—Parties whose presence in a transaction can trigger a license requirement supplemental to those elsewhere in the Export Administration Regulations (EAR). The list specifies the license requirements and policy that apply to each listed party.
Department of State—Bureau of International Security and Nonproliferation.
Nonproliferation Sanctions—Parties that have been sanctioned under various statutes. The linked webpage is updated as appropriate, but the Federal Register is the only official and complete listing of nonproliferation sanctions determinations.
Department of State—Directorate of Defense Trade Controls.
AECA Debarred List—Entities and individuals prohibited from participating directly or indirectly in the export of defense articles, including technical data and defense services. Pursuant to the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR), the AECA Debarred List includes persons convicted in court of violating or conspiring to violate the AECA and subject to “statutory debarment” or persons established to have violated the AECA in an administrative proceeding and subject to “administrative debarment.”
Department of the Treasury—Office of Foreign Assets Control.
Specially Designated Nationals List—Parties who may be prohibited from export transactions based on OFAC’s regulations. The EAR requires a license for exports or re-exports to any party in any entry on this list that contains any of the following suffixes: SDGT, SDT, FTO, IRAQ2, or NPWMD.
Foreign Sanctions Evaders List—Foreign individuals and entities determined to have violated, attempted to violate, conspired to violate, or caused a violation of U.S. sanctions on Syria or Iran, as well as foreign persons who have facilitated deceptive transactions for or on behalf of persons subject to U.S. sanctions. Transactions by U.S. persons or within the United States involving Foreign Sanctions Evaders (FSEs) are prohibited.
Sectoral Sanctions Identifications (SSI) List—Individuals operating in sectors of the Russian economy with whom U.S. persons are prohibited from transacting in, providing financing for, or dealing in debt with a maturity of longer than 90 days.
Palestinian Legislative Council (PLC) List—Individuals of the PLC who were elected on the party slate of Hamas, or any other Foreign Terrorist Organization (FTO), Specially Designed Terrorist (SDT), or Specially Designated Global Terrorist (SDGT).
The List of Foreign Financial Institutions Subject to Part 561 (the Part 561 List)—The Part 561 List includes the names of foreign financial Institutions that are subject to sanctions, certain prohibitions, or strict conditions before a U.S. company may do business with them.
Non-SDN Iranian Sanctions Act List (NS-ISA)—The ISA List includes persons determined to have made certain investments in Iran’s energy sector or to have engaged in certain activities relating to Iran’s refined petroleum sector. Their names do not appear on the Specially Designated Nationals or Blocked Persons (SDN) List, and their property and/or interests in property are not blocked, pursuant to this action.
ANTIBOYCOTT REGULATIONS
The United States has strict regulations preventing U.S. companies, U.S. persons, and their foreign subsidiaries from complying with any unsanctioned boycott. The primary focus of these rules are the Arab League boycott of Israel. These rules apply to individuals and companies located in the United States and their foreign subsidiaries and extend from exporting, financing, forwarding, and other activities that may take place offshore.
The regulations require companies to examine documentation received from their foreign business partners for boycott language and prohibit a company from including boycott language on their export paperwork. Should boycott language be found, it may be deemed reportable or prohibited. Prohibited language requires the exporter to request the foreign company remove the language from the order before proceeding with the request for quotation or request for order. Reportable language may not be prohibited but must be reported to the BIS in addition to any received prohibited language. Additionally, companies are required to report boycott requests to the Internal Revenue Service. Examples of boycott requests are contained in the appendix.
Embargoed Country Screening
While the Export Administration Regulations contain a list of countries for which specific products may be controlled for export, the BIS also maintains a list of countries that are considered Terrorist Supporting Countries. These are Iran, North Korea, Sudan, and Syria.
The Department of Treasury, Office of Foreign Asset Controls (OFAC), administers and enforces economic trade sanctions. OFAC maintains a listing of Specially Designated Nationals that can be found through the Consolidated Screening List. Additionally, OFAC also maintains a listing of countries with active sanctions programs. This listing is provided on the OFAC website.
Each of the sanction programs summarizes the reason for the sanction, the scope of the sanction, prohibitions under the sanction, the type of authorized activities and transactions permitted, if any, and if a General License exists or if a Specific License must be applied for through OFAC.
Due to the scope of some of the sanction programs, some transactions may be allowed without any prior authorization while other transaction smay be permitted and other transactions may be prohibited. Good compliance managers will familiarize themselves with the workings of these regulations and take advantage of utilizing the OFAC hotline in the event that they are not 100 percent certain of their decision or would like to confirm that decision with OFAC prior to exporting.
