In the face of increasing trade-related enforcement action, multinationals have beefed up their compliance policies and procedures, though further challenges remain. Certainly among the Western economies, there has been a significant rise in trade-related disputes, including non-performance disputes, false claims of discrepant goods and failures to honour payments and guarantee terms. In addition, countries are imposing restrictions on the import and export of certain goods and technology, to promote national security and foreign policy interests. To maintain a competitive advantage, effectively managing customs and international trade issues is more crucial than ever.
FW: What major developments have you seen in global trade and customs processes in recent years? To what extent are different jurisdictions collaborating with each other on monitoring and enforcement efforts?
Rowden: The major development in global trade is that most companies are both importing and exporting goods from a wider array of source countries and are shipping to more emerging markets. The shift to a larger trade ‘footprint’ requires a recalibration to deal with the risk posed to multinational companies by these new trade patterns. Since 9/11, the US and other major trading countries have moved to a risk-based model to identify low risk companies through what is generally referred to as Authorised Economic Operator (AEO) programs. If a company can demonstrate that it invests corporate resources to mitigate security and compliance risks, it is viewed as a ‘low risk’ AEO entitled to certain trade facilitation benefits. Regulatory agencies of different countries are increasing their information sharing and we find multi-jurisdiction prosecutions in these areas, which really increase the compliance risk for multinational companies.
Schwechter: Perhaps the most significant global trade development in recent years has been the failure to conclude, with a comprehensive agreement, the Doha Round of multilateral trade negotiations that began in 2001, and the concomitant rise in the negotiation and conclusion of free trade agreements and customs unions, not only between major trading partners, but also between countries with relativity small volumes of foreign trade. This trend is only accelerating with the proposed Trans-Pacific Partnership (TPP), the EU-US Free Trade Agreement, the African Free Trade Zone, the Euro-Mediterranean Free Trade Area, and the China-Japan-South Korea Free Trade Agreement. Free trade agreements generally contain rules of origin that require that substantial manufacturing and processing activities take place in member countries in order for the products to qualify for free trade agreement benefits, and require companies to maintain records supporting the eligibility of the products for which duty free treatment is being claimed. Inability to substantiate eligibility for free trade agreement benefits can result not only in the denial of such benefits, but also in potentially significant penalties.
Tewari: Mega trends in the customs and trade space include expanding trade volumes and a geographically spread-out trade footprint; a growing web of trade agreements; rapid changes in technology and the composition of internationally traded products; the fragmentation of product manufacturing across geographical locations; the shifting of the compliance burden on businesses; and the increasing complexity of international financial transactions impacting the valuation of goods. Combined with an increased international focus on trade facilitation, risk based intervention, audit-based controls, supply chain security, and the emergence of new specialisations in the global trade function, we can see that global trade is faced with the uphill task of keeping pace with the matrix of change in the compliance space.
Antonini: One of the major developments relates to the international fragmentation of production and global supply chains, which blur the traditional concept of the country of origin and ‘made in’ approach. Goods that cross borders are increasingly being produced through supply chains that involve some sort of manufacturing or processing operations in different countries. Parts and components of a car that is being imported in one country have probably crossed several borders in the manufacturing process for the entire car. This results in an increase in global trade, but also blurs the traditional concept of country of origin. In the past, determining the origin of goods was often a straightforward exercise. In today’s globalised world, where value chains are key, however, this is becoming an increasingly complex challenge. A correct origin determination is nevertheless crucial for companies, given the importance of the origin of a good for the determination of import duty liability.
Levine: Governments worldwide, largely following the lead of the US government, have made enforcement of trade-related laws and regulations a high priority. The number and significance of enforcement actions in the US and globally in the areas of anti-corruption, trade sanctions, export controls, and customs fraud have been substantial over the past five years. The reasons for this escalation in trade-related enforcement action range from protection of national security to protection of domestic business interests to promotion of ethical norms, environmental, labour, and other concerns. Whatever the bases for the heightened focus on enforcement, multinational businesses have rightly responded by emphasising the importance of trade-related compliance efforts by implementing or updating compliance policies and practices, conducting internal compliance audits, voluntarily reporting violations, and foregoing business practices and transactions that subject them to enforcement risks.
