8

Essential Overview of Import/Export Compliance and Security Management: Post 9/11

The focus of this chapter is to define all of the old and new compliance and security regulations that supply chain managers engaged in importing and exporting will face into the millennium, most because of the tragedy of September 11, 2001. And as we move through the second decade of the new millennium. security is becoming an increasingly important and critical area of managing any global supply chain.

OVERVIEW

Compliance and security have always been issues that supply chain executives previously had to contend with. Introduce the unfortunate events of September 11, 2001, and compliance and security management is raised to an entirely new heightened level within all import and export organizations, transportation carriers and providers, overseas ports/terminals, vendors and suppliers, and, in reality, almost every entity that is touched within the global supply chain.

Compliance has to do with corporations managing their governmental regulatory obligations in their import/export supply chains, including but not limited to documentation, recordkeeping, valuation, and classification.

Security has to do with protecting the interests of the corporation and the citizenship from potential harmful acts, including but not limited to terrorism, war, and civil commotion.

Having defined both, the important issue is that they are also one in the same, for the most part. One cannot be secure and noncompliant, nor compliant and nonsecure. They go hand in hand.

An example is a new security procedure, the 24-Hour Manifest Requirement. This procedure mandates that, on inbound freight into the United States, U.S. Customs receives a detailed manifest sent electronically, twenty-four hours prior to ship departure from the foreign port of just what will be entering the United States. Failure to comply could result in import refusal, seizure of goods, and/or fines and penalties. This is a new security procedure. However, it also has a compliance element, in that there is a regulatory aspect to the requirement with a financial consequence, and there is a record-keeping component to the overall process.

Another example is when we export goods from the United States via air cargo, we have a “Known Shipper/FAA” onus that the shipper complete certain Federal Aviation Administration (FAA) forms enabling it to drop freight off with the carrier. This is a security regulation. However, the record keeping and consequences aspect of the regulation builds in a compliance element to the security aspect. Whether compliance or security, the events of 9/11 have added a whole new dimension to supply chain management that forces the executives in charge to pay attention to a whole new array of regulations and legal processes.

In this foray has come a new set of compliance and security acronyms. The key ones are listed below.

AUTOMATED EXPORT SYSTEM (AES)

The Automated Export System (AES) is covered in great detail in chapter TK. Basically, it is an electronic system for reporting the shipper’s export declaration (SED) data to the Department of Census. This process will be an integral component of the export security procedures and mandates from the Department of Homeland Security (DHS) in controlling what is exported from the United States. For more information, go to www.aesdirect.gov.

ADVANCED PASSENGER INFORMATION SYSTEM

The Advanced Passenger Information System (APIS) comes under the Aviation Transportation Security Act of 2001 and the Enhanced Border Security and VISA Reform Act of 2001. It is a mandate for the electronic transmission of passenger and crew manifests for inbound and outbound commercial air and commercial sea carriers to the APIS system. It provides another level of security against terrorism. For more information, go to www.customs.gov/xp/cgov/travel/inspections/APIS/.

TRADE ACT OF 2002

The Trade Act of 2002, which gave the president fast-track authority to negotiate trade agreements, also requires exporters to submit shipping documents no later than twenty-four hours after cargo has been delivered to a marine terminal and at least twenty-four hours prior to a vessel’s departure. The act makes it illegal to tender improperly documented shipments to carriers and requires exporters and importers to file customs data electronically. It also establishes a task force to develop procedures for screening and monitoring imports prior to arrival. For more information, go to www.thomas.loc.gov.

HOMELAND SECURITY ACT

The Homeland Security Act passed by Congress in November created the DHS that is charged with preventing terrorist attacks, reducing the country’s vulnerability, and assisting in recovery from attack. By U.S. Customs, the Transportation Security Administration and the Coast Guard will now be part of DHS; the act does protect customs revenues from diversion to other parts of the new department. For the full text of the legislation, go to www.thomas.loc.gov.

CONTAINER SECURITY INITIATIVE

The Container Security Initiative (CSI) is set up to potentially identify high-risk cargo in steamship containers before they arrive in the United States by placing U.S. Customs inspectors at foreign ports, where they work with local authorities to screen U.S.-bound containers. To date, twenty of the world’s twenty largest seaports have signed on and China has agreed in principle to participate. The program also promotes the use of high-tech detection and security devices. For more information, go to www.customs.ustreas.gov.

CUSTOMS TRADE PARTNERSHIP AGAINST TERRORISM

The Customs Trade Partnership Against Terrorism (C-TPAT) requires participants, including importers, carriers, and customs brokers, to document their security procedures. Companies that are accepted into the program also must help overseas suppliers raise their security standards. Participants’ shipments qualify for expedited processing and exemption from physical inspections. Details are available at www.customs.ustreas.gov.

FREE AND SECURE TRADE

The Free and Secure Trade (FAST) program harmonizes some of the requirements for participation in C-TPAT and Canada’s Partners in Protection (PIP) program. Participants receive unique identifiers that make them eligible for expedited processing at the U.S.-Canada border. The motor carrier and the individual driver of FAST shipments must be preapproved. For more information, go to www.customs.ustreas.gov.

VEHICLE AND CARGO INSPECTION SYSTEM

The Vehicle and Cargo Inspection System (VACIS) is a mobile x-ray truck set up to inspect trucks and containers as they pass through our borders. It views the contents of the cargo in the “box.” This capability expedites the inspection process because manual unloading and reloading was the alternative. Primarily used in the southwest, it has proven to be a successful deterrent to illegal and clandestine cargo movements. For more information, go to www.customs.ustreas.gov.