PROGRAM LAST UPDATED |
|
Balkans Related Sanctions |
7/9/2015 |
Belarus Sanctions |
4/29/2016 |
Burma Sanctions |
10/7/2016 |
Burundi Sanctions |
6/2/2016 |
Central African Republic Sanctions |
8/23/2016 |
Counters Narcotics Trafficking Sanctions |
10/4/2016 |
Counter Terrorism Sanctions |
9/28/2016 |
Cuba Sanctions |
7/25/2016 |
Cyber Related Sanctions |
12/31/2015 |
Democratic Republic of Congo Related Sanctions |
9/28/2016 |
Iran Sanctions |
10/7/2016 |
Iraq Related Sanctions |
4/4/2016 |
Lebanon Related Sanctions |
7/30/2010 |
Libya Sanctions |
5/13/2016 |
Magnitsky Sanctions |
2/1/2016 |
Non-Proliferation Sanctions |
9/26/2016 |
North Korea Sanctions |
7/6/2016 |
Rough Diamond Trade Controls |
5/21/2008 |
Somalia Sanctions |
7/5/2012 |
Sudan Sanctions |
3/9/2016 |
South Sudan Related Sanctions |
4/4/2016 |
Syria Sanctions |
8/30/2016 |
Transnational Criminal Organizations |
9/22/2016 |
Ukraine/Russia Related Sanctions |
9/1/2016 |
Venezuela Related Sanctions |
7/10/2016 |
Yemen Related Sanctions |
4/14/2015 |
Zimbabwe Sanctions |
10/4/2016 |
ADDITIONAL EXPORT CONSIDERATIONS
Consularization and Legalization
Many countries require export documentation to be consularized and legalized. This process can add additional costs and time into the export process. In some instances, a visit to the local Chamber of Commerce is sufficient, but if documents need to be sent to a consulate office, there will be additional fees, including messenger delivery fees and consularization charges, which can run between $125 to $500.
Exporters should have a discussion with the foreign customer to find out if the destination country has an import requirement regarding consularization. The answer can differ from country to country and may also differ depending on the commodity and value of the shipment. In the event a shipment is moved without proper documentation, there may be a customs hold at destination, resulting in additional storage fees, potential customs penalties, and a frustrated customer.
Solid Wood Packing Material Certificates (SWPM)
The International Plant Protection Convention (IPPC) is an international plant health agreement that focuses on prevention of the introduction and spread of pests into wild plants and the protection of natural flora. The convention recognizes that the introduction of pests can be spread through vessels, containers, aircraft, storage facilities, and soil.
This convention affects exporters, as the materials used for packing and transporting shipments must meet the IPPC specification as part of the import requirement in over 175 countries. These materials must be heat treated, fumigated, or special heated. Exporters must be certain that the materials used to package their shipments meet the current standard. This is typically reflected by materials containing a certificate and/or marking indicating that they meet the IPPC standard.
Preshipment Inspections
Depending on the commodity, value, and destination country, a pre-inspection of goods prior to export may be required. This may also be a requirement within a letter of a credit. There are several agencies that specialize in this inspection process, which can include verification of quantity, quality, price, customs classification, and import eligibility.
The surveying company will schedule a qualified inspector to certify the cargo is meeting the requirements of the foreign importer’s purchase order. The preshipment inspection is usually paid for by the foreign customer. Additional time may need to be built into the export process to accommodate the scheduling of the preshipment inspection.
Free Trade Affirmations
Special certificates may be requested for countries with which the United States has free trade agreements. Some certificates of origin, including those required by the North American Free Trade Agreement (NAFTA) and the FTAs with Israel and Jordan, are prepared by the exporter.
In order to issue a valid FTA affirmation, the exporter must know that the goods are eligible and qualify for the FTA. This can be done by reviewing the preference criterion for the product and following the rules of origin relevant to the product. The rules of origin may be found in the General Notes section of the Harmonized Tariff Schedule or through the www.trade.gov website.
It is important to keep in mind that creation of an FTA affirmation requires the exporter to retain documentation validating the facts contained within the document. Failure to retain this backup documentation or completing the documentation incorrectly can result in a fine and penalty.
Many companies make the mistake of assuming that these FTA affirmations are an import requirement, which they are not. They are merely the method of complying with the free trade agreement in place to access duty-free status.
Others, including those required by the FTAs with Australia, the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) countries, Chile, and Morocco, are the importer’s responsibility.
Certificate of Analysis
A certificate of analysis may be required for seeds, grain, health foods, dietary supplements, fruits and vegetables, and pharmaceutical products.
Certificate of Free Sale
Certificate of free sale may be issued for biologics, food, drugs, medical devices, and veterinary medicine. More information is available from the Food and Drug Administration. Health authorities in some states as well as some trade associations also issue Certificates of Free Sale.