Arvikar: The ongoing US export reform will change the landscape considerably as commodities are moved from United States Munitions List (USML) control to Export Administration Regulations (EAR) Commerce control. The US government has realised that their regulations are archaic and rooted in the Cold War era and they need to control items only if they are significant to the national security interests of the US or control items that could provide military intelligence to an adversary. The US has also recognised that many countries are allies, particularly in Europe – and New Zealand, Japan, Australia – and therefore is relaxing export regulations. In many cases this relaxation will mean items moved from International Traffic in Arms Regulations (ITAR) to EAR can be exported under permissible exceptions such as STA. The US has also created special export treaties to its closest allies, such as the UK and Australia, allowing special exceptions for the export of ITAR items and defence services. In customs processes there is more focus on supply chain security, and many countries are adopting practices such as the EU security practices – AEO – and the US has also signed mutual recognition treaties with the EU for parity with AEO and the US Customs-Trade Partnership Against Terrorism (C-TPAT) program.
FW: Expanding trade volumes and a focus on compliance make global trade an increasingly risk-laden operation. In your experience, what are some of the major risk exposures, and what steps can firms take to mitigate them?
Schwechter: The risk exposures in global trade are significant, but can be managed and mitigated by installing comprehensive trade compliance programs. As for imports, at least in the US, civil penalty exposure, up to the domestic value of the imported merchandise, for traditional mis-classification violations, incorrect valuation and wrong country of origin declarations, exists. Moreover, the increasing use of duty savings mechanisms such as foreign trade zones, drawback, outward processing, and free trade agreements, provide additional areas for customs enforcement officials to investigate and penalise. Furthermore, with the increasing focus on security ever since the events of 9/11, importers are facing greater prior notification and related requirements, merchandise exams, and delays in moving their goods across borders. Implementation of expanded measures to assure supply chain security and participation in government security-related programs, such as C-TPAT, entail significant costs. While customs civil violations, at least in the US, are generally subject to a ‘reasonable care’ penalty approach, thus providing some legal protection for companies with compliance programs, civil violations of export control, and embargo or sanctions regulations, are based on a strict liability approach and therefore represent greater risk.
Tewari: Risks in customs and trade compliance can broadly be categorised as: financial risk – which can be in the additional duty, interest or penalty; business risk – not being able to deliver goods on time or a supply chain being unable to compete globally resulting in loss of market; and reputational risk – media trial on account of non-compliance can be a major area of concern for shareholders and the investment community. In addition, the risk of prosecution of personnel responsible for compliance functions in extreme circumstances cannot be ruled out. All these risks, put together, can potentially impact the revenue, market share and stock price of the company. Risk mitigation steps would require an increased focus on creating awareness and building capacity around people, processes and emerging specialisation. Having a robust international trade compliance program and a periodic compliance and risk audit program, aided by an expertise in trade dispute resolution at the national and international level, should be an integral part of a risk mitigation strategy.
Antonini: When goods are being imported, the duty liability is determined on the basis of the information supplied by the importer. Customs authorities can carry out certain checks at the time of importation, but often these checks only take place months or years after the customs clearance of the goods. If certain errors are discovered at that stage, unpaid import duties can be reclaimed for imports carried out in the past. This can imply devastating financial consequences for companies, which did not foresee these additional costs relating to imported goods which have been sold or processed during the preceding years. Therefore, companies need to put in place the necessary mechanisms to ensure the correctness of their customs declarations – in particular, tariff classification, origin and valuation. This includes setting up a customs compliance program with the help of both legal advisers specialised in customs matters and persons dealing with the practicalities of customs matters on a daily basis – like customs brokers. This compliance program should be updated and the actual compliance should be audited on a regular basis.
Levine: Companies face compliance risks from many different sources: dealing in markets where corruption is rampant and a lack of ethical standards heightens the risk of FCPA and other anticorruption violations; cross-border shipments of sensitive goods or technology requires special focus on export control requirements; importing goods from related foreign suppliers requires special care to undertake proper transfer pricing to satisfy customs valuation requirements; failure to screen parties to transactions or to monitor possible transhipments may lead to trade sanctions violations; and innumerable other circumstances can give rise to trade risk. As already noted, in the face of increasing trade-related enforcement actions, multinational companies have rightly beefed up their compliance policies and procedures. However, a company’s compliance policy or program is only as good as it actually works in practice.