AUTOMATED COMMERCIAL ENVIRONMENT

The Automated Commercial Environment (ACE) is the new import system that is being implemented by customs. The old system was developed in 1984 and cannot meet the steadily growing demands of growing trade. ACE stands to revolutionize customs and fully automate the data collection process by the government. Within the data capturing, customs will be able to better share information among governmental agencies. The cargo tracking aspects will support such security measures as CSI, CTPAT, and Operation Safe Commerce initiatives to capture advance data from the international supply chain and processes it. For more information, visit www.cbp.gov/xp/cgov/toolbox/about/modernization/ace/ace_fact_sheet.xml.

2016 saw great progress with CBP enacting ACE advancements in the import inbound supply chain.

TRANSPORTATION SECURITY ACT OF 2002

The U.S. Maritime Transportation Security Act of 2002 requires the Coast Guard and local port security committees to conduct vulnerability assessments at U.S. ports. It authorizes the Coast Guard to conduct assessments at foreign ports and to deny entry to vessels from countries that do not meet security standards. It also mandates background checks and identification cards for some personnel, authorizes grants for security improvements at U.S. ports, and orders the development of standards for container seals and locks and a cargo tracking, identification, and screening system for ocean containers. For the full text, go to http://thomas.loc.gov.

24-HOUR MANIFEST RULE

U.S. Customs’ 24-Hour Manifest Rule requires most ocean carriers and consolidators to file cargo manifest data with customs electronically at least twenty-four hours before U.S.-bound cargo is loaded on a vessel at a foreign port. A total of sixteen individual pieces of information are required under the rule, which took effect December 2, 2002. For the full text, go to www.customs.ustreas.gov/news/pressrel.htm. Find the October 30, 2002, press releases, and then click on “Presentation of vessel cargo declaration.”

FOUR-HOUR ADVANCED NOTIFICATION

U.S. Customs and Border Protection (CBP) has decided that, like the twenty-four-hour advanced manifest rule for ocean shipments, air shipments should have a mandatory electronic reporting period.

The first proposed time frame was twelve hours prior to the flight time, which was introduced as the “straw man” proposal. CBP now states that the “straw man” proposal was merely put out to generate comments from the trade community. Nevertheless, the new proposal outlines an electronic manifest notification to take place at “wheels up” or at a minimum of four hours prior to the arrival of the importing aircraft.

If for any reason customs is concerned about the safety of the contents in relations to a terrorist threat, the landing rights of the entire aircraft could be denied. There will be no prescreening of merchandise in this proposed process, unlike the twenty-four-hour advance manifest for ocean in the CSI ports of lading.

As of September 2003, this is still in the “proposal” stage.

PATRIOT ACT

The USA Patriot Act was passed by Congress following September 11, 2001. The Patriot Act expands the government’s investigative abilities and its authority to track and intercept information. This act is viewed as a necessary tool by governmental enforcement agencies, as in some cases it creates federal laws for investigating business records and money trails. While the purpose of the act is to focus on terrorism and money laundering, the act remains a controversial point for civil libertarians. For more information, go to www.usdoj.gov.

OPERATION SAFE COMMERCE

Operation Safe Commerce was launched to fund business initiatives designed to enhance security for container cargo moving throughout the international transportation system. Operation Safe Commerce is testing new security methods with the assistance of real importers. Depending on the outcome of the testing, corporate America may see these changes coming about as governmental recommendations for security. For more information, go to www.cbp.gov.

DEPARTMENT OF HOMELAND SECURITY (DHS)

Building a Secure Homeland

The creation of the DHS is the most significant transformation of the U.S. government since 1947, when Harry S. Truman merged the various branches of the U.S. Armed Forces into the Department of Defense to better coordinate the nation’s defense against military threats.

DHS represents a similar consolidation, both in style and substance. In the aftermath of the terrorist attacks against America on September 11, 2001, President George W. Bush decided that twenty-two previously disparate domestic agencies needed to be coordinated into one department to protect the nation against threats to the homeland.

The new department’s first priority is to protect the nation against further terrorist attacks. Component agencies will analyze threats and intelligence, guard our borders and airports, protect our critical infrastructure, and coordinate the response of our nation for future emergencies.

Besides providing a better-coordinated defense of the homeland, DHS is also dedicated to protecting the rights of American citizens and enhancing public services, like natural disaster assistance and citizenship services, by dedicating offices to these important missions.

WHAT IS THE MISSION OF DHS?

The many men and women who daily protect our borders and secure our country are committed to the safety of our homeland. The DHS helps them do their jobs better with increased communication, coordination, and resources. Specifically, the DHS has three primary missions:

1. Prevent terrorist attacks within the United States.

2. Reduce America’s vulnerability to terrorism.

3. Minimize the damage from potential attacks and natural disasters.

To accomplish these three goals, the DHS focuses on creating the new capabilities discussed in the July 2002 National Strategy for Homeland Security. The Strategy points out that today no one single governmental agency has homeland security as its primary mission. In fact, responsibilities for homeland security are dispersed among more than a hundred different governmental organizations. America needs a single, unified homeland security structure that will improve protection against today’s threats and be flexible enough to help meet the unknown threats of the future. The DHS, the most significant transformation of the U.S. government in over a half century, transforms and realigns the current confusing patchwork of governmental activities into a single department. DHS gives state and local officials one primary contact instead of many, an important advantage when it comes to matters related to training, equipment, planning, exercises, and other critical homeland security needs. It manages federal grant programs for enhancing the preparedness of firefighters, police, and emergency medical personnel. DHS also sets standards for state and local preparedness activities and equipment.