Dangerous Goods Certificate
Exports submitted for handling by air carriers and airfreight forwarders classified as dangerous goods need to be accompanied by the Shipper’s Declaration for Dangerous Goods required by the International Air Transport Association (IATA). The exporter is responsible for accuracy of the form and ensuring that requirements related to packaging, marking, and other required information by IATA have been met.
For shipment of dangerous goods, it is critical to identify goods by proper name and comply with packaging and labeling requirements, which vary depending on the type of product shipper and the country shipped to. More information on labeling/regulations is available from the International Air Transportation Association or Department of Transportation—HAZMAT websites.
For ocean exports, hazardous material regulations are contained in the International Maritime Dangerous Goods regulations.
Best Practice Measures for Exporters
Compliance requires the cooperation of the entire company supply chain. Sales, Customer Support, Shipping, Finance, Engineering, and R&D all play a role in managing export compliance, from knowing who the customer is to how payment is being received to whether a product meets regulatory parameters for being controlled.
1. Get compliance involved early in the export process.
2. Incorporate denied party screening throughout the supply chain.
3. Utilize a freight forwarder letter of instruction.
4. Establish a standard recordkeeping process.
5. Audit files on a regular basis.
6. Train, train, train.
Export Compliance Process Sample
DENIED PARTY SCREENING
1.The export compliance officer will perform the initial screening of potential customers through the Consolidated List.
2.Consolidated website: http://apps.export.gov/csl-search.
3.If there is any match found to a company name, individual name, or address on any list, the pending transaction will be held until the match has been reviewed further.
4.If it is determined it is a true match, the transaction will be closed out and not permitted to move further.
5.If the match is a false match, the export compliance officer will document his or her review and determination.
EMBARGOED COUNTRY SCREENING
1.The export compliance officer will review the current OFAC country list to determine if the destination country, transiting country, or any country listed in the transaction is listed on the OFAC country list.
2.If the country is a match, the export compliance officer will review the specific OFAC citation to determine the reason for the embargo and if the specific transaction is subject to the parameters of the embargo.
3.If it is determined it is a true match and the transaction is subject to prior government authorization or is prohibited, the export compliance officer will review next steps to either stop the transaction or to obtain an export license from the Office of Foreign Asset Controls.
4.If the embargo does not pertain to the specific transaction, the export compliance officer will document the file and include the supporting compliance team member’s name to the file.
BOYCOTT SCREENING
1.The Sales group will review the customer’s purchase order for boycott language.
2.If boycott language is found in a customer’s purchase order or other documentation, the Sales group will review with the export compliance officer whether the transaction is prohibited until such language is removed, requires reporting, or both.
3.Accounting will be notified and will comply with the boycott reporting requirements and file Form BIS 621-P accordingly.
4.Accounting will notify the CFO of any reporting that may be required by the Internal Revenue Service in addition to the BIS report.
COMMERCE CONTROL LIST AND COUNTRY CHART REVIEW
1.The Commerce Control List will be reviewed by the export compliance officer to determine if there is an applicable Export Control Classification Number (ECCN) for the product in question.
2.If needed, Engineering will be brought into the classification process to answer product specification questions.
3.Once a determination has been made, the ECCN will be included in the parts record for that item.
4.If it is determined that the product does not fall under a specific description on the Commerce Control List, that part will be designated as EAR99, meaning it is subject to the Export Administration Regulations but does not have a specific restriction on the product.
5.If an ECCN has been determined, the Reasons for Control will be reviewed against the Commerce Country Chart.
6.If the Commerce Country Chart indicates an export license is not required, the shipment will be exported indicating the ECCN and No License Required (NLR). (Note: all denied party screening will have been performed at this point.)
7.If the Commerce Country Chart indicates prior authorization is required, the Export Compliance Officer will review the Export Administration Regulations to determine if there is an applicable license exception available. All license exception requirements will be reviewed and signed off by the Export Compliance Officer.
8.If a license exception is not available, the Export Compliance Officer will be advised to apply for a license from the Department of Commerce using SNAP-R.
9.The shipment will be held until a license has been received and reviewed and all provisos (if any) have been met.
Case Study 1
Dragon Fire Inc. manufactures protective personal equipment (PPE) for many industries, including the healthcare and food industries. These products are manufactured in the United States and exported throughout the world. Dragon Fire has made a recent acquisition of a new company whose commodities include respirators. These commodities were manufactured for sale only in the United States.
Prior to acquisition of the new company, the compliance manager for Dragon Fire was brought into the vetting process and in interviewing traffic and sales personnel recognized the introduction of this new product would bring challenges to Dragon Fire’s compliance program, as Dragon Fire management was clearly seeking to expand its export market by selling the respirators to foreign markets.