Arvikar: Global terrorism is surfacing as a major challenge to overcome and so customs is focusing more on the voluntary industry programs such as AEO and C-TPAT. These programs are not difficult to set-up and most companies usually have reasonable controls in place with respect to verification of goods – both incoming and outgoing, supplier selection and risk assessment for importation, proper export paperwork preparation, hiring of personnel, visitor management, building and facility security, IT and computer network security, hiring practices, and training of personnel involved in the logistics chain, among others.
Rowden: For multinational companies, the greatest risk is having a global approach to trade compliance. In the past, companies had highly developed trade compliance programs in the US, the EU, Japan, and other advanced economies. Since the passage of the Customs Modernization Act and Sarbanes-Oxley in the US, moving customs to an audit-based system measuring internal controls, along with accession to the World Trade Organisation, companies have an incentive to invest corporate resources into trade compliance. An example of the shift in trade risk is that customs duties generally have fallen to around 2 percent ad valorem for US importers, so tariff classification does not have as big an impact as a potential risk. Nonetheless, more complex multinational manufacturing has increased the trade risk for valuation – for example, transfer pricing – and qualifying goods for duty-free entry under free trade agreements. Companies need to perform a risk analysis of their global trade operations.
FW: The emerging markets have become key players on the international stage, both in terms of exports and imports. Which jurisdictions are emerging as strong venues for trade, and how has their rise impacted trade and customs compliance for more established markets?
Tewari: The centre of gravity of trade volume growth has shifted to the emerging markets of the South and East – Latin American countries, ASEAN countries, and African countries – while efforts are being put into forging new trade alliances between emerging markets and established markets like the Trans-Atlantic Trade and Investment Partnership (T-TIP) and the Trans Pacific Partnership (TIP). Studies indicate that trade facilitation measures have the potential to expand global trade by a few hundred basis points. Emerging markets face a steep learning curve regarding globally acceptable customs and trade compliance regimes; international conventions like the Missile Technology Control Regime (MTCR); the Treaty on the Non-Proliferation of Nuclear Weapons (NPT); the Chemical Weapons Convention (CWC); the Wassenaar Arrangement; and Strategic Goods Policies and related laws like the Foreign Corrupt Practices Act, the UK Anti-Bribery law, the OECD guidelines on Basis Erosion and Profit Shifting (BEPS), child labour policies, and the US Conflict Minerals Policy.
Antonini: Exports and imports, and the geopolitical reality, is no longer limited to traditional players like the EU and the US. Emerging markets, including the BRIC countries, Mexico, Indonesia, South Africa and Turkey, are making up an increasingly important share of international trade. According to UNCTAD, South-South trade made up 23 percent of world trade in 2010, compared to 13 percent in 2000. However, the growth rates of emerging economies are lower than in the past, probably as a result of the effects of the slowdown in developing countries. While the shift in the balance of power in world trade provides great opportunities, it also presents a number of challenges. Customs authorities in some of these emerging markets are less experienced than those in developed countries. This can imply additional risks for importers from theses developing countries.
Levine: Some obvious ‘up and comers’ in global trade include the BRICs. Others are Vietnam, Malaysia, Thailand, Chile and Mexico. Several countries in Africa have increased trade with developed and developing countries. The countries now fully engaged in international trade are too numerous to mention. Seeking the opportunities available in dealing with parties and governments in countries where legal and ethical norms are less advanced than those with established compliance rules and enforcement systems, poses significant compliance challenges.
Arvikar: The Wassenaar Arrangement has been widely adopted as a multinational regime for the control of weapons and arms and the classification of commodities for export control. Since it is a multinational regime, many countries are signatories and therefore have adopted a common scheme of classifying goods, both commercial and more sophisticated ones, such as arms, which may require special controls for exports. These regimes periodically review the ‘lists’ to ensure emerging technologies and products are properly classified and coded. Similarly, the customs lists maintained by each country are periodically reviewed and released by the World Customs Organization (WCO) as new goods appear on the market and are properly classified for tariff purposes.
Rowden: Obviously, the biggest development in changing trade patterns is the integration of China into the global economy. The major challenge for multinational companies in many of these emerging markets is establishing a culture of compliance, which means conducting international transactions in a way that is transparent, legal, and can be audited. In some jurisdictions, where the rule of law is weak with a high degree of distrust among parties, this process to develop a culture of compliance can take upwards of five years. Countries which are emerging as strong venues are South Korea and Mexico, both of which have benefited from China when multinational companies seek to balance competitiveness and the potential costs of trade risk.