WHAT WAS THE PLAN FOR CREATING THE NEW DEPARTMENT?

Timeline

On November 25, 2002, the president signed the bill creating the new DHS, and on January 24, 2003, the DHS came into existence. On November 25, the president also submitted a Homeland Security Reorganization Plan to Congress. Ninety days after this plan was submitted, the component parts of DHS were free to move to the newly created department. By law, the DHS secretary has one year from the time the department became effective to bring all of the twenty-two agencies into the new organization. The president stated in the reorganization plan that he anticipated most of the component parts would move into the new department by March 1, 2003.

In the years 2005 through 2017, DHS has become a mature government silo with major controls over security and trade compliance management.

DHS Transition Team

A Homeland Security Transition Planning Office (TPO) was established in late June 2003 to work with Congress on the legislation and to coordinate planning for DHS. In 2017, General John Kelly took the helm of the DHS and is transitioning his management team along with the Trump initiatives into position for leading the charge against terrorism and the protection of our borders and national interests. About fifty representatives from the tapped agencies, the Office of Personnel Management, the Office of Management and Budget, and the White House were brought together to develop options that would allow the DHS to achieve the new and enhanced capabilities in the most effective and timely manner.

The TPO is structured around several different teams that parallel the structure for the DHS: Border and Transportation Security, Science and Technology, Emergency Preparedness and Response, Intelligence and Infrastructure Protection, United States Secret Service, Human Resources, Systems, Legal, Communications, and Budget. The primary role of these teams during the transition process was to map out logistical options and reorganization details for the incoming DHS leadership, who ultimately make the substantive policy decisions on these issues. The goal, to the greatest extent possible, was to make the reorganization a collaborative effort with the tapped agencies, employees, unions, Congress, state and local entities, and private sector.

BUILDING A STRONG DEPARTMENT

The following are elements that we believe are important to ensuring a smooth and successful employee transition into the DHS:

A commitment to provide up-to-date information about the progress of the DHS transition team

Openness about the process and results

A pledge to build the DHS culture on the foundations of the cultures of the agencies moving into the new department

A commitment to distribute paychecks on time and to ensure that services like technical support, legal support, and human resources are not disrupted

DHS HAS FIVE MAJOR DIVISIONS (DIRECTORATES)

1. Border and Transportation Security (BTS). BTS is led by Under Secretary Asa Hutchinson and is responsible for maintaining the security of our nation’s borders and transportation systems. The largest of the directorates, it is home to agencies like the Transportation Security Administration, U.S. Customs Service, the border security functions of the Immigration and Naturalization Service, Animal and Plant Health Inspection Service, and the Federal Law Enforcement Training Center.

2. Emergency Preparedness and Response (EPR). This directorate, which is headed up by Under Secretary Mike Brown, ensures that our nation is prepared for, and able to recover from, terrorist attacks and natural disasters.

3. Science and Technology (S&T). Under the direction of Under Secretary Dr. Charles McQueary, this directorate coordinates the department’s efforts in research and development, including preparing for and responding to the full range of terrorist threats involving weapons of mass destruction.

4. Information Analysis and Infrastructure Protection (IAIP). IAIP merges the capability to identify and assess a broad range of intelligence information concerning threats to the homeland under one roof, issue timely warnings, and take appropriate preventive and protective action.

5. Management. The Under Secretary of Management, Janet Hale, will be responsible for budget, management, and personnel issues in DHS.

Besides the five directorates, several other critical agencies folded into DHS or were newly created:

United States Coast Guard (USCG). The commandant of the Coast Guard reports directly to the secretary of Homeland Security. However, the USCG also works closely with the under secretary of Border and Transportation Security and maintains its existing independent identity as a military service. Upon declaration of war or when the president so directs, the USCG would operate as an element of the Department of Defense, consistent with existing law.

United States Secret Service. The primary mission of the Secret Service is the protection of the president and other governmental leaders and security for designated national events. The Secret Service is also the primary agency responsible for protecting U.S. currency from counterfeiters and safeguarding Americans from credit card fraud.

Bureau of Citizenship and Immigration Services. While BTS is responsible for enforcement of our nation’s immigration laws, the Bureau of Citizenship and Immigration Services dedicates its full energies to providing efficient immigration services and easing the transition to American citizenship. The director of Citizenship and Immigration Services reports directly to the deputy secretary of Homeland Security.

Office of State and Local Government Coordination. A truly secure homeland requires close coordination between local, state, and federal governments. This office ensures that close coordination takes place with state and local first responders, emergency services, and governments.

Office of Private Sector Liaison. The Office of Private Sector Liaison provides America’s business community a direct line of communication to DHS. The office works directly with individual businesses and with trade associations and other nongovernmental organizations to foster dialogue between the private sector and DHS on the full range of issues and challenges faced by America’s business sector in the post–September 11, 2001 world.

Office of Inspector General. The Office of Inspector General serves as an independent and objective inspection, audit, and investigative body to promote effectiveness, efficiency, and economy in the DHS’s programs and operations and to prevent and detect fraud, abuse, mismanagement, and waste in such programs and operations. To contact Acting Inspector General Clark Kent Ervin or his staff, call (202) 927-5240. To report waste, fraud, or abuse, call the hotline at 1-800-323-8603.

WHO IS PART OF DHS?

The agencies who are part of DHS are housed in one of four major directorates: Border and Transportation Security, Emergency Preparedness and Response, Science and Technology, and Information Analysis and Infrastructure Protection.