The current product line is considered to be occupational health equipment to protect against hazards specific to civil industries and is considered EAR99, as it is not specifically listed on the Commerce Control List and is specifically noted in Category 1 as not being controlled under the ECCN Category 1A004 “Protective and Detection Equipment Not Specially Designed for Military Use.”
However, the new respirators clearly fall under gas masks, as they are full face masks that defend against biological agents (ECCN 1A004.a.1).
The compliance manager now reviews the Reasons for Control for this specific ECCN and finds the respirators are controlled for National Security (NS2), Chemical and Biological (CB2), and Anti-Terrorism (AT1). The compliance manager reviews the Commerce Country Chart to determine which countries require prior export authorization and which countries do not require export authorization. Prior sales have focused on Australia, Japan, and Israel, and the compliance manager has been advised that these same countries will be targeted by sales.
The compliance manager reviews the Commerce Country Chart and finds the respirators are not controlled for Japan and Australia. However, there is a control for Israel. List-based license exceptions are reviewed to see if there is an ability to forego applying for an export license to Israel. Limited Value Shipments (LVS), Country Group B Destination (GBS), and Civil End Users (CIV) are indicated as not applicable on the Commerce Control List.
The compliance manager meets with Sales and Management to advise all of the export licensing requirement so that this can be brought into any conversations with a prospective customer. Additionally, the compliance manager arranges for updated export compliance training to familiarize colleagues with the requirements Dragon Fire will have to follow in order to be export compliant in shipping these products.
The compliance manager registers for the Simplified Network Application Process (SNAP) in order to be ready to process Dragon Fire’s first export license once a sale to Israel is made.
Case Study 2
BNK Industries manufacturers security technology for commercial locations. Its laser technology is designed and intended for utilization in offices, warehouses, industrial locations, and other business facilities.
They have their first foreign sale to an industrial complex in Dubai. They reach out to the BIS, Bureau of Industry and Security, to determine if they require an export license at the request of their freight forwarder, who is uncertain for this transaction.
In the BIS interface, they are required to provide details on the customer and obtain a “end user” statement.
The concern is that the technology, although designed for security purposes, could be easily retooled into some more clandestine utilization.
After scrutiny, the BIS allows the sale, but an export licensed will be required.
Due diligence on the part of the exporter and their service provider avoided serious consequences if they sold the goods and did not obtain the proper authorizations.
SUMMARY OF EXPORT COMPLIANCE ISSUES
Various governmental authorities are beginning to crack down on exporters, namely U.S. Customs, the BIS, the Department of Transportation (DOT), and the Federal Aviation Administration (FAA).
In conjunction with this, there have been numerous changes to Inco-terms from the 1990 edition to the new 2000 series and changes in practice for the ITAR, AES, and Census Bureau in respect to the definition of the “exporter” for completing the SED.
“Exporting,” which has always been associated with intense documentation, bureaucracy, and lots of “frustration,” is now inundated with lots of governmental scrutiny. This additional aggravation can come in the form of
More paperwork
The need to automate fines and penalties
Intensive recordkeeping
Adherence to more legal issues
Prevention from exporting altogether
A post-9/11 fever to control our overseas deals
I have most recently followed numerous cases where exporters have received significant fines for not complying with various export regulations. These are on the increase as the various governmental agencies gear up for enforcement by technology and manpower, and mandates for stricter controls take priority. In the appendix is an update of fines and penalties issued by the BIS against U.S. exporters for various violations of U.S. export law.
As a thirty-plus-year veteran of international trade, I never spent as much time on export controls as I do now, in all three areas of my practice, consulting, education and training, and logistics management.
I am also witnessing a time when many corporations, both mom and pop and Fortune 100s, are just not paying attention to export compliance matters as seriously and diligently as is necessary.
The consequences are becoming serious and costly. Serious exporters who have learned to pay attention to these important issues, like export packing, marine insurance, quality documentation, and successful logistics, will now be spending time, money, and resources on compliance issues to survive in global trade.
INCOTERMS IN EXPORTING
I have always felt that Incoterms are the foundation of global trade and are also the most misunderstood by exporters. I am not going to focus on the thirteen options that Incoterms represent but more on how they are misunderstood from a practical standpoint.
Incoterms fundamentally tell an importer and an exporter (to a certain extent) what their responsibilities are, their potential liabilities, their potential risks, when title transfers, and who is responsible for certain costs in the international transaction.