Schwechter: Emerging market jurisdictions that have appeared as strong venues for trade include countries such as India, Brazil, Mexico, Indonesia, South Korea, Turkey and Vietnam. They are joined by economies such as China, which has experienced rapid growth, and Russia, with its vast natural resources. The compliance risks posed by many of these emerging market countries are often focused in two areas. First are the challenges posed by extensive administrative and other requirements related to imports, which can have the effect of discouraging the entry of foreign-origin goods.Second are the corruption risks inherent in trying to make sure that imported merchandise flows freely into the country?
FW: Moving goods in today’s global economy can be a complex and costly process. What steps can firms take to manage costs and increase the operational effectiveness of their end-to-end supply chain?
Antonini: Some of the steps that companies can take to optimise their supply chain from a customs law perspective include the application of customs arrangements, such as inward processing, which results in an exemption from import duties on imports of raw materials that are processed in finished products then re-exported. Another key step involves an in-depth analysis of the potential benefits of free trade agreements or unilateral preferential arrangements – in particular the Generalised System of Preferences. In this respect, companies too often fail to look into the possibility of cumulating origin. Cumulation is provided for by several free trade agreements and allows goods, even though these have in principle not been processed in a sufficient way in the exporting country to obtain origin, to be considered as originating – and thus benefit from the preferential duty rate – if the raw materials or components originate in particular countries.
Levine: At the risk of oversimplifying, global companies – or companies wishing to expand globally – should focus on similar factors and steps to maximise operational effectiveness and to minimise costs in their global supply chains, as they would do for their local sourcing, sales and distribution. Knowing and understanding well all business partners, counterparties, agents, supply sources, vendors, subcontractors, and so on, is essential to avoiding unwanted surprises in a global supply chain that can translate into unexpected costs. Retaining well known and reputable service firms to handle supplier identification, shipping, brokering, handling, and other logistics, likewise, will help minimise problems. There is no substitute for comprehensive due diligence in all aspects of global business operations.
Arvikar: Establishing processes and systems that make the company cognisant of the regulations and ensure compliance at all times is important. Having documented practices and procedures, and trained employees, is important so everyone understands their specific role within the entire supply chain. These procedures should cover proper product classification, ensuring codes are properly documented and used where required – for example, on shipping documents and invoices, properly classifying commodities on import documents, and providing all required data so brokers or carriers file all documents needed for legal importation, as well as periodic reviews and audits to ensure compliance. Unfortunately, there are no global ‘tools’ and each company must create its own system for compliance.
Rowden: There is a business maxim ‘if you can’t measure it, you can’t manage it’, and the same is true for managing global trade risks. As a result, there is a high demand for know-how on structuring a company’s global trade compliance program, and the factors that should be considered. Such factors include: whether a company is centralised or decentralised along business units; the culture of the company; the risk profile of the company’s industry; how highly regulated the company is by government agencies, and so on. There is no ‘one size fits all’ solution for companies developing these programs.
Schwechter: There are several steps companies can take to manage costs and increase the operational effectiveness of their end-to-end supply chain. First, they can consolidate the handling of their import and export transactions with a limited number of responsive and knowledgeable customs brokers and freight forwarders. Consolidation will allow them to take advantage of what can be significant volume discounts, and will result in better and more effective control over import and export operations and logistics. However, in selecting their customs brokers and freight forwarders, companies should insist that the brokers and forwarders use dedicated staff to handle their transactions. Too often, mistakes are made in the preparation and submission of customs entries and export declarations because the responsible broker or forwarder personnel are unfamiliar with their clients’ importing and exporting practices and documentation. Second, importers can join their countries’ importer security programs, such as C-TPAT in the US. While the initial cost can be significant, it is more than justified by reduced delays in entering merchandise, maintaining good relationships with customers and vendors who require that their business partners join these programs, the enhanced security for their shipments, and the comfort of knowing that in the event of a possible future terrorist incident, their goods most likely will be the first ones allowed into the country.