The Border and Transportation Security directorate brings the major border security and transportation operations under one roof, including the following:

U.S. Customs Service (Treasury)

Immigration and Naturalization Service (part) (Justice)

Federal Protective Service (GSA)

Transportation Security Administration (Transportation)

Federal Law Enforcement Training Center (Treasury)

Animal and Plant Health Inspection Service (part) (Agriculture)

Office for Domestic Preparedness (Justice)

The Emergency Preparedness and Response directorate oversees domestic disaster preparedness training and coordinates governmental disaster response. It brings together the following:

Federal Emergency Management Agency (FEMA)

Strategic National Stockpile and the National Disaster Medical System (HHS)

Nuclear Incident Response Team (Energy)

Domestic Emergency Support Teams (Justice)

National Domestic Preparedness Office (FBI)

The Science and Technology directorate seeks to use all scientific and technological advantages when securing the homeland. The following assets are part of this effort:

Chemical, Biological, Radiological, and Nuclear (CBRN) Countermeasures Programs (Energy)

Environmental Measurements Laboratory (Energy)

National Biological Weapons (BW) Defense Analysis Center (Defense)

Plum Island Animal Disease Center (Agriculture)

The Information Analysis and Infrastructure Protection directorate analyzes intelligence and information from other agencies (including the CIA, FBI, DIA, and NSA) involving threats to homeland security and evaluates vulnerabilities in the nation’s infrastructure. It brings together the following:

Critical Infrastructure Assurance Office (Commerce)

Federal Computer Incident Response Center (GSA)

National Communications System (Defense)

National Infrastructure Protection Center (FBI)

Energy Security and Assurance Program (Energy)

The Secret Service and the USCG are also located in the DHS. These agencies remain intact and report directly to the secretary. In addition, the INS adjudications and benefits programs report directly to the deputy secretary as the Bureau of Citizenship and Immigration Services.

OPERATION SAFE COMMERCE

Operation Safe Commerce is a joint initiative between the Department of Transportation and the Bureau of Customs and Border Protection to fund business initiatives designed to enhance security for container cargo.

The Transportation Security Administration (TSA) has appropriated $58 million to be used in evaluating the various technologies that have arisen. The information gathered will ultimately be used to develop standard security procedures for companies involved in international shipping.

Subcontractors are working with international shippers at the ports of Seattle, New York/New Jersey, and Long Beach/Los Angeles. There are currently eleven pilot projects being headed by companies like Unisys, Boeing, and Maersk, to name a few.

The subcontractors work with the importer to functionally use various technologies to monitor the security of the supply chain in actual import shipments. The test program will have an added benefit in “working out the bugs” and creating a “usual standard” for import security programs.

Some of the technologies being considered are digital photography, radiation detectors, container tracking by GPS satellite, and smart seals equipped with radiofrequency tracking technology.

Each of these technologies has its obvious benefits in securing supply chains. However, until these solutions are mandated by the government, importers will not be running to purchase these technologies due to costing. Aside from providing security, many companies do not see a direct benefit in purchasing these technologies, thus requiring implementation of governmental mandates to “sign on” and incorporate these technologies into their supply chains.

FAST

FAST is a joint program between the Canada Customs Revenue Authority (CCRA) and CBP. FAST streamlines the customs clearance process along the shared border, allowing for an expedited clearance while enhancing the security efforts of both countries.

To qualify for FAST expedited clearance, the shipment must meet the following requirements:

1. The shipment must be entered by a member of C-TPAT or PIP.

2. The shipment must be carried by a FAST-/C-TPAT-approved carrier.

3. The shipment must be driven by a FAST-approved commercial driver.

There are two cargo release methods for FAST shipments. The FAST release is a paperless processing achieved via electronic data transmissions and transponder technology. The prearrival processing system (PAPS) release is a release using barcode technology. The invoice and manifest information is faxed ahead to the border, notated by a barcode. When the truck arrives at the border, customs scans the barcode to determine if an exam is required.

It is estimated that the FAST program will expand throughout the year to include at least ten U.S./Canadian ports that will have qualified for FAST by the end of 2003.

RADIOACTIVE CARGO REQUIRES SECURITY

The Maritime Transportation Security Act of 2002 passed Congress in November 2002. The act sought to enhance maritime security and imposes broad security requirements on the maritime industry. The requirements focus on compliance with the regulations, particularly on “high-risk” vessels and facilities. These enhanced regulations have caused delays at ocean ports across the United States.

In 2002, the Palermo Senator was delayed when radiation was detected during a routine inspection of the ship. Following three tense days of testing, the source of the radiation was determined to be a container of clay tiles.

Many products naturally emit low levels of radiation. Importers are not aware that their products containing these trace amounts of radioactivity raise red flags when shipped in bulk. These trace amounts build up, causing a shipment that was manifested as nonradioactive cargo to be the focus of intensive examination by CBP, Department of Energy, and even the Federal Bureau of Investigation.

One way for shippers to avoid delays is by testing cargo for radioactivity prior to shipping to make sure the levels fall within the regulatory guidelines. Using a forwarder who specializes in handling radioactive shipments can also ease the burden of unforeseen delays. Finally, it is important for shippers to keep themselves current on changing regulations and updates they may receive from industry organizations.

GREEN CUSTOMS PROJECT

Many importers are aware of the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES). CITES regulates and enforces the Endangered Species Act, protecting habitats, animals, and environments at risk. These regulations are enforced by customs throughout the world.

A program encompassing CITES and other such international environmental regulations have been created by the United Nations Environment Program (UNEP). The purpose of the Green Customs Project is to train customs officers to detect and apprehend criminals trafficking in banned environmental commodities, like hazardous waste and illegal chlorofluorocarbons.