Incoterms are universal in that they apply to all trading nations, under all circumstances and times. They transpose language, cultural issues, and legal issues local to all countries and peoples. This means not that exporters do not consider local issues when completing the transaction but that exporters can feel comfortable that, for the most part, an Incoterm in the United States will have the same meaning to their customer in South Africa, Brazil, or the Netherlands.
In most U.S. corporations, a salesperson or sales division, agent, or distributor begins the sales process. This is also where the terms of sale are generally concluded. It has been my experience that most international sales representatives, though they have the responsibility, do not understand the ramifications of Incoterms, particularly as they relate to who is responsible for various transportation costs associated with the export and who is responsible for managing the execution of the export documentation.
The consequences of not comprehending the Incoterms can sometimes lead to internal aggravation between operations, finance, and sales due to the potential for additional or unaccounted transportation expenses.
An example might be where an export salesperson in Cincinnati has an internal EXW base price of $30,000 and is asked to deliver the freight to an ocean gateway, like Baltimore.
Technically the sale has now changed to FOB Baltimore, in lieu of EXW Cincinnati. This now puts the burden of the transportation costs of the inland leg back to the exporter. Unless this has been figured into the base costing or as a line item surcharge, after the fact it will be difficult to account for or recover the cost from the buyer or importer unless it was identified up front. This is where the internal strife will begin and escalate.
Most exporters do not realize that FOB and CIF terms are being replaced by FCA and CIP, respectively, and that FOB and CIF are designated for ocean freight transportation only. I regularly see FOB USA Airport and CIF Destination Airport, which technically are incorrect.
The other issue with Incoterms is that an Incoterm, like CFR by itself, is not complete. An Incoterm is complete when tied in with a place (for example, FOB Port Elizabeth, CFR Oakland, CIP Rotterdam, DDP Tokyo). An international salesperson who offers FOB, CIF, and CPT terms without the named place is only addressing part of the equation and leaving out a very integral component, leading to confusion and much frustration.
A critical issue I will address with respect to Incoterms is that they are the standard terms of sale to describe what would be considered a typical international transaction. There are thirteen standard options. However, normal trading practice will afford variations of the thirteen, leading to countless options and some combinations that challenge the senses.
For example, you could have an export sale via ocean freight, FOB Charleston, but sales agrees to prepay the ocean freight to the importer’s domestic gateway, say Copenhagen, billing the ocean freight charges back to the importer by the EXW invoice cost. While from appearances purposes this might not make sense, it could be accomplished by any agreement reached between the two trading parties. For tax, sales, or inland distribution reasons, the importer might best be served by incorporating the international freight costs, so the exporter accommodates the client by formally selling FOB Charleston but functionally selling CIF Copenhagen. The paperwork shows one thing, but a side agreement creates another. You must always be careful when doing side agreements or extensions to make sure you are not creating an illegal transaction or a future compliance headache. The reality is that international salespersons, agents, and distributors are always agreeing to provisions in the export transaction, which will alter the ramifications, liabilities, and costing as determined by the actual Incoterms.
The last issue I will address regarding Incoterms is that they are terms of sale that run in conjunction with a related but completely different subject, the terms of payment. And that could be where confusion and potential pitfalls lie.
Consider an example where an exporter sells FCA O’Hare Airport in Chicago. Basically the exporter is accepting responsibility to the point at which the goods are loaded onto an aircraft at the designated airport. They pass liability, title, and costing once the goods are loaded on board the plane.
But the terms of payment are Sight Draft 60 days. The plane crashes. Per Incoterms, technically the risk of the international leg was for the account of the buyer. Now the buyer, having not received the goods, is still obligated to pay. Will it? What will it cost for the exporter to collect? The more third world the transaction, the smaller the opportunity to collect. These are all real, very serious, everyday issues. International sales and operations must pay attention to the potential conflicts that arise in exports between the terms of sale and the ultimate terms of payment.
By the way, the exporter could have arranged for contingency/unpaid vendor insurance, which would have provided “All Risk” protection if the exporter was unable to collect from the buyer.
It is also imperative to remember, as previously mentioned in the chapter, that irrespective of the Incoterm, the USPPI, which would typically be the manufacturer, would be partially and possibly totally responsible for the export compliance, who the shipment is sold to, where it ends up, and what it is used for.
The BIS
In all of my export educational seminars, my corporate export facilities review, and my consulting practice, I never have spent as much time as I do now reviewing and analyzing issues that U.S. corporations face in managing export compliance.
The reality is that the government using the BIS has stepped up its enforcement efforts, not only on issues typically engaged in national security but now with our mainstream exporters in areas like the accuracy of the SEDs; the overall consistency, conformity, and trueness of the exporter’s invoice, packing list, certificate of origin, and so on; overall recordkeeping; and the due diligence process in determining what can be exported to whom and where.