Tewari: Industry needs to invest, collaborate and share trade and trade-related soft and hard infrastructure which can help develop and implement global compliance programs across the depth and width of the international supply chain. This could mean IT infrastructure for data capturing, tools for trade related data analytics, and engaging trade experts and service providers with the skill set to deliver cross-border trade compliance across the length of value chain. The task of laying sub-sea optical fibre data and communication cables under the SEAIOCMA agreement is a fine example of collaboration among global stakeholders. The effective of use of data analytics for planning supply chain efficiency and bringing operational effectiveness to the end-to-end supply chain cannot be emphasised enough.
FW: In what ways can new technology be employed to monitor the movement of goods and aid in global customs compliance?
Levine: Large business management software tools have provided many multinational companies with ample capabilities for overseeing, monitoring, and managing international trade compliance issues. External service providers have developed tools at varying price ranges for global businesses to use, as well, though companies should avoid relying entirely on an outside firm to manage compliance requirements; in-house understanding of the rules and requirements, as well as basic policies and practices maintained by in-house personnel, are essential.
Arvikar: Technology can play a major role in global trade. The WCO can develop tools that can be deployed globally and allow for international cooperation in commodity classification for tariffs and worldwide tracking of goods as they cross international boundaries. Websites can be used to report and track goods at any given time; many carriers use tools allowing a person to track the movement of goods and know exactly at any given time where an item is during shipping. Hand-held tools such as smartphones, tablets, and similar customised tools, can be useful for this purpose.
Rowden: Global trade is a very data intensive enterprise. Most companies have internal data systems for finance, manufacturing, supply chain, and other corporate functions. Nonetheless, the data systems necessary for trade compliance –which is considered a ‘niche’ area by information technology developers – are an ‘add on’ to the corporate data infrastructure. Sophisticated Global Trade Management systems are now being deployed, which measure the supply chain in ‘real time’ by reporting manufacturers’ delivery time of product, leveraging transportation volume to reduce costs, and providing landed costs for products prior to shipment, among others. All these data points can provide metrics for audits and show trends to help trade compliance professionals plan.
Schwechter: New technology is critical to ensuring global customs compliance – from prior notifications to the governments of importing countries regarding shipments of goods, to the screening of all parties to transactions to ensure none has been designated as sanctioned, to establishing and meeting export licensing requirements. Companies engaged in international trade must use sophisticated software to monitor the global movement of their goods. Two recent US State Department settlements of alleged export violations required the settling companies to establish automated export compliance systems to better monitor all their export transactions and to identify those activities subject to export licensing and the receipt of required licences.
Tewari: The shared development of capital intensive IT infrastructure, and mobile based applications for capturing and disseminating accurate information on trade and logistics, could potentially be a game changer. Such infrastructure can help in the capturing of ‘big data’ in trade and logistics. Data analytics can be used to analyse this big data and plan efficiency in trade routing, package sizing and standardisation; and also as an aid in identifying and monitoring risks and planning risk mitigation steps in trade compliance. Wider acceptability and the commercialisation of ground breaking technology such as additive manufacturing and 3D printing could be a big event in the manufacturing, logistics and supply chain space. Through the combination of data capturing and information sharing through ubiquitous smart phones, and its leveraging with the Globally Networked Customs initiative, an efficient model can be planned for compliance collaboration between business, customer and regulatory authorities.
Antonini: Technology has changed the way we do business which has resulted in an increasing workload for customs authorities. Consumers often order products from abroad via e-commerce, dealing directly with the producing entity. Whereas in the past wholesalers imported big quantities of goods to resell them to individual consumers in the importing country, nowadays many customs declarations relate to specific goods for one end-customer. This brings a significant increase in customs declarations. In the EU, for instance, 261 million customs declarations were made in 2012. However, at the same time, technology can provide tools to customs authorities to facilitate their workload and to decrease the burden on importers. In the EU, for instance, about 99 percent of customs declarations are made electronically. Technology also allows companies to collect detailed information about trade flows worldwide and to create mechanisms to identify needs and priorities.
FW: What specific risks might arise from products and property with a national security interest? How important is it for firms to be aware of export issues when moving sensitive information or goods to foreign partners or third parties?
Arvikar: Export knowledge is absolutely critical from a regulatory and national security standpoint. One must know what goods are controlled and how one can export or import them based on the nature of the goods. Export compliance requires that you know exactly who the end-user is and what they do with it. Countries maintain lists, and special online screening tools are available for conducting such screens to ensure sensitive or controlled goods do not fall into the wrong hands, and restricted and embargoed parties are excluded as trade parties. Since regulations keep on changing, parties needs to remain aware of the latest requirements for compliance, whether they are a small exporter or importer, or a large one. Even large companies have run afoul, perhaps not deliberately, but unknowingly, and suffering public exposure and penalties is not good for business.