Criminals circumventing these regulations and illicitly trading these natural resources earn by some estimates over $5 billion per year. Changed manifests, smuggling, and corruption are just a few of the means used by such traffickers.

The United Nations formed the UNEP to coordinate efforts between the international agencies monitoring environmental regulations. These agencies include Interpol, the World Customs Organization, and other UNEP member groups, like CITES. Customs officers stand at the world’s borders. Customs agents will receive specific training on intercepting these illegal cargoes based on the experience and training methods within the various agencies. By using information sharing, training, and combined energies of these agencies, officials hope to see a decrease in these types of trafficking activity.

VERIFICATION OF GOVERNMENT CONTRACTS

Import shipments destined for the U.S. government are subject to the usual customs entry and examination requirements. These same import shipments may qualify for preferential tariff treatment under Chapter 98, provided the governmental contract is current.

The imported product will be classified under the appropriate Chapter 98 harmonized tariff number. The import entry will reflect this preferential tariff number and the alternate tariff number that would have been applicable had the product not been classifiable in Chapter 98.

Importers may advise their broker that the shipment qualifies for such preferential tariff treatment and declare the shipment as such to customs, only to receive a CF29 some months later advising of a rate advance. The reason for the rate advance is due to the fact that the governmental contract information was invalid.

Therefore, it makes good sense to confirm the status of a governmental contract prior to such import. This can be done by contacting the specific governmental agency and speaking with the acting contracting officer.

IMPORT/EXPORT RECORDKEEPING IS SERIOUS BUSINESS

A civil penalty is imposed on an exporter in the amount of $10,000 for violation of 15CFR762.2. Is this a penalty for fraud, incorrect valuation, and improper marking? No, this penalty is for a recordkeeping violation under the Export Administration Regulations. In addition, the Bureau of Industry and Security (BIS) Office of Enforcement can issue this penalty for each document missing from the file (764.2).

Customs and Border Protection is just as tough on importers. For willful failure of the importer to maintain, store, or retrieve the demanded record, the importer shall be subject to a penalty for each release of merchandise, not to exceed $100,000 or an amount equal to 75 percent of the appraised value of the merchandise, whichever is less. In cases of negligence, the penalties for the same violation are a bit less, at $10,000 for each release or an amount equal to 40 percent of the appraised value of the merchandise, whichever is less (143.39/163).

Customs and Border Protection and BIS have a statement that is signed by every importer/exporter (filing an SED) that is paraphrased, “I certify the above information is certified true and correct.” Whether the broker is signing the statement on the CF7501 or the forwarder is signing the shipper’s export declaration, a statement is being submitted on behalf of the company. If that statement is found to be a false statement, a penalty will be assessed. And that is before the auditor even opens the transaction file.

The foundation of a customs/BIS audit is to review files. Customs clears import shipments via Automated Broker Interface (ABI), and BIS receives information from the Automated Export System (AES) transmission. This information is supported by documentation. A customs auditor may request files to support previous statements made to customs, whether on a CF28 (request for information) or proof of payment to a supplier (was the declared amount the actual amount paid?). A BIS auditor may check to see proof of payment received by a customer and if the denied lists were checked.

Recordkeeping is a serious issue for importers and exporters. Importers and exporters must exercise care, supervision, and control over their customhouse brokers and freight forwarders. This can best be demonstrated by standard operating procedures (SOPs) issued to supply chain personnel, letters of instructions to brokers and forwarders, and copies of all correspondence for each shipment. It is only by supporting documentation that an importer/exporter is able to display that it has taken steps to reasonably supervise its agents.

Importers/exporters must create SOPs within the immediate company and ancillary offices and with their brokers and forwarders. The SOPs can be a “catchall” for all divisions, with specific procedures spelled out for each individual site and working unit. The SOP should be workable and reviewed by the key personnel for functionality. This will also prevent resentment when an SOP is prepared and implemented without input from the actual users.

Most importantly, if an importer/exporter is going to create and implement an SOP, there had better be internal controls in place to confirm the SOP is being followed correctly. An existing SOP to which no one is adhering can be an aggravating factor in the event of an outside audit by customs or the BIS. There is now hard evidence that although a SOP was created, which demonstrates there is an awareness of the rules and regulations, it was ignored for whatever the reason. This is an immediate strike during an audit.

During our facility review process, recordkeeping is a consistent problem. “Accounting has that invoice.” “Sales keeps those order forms.” “Our broker holds that for us.” “That gets filed in my wastebasket, was it important?” “Never saw it, never heard of it.” “The woman who used to work here said we didn’t need it.” If any of these answers sound familiar, your company is not alone.

Where are the company’s records being kept? To get started, evaluate the supply chain and the sales process. These documents are hiding somewhere. They will be found, and it is highly likely to not be where they are expected. The prudent importer/exporter exercising reasonable care and supervision over its brokers/forwarders is also exercising reasonable care and supervision over its own personnel. A good SOP will include recordkeeping practices within the company. In cases where the importer/exporter is not receiving complete documentation from its broker/forwarder, a written letter of instruction should be given to the company’s agents. In addition to handling procedures, the letter should include which documents will be required and when they will be required. The letter should be signed by the broker/forwarder, with a copy to the office of the compliance officer.

So, there is now a letter of instruction in place. Now what? A letter of instruction is only as good as the follow-up procedures in place. Someone with the company needs to make sure the instructions are being followed. Are the documents being received timely and in the manner described? Once again, a letter of instruction on file demonstrates the company is aware of the regulation requirements. Is there diligent follow up by the importer/exporter? Failure to follow up shows lack of reasonable care, another strike.