The BIS is complicated. Understanding the regulations in detail is cumbersome and arduous. It would take a full-length monograph to review all the issues in detail. I will discuss the very basic parameters of what each exporter should know in general about export compliance with the BIS.
The BIS asks five questions:
What are you shipping?
What quantity/what value?
Where?
To whom?
For what utilization?
In the simplest of explanations, this is what I believe the BIS is requiring each exporter to answer before it can be compliant in its export operations. A key factor here is that the BIS requires that in each transaction, each export relationship, and so on, there is a “SOP” starting with proper due diligence, accountability, recordkeeping, and compliance before an exporter can successfully export.
Ignorance of the rules and regulations is not an acceptable excuse. The fines and penalties can be severe and harsh both civilly and personally, with prosecution, suspension/revocation of export privileges, and imprisonment as potential consequences.
One just needs to read the export chronicles to see the recent rash of enforced compliance by the BIS in a proactive mode to catch potential noncom-pliant individuals and corporations.
Corporations showing different values between the SED and the commercial invoice or showing a lower value on the commercial invoice then was what the transaction accounted for have been fined by the BIS.
Corporations shipping freight to destinations knowing that a potential trans-shipment or third-party sale will occur to a prohibited country have been penalized.
Corporations shipping to individuals or corporations on the Denied Persons list have had their export privileges revoked or suspended, temporarily or permanently.
Corporations have had their goods seized for showing that the goods are of U.S. origin on the export documents, when they were originally imports into the United States.
Technology companies have appeared to export innocuous software only to learn that their products require export licenses, in that the technology has applications for national security exposures.
High-tech companies have found out that their products are licensable since with minor retooling, like with the laser equipment example utilized in our prior case study for alarm systems, they could be made into laser weaponry.
The bottom line is that there are hundreds of reasons that the exporter must pay attention to the new level of scrutiny that the BIS is executing on export compliance. This is to avoid serious fines and penalties, prevent export privilege suspensions, prevent prosecution of the corporation and individuals, and avoid the expense associated with litigation, mitigation, and the inability to export successfully.
I have observed many corporations ignoring their export compliance requirements and/or procrastinating on dealing with them. For many, this delay or inaction has been very costly.
The activity of the BIS is not waning. It is growing. From the actual outbound ports to the corporate transaction, files are under stiff review and scrutiny.
The BIS has established a twenty-step process (Figure 9-3) that the exporter must use to make sure that it can export the product to a particular country, to a specific entity, and for certain utilization. The process must be documented, maintained for at least five years, and totally retrievable under any potential audit.
The BIS has established red flags, or potential occurrences or observations made to the export company, from the potential foreign buyer that are supposed to cause the exporter to raise its level of diligence until the inquiry/diligence is successfully mitigated, closed out, or favorably rectified.
Following are some examples:
The foreign buyer wants to pay cash.
The foreign buyer uses a freight forwarder for the delivery site.
The foreign buyer is in a completely different line of business.
The foreign buyer purchases a product that requires installation and training but tells you not to provide it.
The foreign buyer is not cooperative with details, delivery sights, dates, and other information.
There are numerous other red flags that the BIS has identified that the U.S. exporter must learn to understand and react to before completing the export transaction.
Corporate management would be shocked to learn of the multitude of onus on it in the execution and diligence of its foreign sales.
Exporters must learn the regulations, maintain and update the changes, and have SOPs in place to deal with all of the export compliance issues. They must employ specialists on staff or delegate the responsibilities to third parties under contract who are well qualified to provide the export compliance management response necessary. Law firms, freight forwarders, and consultants are the three major types of third-party service providers that can offer export compliance expertise.
FIGURE 9-3. Steps for using the Export Administration Regulations (EAR).
When the Occupational Safety and Health Administration (OSHA) was developed and expanded in the 1970s to 1980s, many corporations resisted this new regulation but soon learned it was ingrained into business compliance and governmental intrusion. Some twenty years later, it is well entrenched into corporate America. I view what happened with health and safety issues in corporate America then to be very similar to what is happening now with export compliance. We can argue about it, we can fight it, but it is here now, apparently here to stay, and we need to deal with it constructively, like a necessary evil.
I firmly believe that corporations and individuals who embrace export compliance proactively will benefit immensely, as those that defer will be at a loss with export operations that are handicapped.
In establishing its export compliance program, the corporation has nominated its corporate compliance officer and created a set of SOPs.
The key to bringing the program to fruition is to establish an internal education and training program.