Rowden: Export controls, particularly so-called ‘dual use’ items, are among the most difficult trade compliance issues for companies to manage. Although such regulations are considered ‘national security’, trade compliance professionals are responsible for administering these regulations. Often it is difficult to know if an item may be controlled for national security purposes, and this underscores the need for every company to have a global trade compliance program which asks questions such as: What is the item? What does it do? What is it used for? What country is the item going to? Who is the customer? What does the customer intend to use the item for? Also, unlike the import side, information and data is controlled under US export laws and this makes it especially difficult for multinational companies to construct the necessary internal controls to comply with such restrictions when the global trend is to leverage the collaboration of a worldwide workforce.
Schwechter: The risks that arise from trading in products and property with a national security interest are significant. Monetary penalties can be substantial. In addition, at least in the United States, exporters that violate applicable rules can be denied the ability to export, and foreign persons who violate US export control laws can be denied the privilege of receiving US-origin goods and technology. Particular problems arise in the case of exports or re-exports of technology, since they can occur not only through traditional company-to-company technology licensing, but may also involve disclosures of technical data to foreign persons. Many companies subject to US export control requirements fail to realise that such disclosures can trigger export control licensing requirements, even when the foreign persons are employees of the company or one of its affiliates.
Tewari: A porous global supply chain and unsecure trade infrastructure can be a cause of concern and a risk from a security and safety perspective. The SAFE framework in global trade is a response to such security threats, and organisations which are ready to participate and invest in programs like AEO will be rated as low risks and the movement of their goods facilitated. Adherence to global conventions like the MTCR, the NPT, the CWC, the Wassenaar Arrangement, and Strategic Goods Policies are non-negotiable in emerging international trade regimes, and will be dealt with taking a strict liability approach. Companies need to ensure awareness, sensitivity and training. In addition, the development of expertise, suitable processes and controls to ensure compliance is essential. It is very important for the suppliers of sensitive products or information to undertake a thorough background check of buyers and ensure compliance throughout the supply chain.
Antonini: Increasingly, countries are imposing restrictions on the export or import of certain goods and technology to promote national security interests and foreign policy objectives. Although implementation and enforcement of such restrictions still varies strongly from jurisdiction to jurisdiction, companies have a strong interest in carefully reviewing export control of sensitive products in the jurisdictions where they are operating, and sometimes even in certain jurisdictions where they do not due to the extraterritorial scope of some legislation. Companies need to assess, first, whether their goods qualify as sensitive products and are thus subject to control. Too often, companies are dealing with sensitive items without even realising it. A second step is to analyse the legal framework and to put in place an internal compliance program. This should not simply cover the export of such goods or technology, but also the contracts that are being concluded by companies. When dealing with sensitive goods, it is also crucial to have information about the end-user of the products being supplied.
Levine: Businesses dealing in products, technology, software, services and information with national security implications must fully understand all applicable legal and regulatory issues. This includes export controls – both dual use and defence controls – as well as trade sanctions and other government restrictions, such as the US Committee on Foreign Investment in the United States (CFIUS) requirements.
FW: Have you seen an increase in international trade disputes? Are there any common issues that seem to surface frequently?
Rowden: Certainly, there are the legacy trade disputes which were intractable under the General Agreement on Tariffs and Trade (GATT), such as the beef hormone dispute, the US foreign sales corporation tax regime, and genetically modified organisms (GMOs). These are the disputes between advanced market economies. Since the World Trade Organisation came into force, there are a lot more market access, non-tariff trade barrier, and anti-dumping (ADD) and countervailing duty (CVD) disputes. These disputes are generally between advanced market economies and emerging non-market economies such as China. We hope the former category of disputes may be resolved through the new free trade agreements, such as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (T-TIP). The latter category will just need to work itself out through the World Trade Organisation (WTO) and the maturing of non-market economies transitioning to consumer-based market economies.
Schwechter: International trade disputes are becoming ever more prevalent, as evidenced by the 450-plus dispute resolution matters that have been brought before the WTO. In addition, more and more countries are using antidumping proceedings and related import relief measures to try to limit competition from foreign producers and exporters.