We know why recordkeeping is important and have some idea as to how to control the recordkeeping process internally and externally. How does a company know what documents to keep? The answer is very simple, EVERYTHING. Certain privileges provided by U.S. Customs, like drawback and temporary import bond (TIB), require detailed recordkeeping establishing the basis for utilizing these programs. Incomplete records could lead to false claims, interpreted as fraud, which carry severe penalties.

Similarly, the BIS is just as clear in its regulations (15CFR762.2): records include export control documents, memoranda, notes, correspondence, contracts, invitations to bid, books of account, and other records pertaining to the types of transactions (exports) made by the exporter. The BIS record-keeping is far reaching to also cover foreign subsidiaries and any U.S. person working in a foreign company.

Licensing determination must be documented. Were the denied lists reviewed? Were the country charts taken into account? If the answers to these questions are yes but the tasks were not documented and John Smith on the denied list received a shipment from the company, this is a serious issue (Figure 8-1).

FIGURE 8-1. Manual records with electronic backup are an excellent import/export recordkeeping procedure.

The record retention period is five years for Customs and Border Protection and BIS—five years from the date of entry for customs and five years from the date of shipment for BIS.

U.S. Customs is just beginning to approve electronic methods of record-keeping in certain instances when it was satisfied with the system and retrieval processes. All electronic recordkeeping processes must be approved by customs prior to formalized acceptance (19CFR163.5b).

Specific commodities are also subject to the jurisdiction of other governmental agencies. Hazardous materials, pharmaceuticals, food, cosmetics, animals, and animal products are subject to the additional requirements of the Department of Transportation, FAA, Department of Agriculture, Plant and Health Inspection Services, Food and Drug Administration, and Fish and Wildlife Services and may require additional records.

In summary, all records for every import/export transaction must be kept for five years. It is the responsibility of the importer/exporter to maintain all of these records. The conscientious importer/exporter will have a checklist to review all documents received and files created and will periodically perform in-house audits. Outside audits by experienced and knowledgeable consultants can be beneficial in resulting recommendations and may bring out other compliance issues that may arise as a result of the audit process. Recordkeeping may appear to be a time-consuming process, but once the key elements have been established, recordkeeping is doable and manageable.

We also recommend a redundancy system be established in another venue, offsite so that if the records are destroyed, there is at least one backup option. The events of September 11, 2001, meant a lot of different things to people who were directly involved with the New York World Trade Towers. Those companies that had offices lost everything in the building’s collapse. Those that had no offsite secondary system for recordkeeping lost documents, records, and files forever, with little opportunity for replacement.

SUCCESSFUL SUPPLY CHAIN COMPLIANCE MANAGEMENT

The events of September 11, 2001, posted a whole new set of skill sets for the American supply chain executive. Suddenly logistics professionals were faced with a new glossary of terms:

CSI (Container Security Initiative)

C-TPAT (Customs Trade Partnership Against Terrorism)

24-Hour Manifest Ruling

USPPI (U.S. Principal Party In-Interest) Deemed Exporter Rules

Homeland Security

Bureau of Customs and Border Protection

Presently, any logistics professional anywhere in the world doing business in or out of the United States is becoming familiar with these new compliance and security terms. The world is being forced to fall in line with the new U.S. government “Initiatives” in post-9/11 security and compliance.

It has added cost and time to international transportation—some argue as much as 20 percent, but this author feels it is much closer to 6 to 8 percent. It has required supply chain executives to reevaluate the logistics process, which might be unique to their companies, and acquire a new additional step to the many considerations of importing and exporting.

Documentation, production and inventory control, finance, customer service, and logistics were every supply chain manager’s chief concerns. Now added to the list is security and compliance management.

In many organizations, the issues are so consequential that new internal positions are being created to address these security and compliance concerns.

Supply chain SOPs are being updated to include procedures outlining how their companies will deal with the new security and compliance issues.

One of the major issues affecting supply chains has to do with the reorganization of the U.S. government. The new cabinet and DHS, under various directors, has been created as a focal point for the United States in controlling the efforts of protecting the homeland.

This agency is incorporating over thirty governmental agencies, which previously reported to or were part of other governmental departments. U.S. Customs, the oldest U.S. government agency, is now part of DHS and has changed its name to the Bureau of Customs and Border Protection. A main reason for these changes is to reflect a new and defined primary purpose of customs, protecting our borders.

One of the new supply chain actions of customs is CSI, a proactive and preventive outreach program. Customs believes that if a container were to arrive at a U.S. port with a dirty bomb or a biological weapon on board, it would be too late for authorities to deal with the problem.

Therefore, the CSI was created, which extends customs reach into foreign ports, enabling customs to inspect foreign supplier facilities and container loading/handling operations in foreign ports well before the goods are shipped into the United States.

Tied into this effort is the twenty-four-hour manifest requirements that importers and their inbound carriers declare the contents of all import containers at least twenty-four hours before the vessel sails from the foreign port.

U.S. importers have had to significantly change their suppliers and import alert and documentation processes to accommodate these new requirements. As the initiative is still new, all of the “bugs” have not been worked out, to the dismay of many importers.

The U.S. government, particular in its interface with the Departments of State, Census, and Customs and the BIS, is now enforcing rules regarding deemed exports and USPPI.

The USPPI is a process in which the government on all export SEDs requires that the USPPI be identified and take compliance responsibility for the export.