IMPORTANCE OF INTERNAL EDUCATION AND TRAINING
Internal education and training will enable corporations to develop their own in-house expertise. As compliance officers mature in their new roles, they will be developing outside resources on which to expand their knowledge. At the same time, one of the many responsibilities of a compliance officer is to disseminate information regarding the compliance program and newly established procedures.
A good export compliance program outlines the framework for the training. Compliance training should begin with senior management for several reasons:
Compliance is directly related to the company’s bottom line.
Senior management will understand the importance of compliance and, therefore, support the efforts of the compliance manager with additional funding and the “hammer” to be used by the compliance officer to enforce the new standard.
Senior management will provide guidance on the execution of the agreed strategies to be used throughout the company.
Middle management and support staffing must also be included in training. There should be a company directive stating that newly hired employees with specific supply chain responsibilities will require an export compliance overview within thirty days of date of start in the new position. This type of directive requires the cooperation and assistance of the human resources department. It can be incorporated as part of the new employee’s indoctrination schedule, along with the employee becoming familiar with the latest benefit plan, for example.
Degree of Training
The levels of training will vary depending on the import/export responsibilities of the employee. At a minimum, all company personnel should be included in a basic compliance class. Everyone in the company, including shipping, receiving, accounting, customer service, and sales, should be required to attend. Everyone in the company would then be made aware of the compliance program in place within the corporate structure and that senior management is on the “same page” backing the program.
Accounting, sales, customer service, and operations training should include Incoterms, letters of credit, types of payments, risks of global trade, and denied parties screening. Operations, shipping, and receiving training should include import/export documentation, NAFTA procedures, packing, marking and labeling, and valuation issues.
Training topics should also encompass regulations under other governmental agencies like the FDA, U.S. Department of Agriculture, Department of State, and DOT, to name a few. Whatever the topics, they should cover the specific needs of the organization.
Sources of Education and Training
Training programs and seminars are offered using different venues. Some programs are offered in connection with international trade organizations like the Society of International Affairs, Professional Association of Import/ Export Compliance Managers, American Management Association, World Trade Institute, Global Training Institute, and National Institute for World Trade.
There are also government-sponsored programs available, like the Business Executives Enforcement Team (BEET). These BIS/BEET meetings are held in conjunction with local business associations. The BIS website contains a comprehensive list of upcoming training programs.
One of the many benefits of attending these seminars is the access to the governmental personnel that are approving license applications, dispensing advice, and enforcing the regulations. These personnel represent an important resource to the compliance manager and are available for in-house visits via their agency outreach programs.
Resource Development
As compliance officers further define their roles, network themselves outside of their organizations, and collect key data, they must funnel that information internally to all of the key stakeholders. The corporate compliance officer must continue to update the supply chain.
U.S. Customs and the BIS have daily updates in today’s post-9/11 environment. Employees that have received training and are familiar with their day-to-day responsibilities need to be informed of the latest changes. Is United Parcel Service going on strike? Will there be port delays in Long Beach next month?
A company website with a “compliance corner” may offer some corporations a good solution. Other companies may choose to broadcast updates by email to appropriate personnel within the supply chain.
Magazines and newsletters once read should not be tossed away but should make their way around the office. Notable website links should be sent to all in the company address book.
Corporate compliance officers are also resources within their companies. They must advertise their positions to make sure the appropriate people are answering the compliance questions.
Procedures in place, corporate support, and the nomination of the corporate compliance officer are the fundamentals of the compliance team. The corporate compliance officer is part of a team and part of a team effort. The best strategy will not work if the team is not working together. It is said that a dedicated team is the fuel for progress and growth. The same is true for the corporate compliance officer and his or his supply chain team.
One of the best resources is published monthly—American Shipper Magazine, where I write a monthly column. The website www.americanshipper.com is full of information on international business, logistics, importing, exporting, and important current events we all need to be kept appraised of daily.
RoHS in Exports
Definition
The definition and aim of the RoHS directive is quite simple. The RoHS directive aims to restrict certain dangerous substances commonly used in electronic and electronic equipment. Any RoHS compliant component is tested for the presence of lead (Pb), cadmium (Cd), mercury (Hg), hexavalent chromium (Hex-Cr), polybrominated biphenyls (PBB), and polybrominated diphenyl ethers (PBDE). For cadmium and hexavalent chromium, there must be less than 0.01 percent of the substance by weight at the raw homogeneous materials level. For lead, PBB, and PBDE, there must be no more than 0.1 percent of the material when calculated by weight at the raw homogeneous materials level. Any RoHS-compliant component must have 100 ppm or less of mercury, and the mercury must not have been intentionally added to the component. In the EU, some military and medical equipment are exempt from RoHS compliance.
RoHS due diligence can be a defense if you can provide that you took all the reasonable actions possible to ensure RoHS compliance. In order to use this defense and successfully defend yourself from an accusation of noncompliance, though, you need to take action long before you enter a court. You need to ensure that your company is run in such a way that you have control over materials and production. You also want to ensure that you have a system of checks in place that prevent any potential problems—such as a sudden change in the way materials are produced overseas. Finally, you will need to document or have some proof that you are taking these preventative measures. If you are ever facing a legal challenge, documentation and proof will let you show a court that you have exercised due diligence.
There are other ways to ensure RoHS compliance, as well. You need to train all of your team members and employees about RoHS and about the system of checks and balances that you have in place to ensure that your products are compliant. You are also responsible for ensuring that the system of checks is in place and is being used by your employees. You may also want to schedule periodic random testing of your products for RoHS compliance. This will leave a clear paper trail and will show that you are serious about complying with RoHS regulations. Since RoHS testing can be expensive, you will have to budget for it and decide how often you can afford to test your products.
FCPA in the Global Supply Chain
An area of DOJ enforcement that has grown in recent years has been with the Foreign Corrupt Practices Act.
The Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. §§ 78dd-1, et seq. (“FCPA”), was enacted for making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Specifically, the anti-bribery provisions of the FCPA prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.
Since 1977, the anti-bribery provisions of the FCPA have applied to all U.S. persons and certain foreign issuers of securities. With the enactment of certain amendments in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States.
The FCPA also requires companies whose securities are listed in the United States to meet its accounting provisions. These accounting provisions, which were designed to operate in tandem with the anti-bribery provisions of the FCPA, require corporations covered by the provisions to (a) make and keep books and records that accurately and fairly reflect the transactions of the corporation and (b) devise and maintain an adequate system of internal accounting controls.
For FCPA compliance questions relating to specific conduct, you should seek the advice of counsel as well as consider using the Department of Justice’s FCPA Opinion Procedure, found at doj.gov.
Import and export executives need to become familiar with how the FCPA regulations might impact their purchasing, sales, or business development strategies on foreign shores.
Antiboycott in International Trade
During the mid-1970s the United States adopted two laws that seek to counteract the participation of U.S. citizens in other nation’s economic boycotts or embargoes. These “antiboycott” laws are the 1977 amendments to the Export Administration Act (EAA) and the Ribicoff Amendment to the 1976 Tax Reform Act (TRA). While these laws share a common purpose, there are distinctions in their administration.
Objectives:
The antiboycott laws were adopted to encourage, and in specified cases, require U.S. firms to refuse to participate in foreign boycotts that the United States does not sanction. They have the effect of preventing U.S. firms from being used to implement foreign policies of other nations which run counter to U.S. policy.
Primary Impact:
The Arab League boycott of Israel is the principal foreign economic boycott that U.S. companies must be concerned with today. The antiboycott laws, however, apply to all boycotts imposed by foreign countries that are unsanctioned by the United States.
Who Is Covered by the Laws?
The antiboycott provisions of the Export Administration Regulations (EAR) apply to the activities of U.S. persons in the interstate or foreign commerce of the United States. The term “U.S. person” includes all individuals, corporations and unincorporated associations resident in the United States, including the permanent domestic affiliates of foreign concerns. U.S. persons also include U.S. citizens abroad (except when they reside abroad and are employed by non-U.S. persons) and the controlled in fact affiliates of domestic concerns. The test for “controlled in fact” is the ability to establish the general policies or to control the day to day operations of the foreign affiliate.
The scope of the EAR, as defined by Section 8 of the EAA, is limited to actions taken with intent to comply with, further, or support an unsanctioned foreign boycott.
What do the Laws Prohibit?
Conduct that may be penalized under the TRA and/or prohibited under the EAR includes:
Agreements to refuse or actual refusal to do business with or in Israel or with blacklisted companies.
Agreements to discriminate or actual discrimination against other persons based on race, religion, sex, national origin or nationality.
Agreements to furnish or actual furnishing of information about business relationships with or in Israel or with blacklisted companies.
Agreements to furnish or actual furnishing of information about the race, religion, sex, or national origin of another person.
Implementing letters of credit containing prohibited boycott terms or conditions.
The TRA does not “prohibit” conduct, but denies tax benefits (“penalizes”) for certain types of boycott-related agreements.
This is another area personnel engaged in global trade need to pay attention to, avoid penalties, fines, and government scrutiny.
CONCLUDING REMARKS
The export supply chain as identified in this chapter will run more safely, timely, and competitively when the export manager pays attention to detail and operates in a fashion integrating compliance into all facets of the export trade. Creating the sale, processing the order, and collecting payment are all integral issues that need to be paid attention to and, when they are, will assure successful exporting.