The USPPI is defined as the entity that receives the primary financial benefit for the export transaction. In most cases this would be the manufacturer, irrespective of contractual obligations, routed freight shipments, or International Commercial (INCO) terms of sale. It is very likely by mandate that the manufacturer must apply a much higher level of due diligence in export compliance.

Knowing the end use, the end user, how the goods or equipment will be used, valuations, and schedule B numbers are all but a few of the necessary control items that will fall back onto the responsibility of the USPPI, which is likely to be the U.S. manufacturer. This ruling potentially applies to foreign subsidiaries, as well.

Deemed exports are another issue that is not relatively new but post 9/11 has seen a significant increase in governmental scrutiny. Deemed exports relates to the concept of what constitutes an export.

The government holds that not only physical transfer of freight is an export but that the passing of information, technology, and software can also be exported and, therefore, controlled as “exports.”

The deemed export rules extend to situations when foreign nationals come and visit a plant or facility in the United States, where they are provided technical information or training with the intent for them to bring this back to their countries. It applies to foreign employees, as well. This transfer of information, data, training, or technology is a “deemed export” and has the same export controls in place, as if it were the physical export of a product overseas.

Our supply chains all include foreign subsidiaries, contract manufacturers, and channel partners with whom we share technical and proprietary information. But are we doing it with an “export control process” in mind?

These are but a few of the issues facing supply chain executives post 9/11. The best supply chain managers are incorporating several new concepts into their global supply chains. We are outlining these actions as our recommendations to make for the most successful import/export supply chains:

1. Identify a point person for security and compliance. Spend money and resources for this person to develop the necessary skill sets to make your company compliant. This person can be part of any unit of an organization, but somewhere in the supply chain command is a feasible place.

2. Develop resources. The supply chain and all the surrounding compliance and security issues are evolving as we read this. The supply chain executive must keep in the loop of current information by developing various resources to be timely and comprehensive in the management of his or her responsibilities.

3. Develop an internal set of SOPs for import/export compliance and its role and functionality in your global supply chain.

4. Train and educate all of your supply chain personnel, not only in logistics management but also in the skill sets of compliance and security. Keep the training current and build it into your human resources function.

5. Develop effective relationships with global service and third-party providers that prioritize compliance and security into their supply chain relationships with your organization.

6. Build compliance and security SOPs into your vendor contracts with various levels of performance guarantees.

Global supply chain executives are working in a new world, post 9/11. Those that operate by building an international logistics structure that integrates compliance and security will operate mitigating the risks of fines, penalties, and work stoppages and will overall create the most comprehensive, most cost-effective, and best-managed supply chains.

And at the same time, this international logistics structure is nationalistic and part of the U.S. government’s programs and initiatives in Homeland Security.

E-COMMERCE

The growth of E-commerce over the past ten years has been nothing less than phenomenal.

E-commerce is now dominating consumer sales in the United States and is working its way into most countries on all six continents.

E-commerce in the United States has both replaced and supplemented retail sales distribution outlets, which have been the main place where consumers find and buy everything they need.

E-commerce has always been in the 5 to 10 percent range of sales for most companies, but it has now grown in some industry verticals to more than 50 percent of overall sales volume—and it is still growing.

Any companies not thinking about E-commerce as a factor in overall sales both at the consumer and commercial levels will be left behind.

The following recommendations are based on our experiences in helping companies enter or further develop E-commerce markets globally.

E-commerce is expanding globally and becoming an integral part of every company’s global strategy.

1. Determine the viability of your product sales country by country before committing to any larger initiative. Test marketing and local resources can assist you in this evaluation stage.

International E-commerce sales are very different than U.S. domestic E-commerce sales.

2. Determine whether your website can be accessed on a local basis. In many countries, the population has none or limited access to external Internet resources.

Additionally, in many countries, the best access may be through internet trading platforms such as Amazon, Alibaba, Newegg, and Overstock.

3. You need to investigate an array of issues when selling into a new market overseas:

Competitive products and their approach to sales in that country

Legal issues regarding your products sale in that country

Any IPR issues of concern

Import documentation requirements

Other government agency requirements, such as their equivalent to our USDA, FDA, FCC, BATF, and so on

Packing, marking, and labeling requirements

Denied party listing review

Website entry—your own or third party

4. In the United States, we have a mature and competitively based infrastructure for domestic distribution of products to consumers in home deliveries.

While this system in the United States works well, it is a huge component of the overall costing model, and E-commerce sellers are always looking for less-expensive and more-timely options.

Amazon drone in testing mode

Amazon has made very clear its potential use of drones as a delivery mode. Testing began in 2015 and continues into 2017. Internationally, this has become more of a challenge, as many countries do not have a mature domestic infrastructure for sales and deliveries to consumers and their homes.

The importance of resolving this issue is cost. E-commerce sales only work when the cost of shipping from origin to destination is significantly minimized. Some companies in North America are looking at driverless vehicles, and in 2016, Budweiser successfully tested commercial driverless vehicles on routes in Colorado.

Budweiser driverless test vehicle in Colorado

5. Globally those companies who have been successful in E-commerce sales in an array of foreign countries have mastered the cost of logistics and distribution.

This is best obtained following this outline of action steps:

Partner with service providers who have defined expertise in E-commerce sales and distribution.

Consolidate shipments in the United Sates and ship overseas in larger bulk orders. This will reduce the cost of the international leg.

Obtain all the necessary information proactively on packing, marking, labeling, and documentation requirements.

Make sure the websites you are utilizing contain all of the necessary shipping information and costs relative to what the buyers need to be made aware of.

Arrange for competitively priced customs clearance along with the “last mile” delivery requirements.

This is much easier said than can be accomplished. Customs clearance costs and home deliveries are typically an expensive component of the overall sale or purchase. E-commerce companies have had to be very creative to resolve these costing and business process concerns for low-cost consumer items typically handled individually.

Global Transportation Service Providers, such as Western Overseas, based in Los Angeles has taken a leadership role in working with smaller and mid-sized companies function successfully on E Commerce logistics and fulfillment.

Those companies like Amazon and Alibaba in countries such as China have been successful in developing low-cost and expedient processes to handle this area successfully for their E-commerce clients.

Structure systems for return shipping needs proactively, as they will be potentially cumbersome and add cost to your E-commerce global supply chain.

When starting E-commerce capabilities, do “beta testing” in every foreign market before committing to a final deployment of resources and capabilities. This helps to

Work out the “bugs” in advance

Reduce initial cost if the process does not work

Create a better foundation before diving in fully

Make sure payment options are addressed in advance and tested before offering product for sale.

Trade compliance concerns for all export and import regulations still apply in E-commerce sales as they do in all commercial transactions. Areas such as but not limited to the following all need to be addressed:

Denied parties search

HTSUS and Schedule B numbers

Documentation

Record keeping

Origin determination

Export license requirements

Assure the collecting order information electronically.

When you’re ready to sell internationally, make sure that essential customer information doesn’t fall through the cracks. Use these tips to create clear, customer-friendly payment descriptions:

Label your fields as clearly as possible and provide alternatives to help customers who don’t speak English (or for whom it’s not the primary language). For example, “First” could be displayed as “First Name/Given Name” and “Last” as “Last/Family Name/Surname”

Add a third or even fourth line to the address field to accommodate longer international addresses.

Add a field for “Country.”

Insert a “Country Code” field above or to the left of the “Telephone Number” field.

Ask for “State/Territory/Province” rather than just “State.”

Request “ZIP/Postal Code” rather than just “ZIP Code.” Also, if your system uses the “ZIP Code” entry to automatically fill in the “City” and “State” fields, you might want to offer separate fields for “ZIP Code” and “Postal Code”—many other countries use five-digit postal codes, and a postal code keyed into the “ZIP Code” field could gum up the customer’s address.

Act with due diligence in avoiding exposure to fraud.

Best Practices include the following:

Accepting online payment, even with established credit cards, exposes the seller to some risk. According to Cybersource’s 2010 11th Annual Online Fraud Report (cybersource.com), U.S. merchants continue to reject three times as many international orders (7.7 percent) as domestic orders (2.4 percent). Merchants reject orders they have reason to believe may be fraudulent. But there is some good news: the same survey notes that actual international E-commerce fraud rates for U.S. merchants fell from a 2008 average of 4.0 percent of total online orders to 2.0 percent in 2009. The drop can be attributed in part to firms that use various methods to safeguard against unauthorized use of credit cards.

Although the trends in online fraud are encouraging, U.S. firms need to continue to be vigilant. This is true especially in countries that used to be considered “safe” for E-commerce retailers. The U.S. Commercial Service has a long history of reports from U.S. exporters about online fraud coming from China and Nigeria, but now fraudulent activity is occurring in places where it was once rare; the U.S. Commercial Service is now receiving complaints about fraudulent activity in Singapore and the Scandinavian countries, among other previously low-risk countries.

The key is to address fraud concerns proactively with due diligence and reasonable care standards. This will reduce fraud opportunity and maximize the best outturns.

Protecting the Receivable in Export Sales and E-Commerce Exports

Export credit insurance (ECI) protects an exporter of products and services against the risk of nonpayment by a foreign buyer. In other words, ECI significantly reduces the payment risks associated with doing business internationally by giving the exporter conditional assurance that payment will be made if the foreign buyer is unable to pay. Simply put, exporters can protect their foreign receivables against a variety of risks that could result in nonpayment by foreign buyers. ECI generally covers commercial risks (such as insolvency of the buyer, bankruptcy, or protracted defaults/slow payment) and certain political risks (such as war, terrorism, riots, and revolution) that could result in nonpayment. ECI also covers currency inconvertibility, expropriation, and changes in import or export regulations. ECI is offered either on a single-buyer basis or on a portfolio multibuyer basis for short-term (up to one year) and medium-term (one to five years) repayment periods.

KEY POINTS

ECI allows exporters to offer competitive open account terms to foreign buyers while minimizing the risk of nonpayment.

Even credit-worthy buyers could default on payment due to circumstances beyond their control.

With reduced nonpayment risk, exporters can increase export sales, establish market share in emerging and developing countries, and compete more vigorously in the global market.

When foreign accounts receivable are insured, lenders are more willing to increase the exporter’s borrowing capacity and offer more attractive financing terms.

ECI does not cover physical loss or damage to the goods shipped to the buyer or any of the risks for which coverage is available through marine, fire, casualty or other forms of insurance. Contact www.export.gov or www.trade.gov for more details.

CONCLUDING REMARKS

Compliance and security management is covered throughout this book and in detail in Chapters 9 and 10. The supply chain manager that recognizes the critical importance of building compliant and secure supply chains and is proactive, not reactive, to implementing cost-effective strategies in dealing with the new regulations will maintain his/her company’s competitiveness. Failure to heed the necessary regulations will limit the potential and future success of global sourcing and export sales initiatives.

Utilization of advantaged programs will also make supply chains work more competitively. China, which will become our largest market for both sourcing and sales, can also be leveraged in how we approach our supply chain opportunities.