Tewari: The WTO is a credible forum for the resolution of international trade related disputes. The origin of trade disputes generally lies in the competing business interests of domestic industry vis-a-vis the interest of foreign suppliers of goods which can be seen in cases of ADD, anti-subsidy investigation, issues related to IP embedded in traded goods, or the protection of the geo-political interest of a product or a nation. The statistics for trade disputes also show a positive correlation between the slowing global economy and the rise in trade disputes, though there are other factors which contribute to this. However, at a national level, an aggressive tax regime, such as currently exists in India, can be a cause of trade disputes which are increasing in terms of size, number and media attention. Such disputes are on the rise in specific jurisdictions.
Antonini: When looking at the disputes brought before the Dispute Settlement Body of the WTO, it appears that 2012 saw the highest number of requests for consultations received in a single year after 2002. However, the figure is still lower than in 2002 or between 1996 and 2000. As such, it does not seem correct to conclude that an actual increase in international trade disputes has taken place. Disputes traditionally tackled classic commercial matters such as trade remedies – anti-dumping, anti-subsidy or safeguard measures. While these issues are still often disputed, in recent years more and more disputes relate to what can be referred to as ‘global’ concerns. Such concerns include matters of environmental protection, sustainable exploitation of natural resources and animal welfare. Other examples can be found in disputes relating to packaging regulations on tobacco and tobacco products. One of these disputes holds the record for the largest number of WTO members that have reserved their rights to participate as third parties in a dispute.
Levine: I have actually seen a decline in international trade disputes, at least in the US in the area of import relief actions – anti-dumping, countervailing duty, safeguards. However, these actions remain a tool of choice for several industries, including the various steel industries, and new industries seem to be relying on these actions to protect domestic markets. This includes the renewable energy sector, with important and large actions in the solar and wind energy sectors.
Arvikar: There will be always some degree of protectionism, unfortunately, and anti-dumping laws will always remain. Telecommunications is one market where we are starting to see disputes as a few large telecomm companies – usually Chinese – win global contracts and put domestic companies at a disadvantage. However, in many cases disputes may arise because one country may restrict trade for legitimate reasons, such as human safety and health risks, which may not be viewed as justifiable or legitimate by another.
FW: When problems arise with customs authorities, what are the first steps that a firm should take to deal with a government audit, investigation or enforcement action? How does this vary by jurisdiction, and how valuable is an understanding of local markets?
Schwechter: Whatever the jurisdiction, the first step that firms facing government audits, investigations or enforcement actions should take is to conduct a comprehensive internal investigation protected by attorney-client privilege, to determine the scope of the problem, and, to the extent violations of law have occurred, to correct company compliance procedures promptly and develop a strategy for dealing with the governmental authorities. This strategy may well involve cooperation with the authorities in order to mitigate any potential penalties. The nature of the cooperation will be significantly aided by an understanding of local practices and requirements.
Tewari: An important step in customs compliance planning is having a well thought through ‘supply of goods agreement’ which defines the framework and terms of supply (TOS). To ensure that a supply of goods agreement is implemented to the letter and spirit for various stakeholders, it is good practice to have a detailed standard operating procedure (SOP). Systemic preventative steps to be undertaken for risk mitigation include adhering to a well-defined TOS and SOP, maintaining robust records of tax positions and trade compliance related documents, periodically reviewing tax positions in light of the changing ecosystem and changes in business parameters, and oversight of the customs broking function. At the audit or investigation stage, no fresh set of documents or arguments can be created. With proper planning and processes in place, during audit the firms need to put together a seasoned customs professional or customs compliance team to clearly articulate the tax position of the firm, extend full cooperation in the process of audit or investigation, and demonstrate evidence of the meticulous implementation of compliance procedures as articulated in the SOP.
Antonini: When faced with customs problems, time is of the essence. Although procedures vary across jurisdictions, in general deadlines are short while failure to meet these deadlines can have serious implications for companies. This is even more troublesome in view of the lack of detailed knowledge of customs matters that all too often still exists within companies themselves. When faced with a governmental action – whatever the form – it is thus of key importance to react swiftly. Companies should immediately involve a central legal adviser, who ideally knows the business and has a good knowledge of the customs practices existing within the firm concerned. The assistance of this legal adviser should be complemented by the assistance of someone who has expertise in the country concerned. Understanding local procedures is key.
Levine: Without variation between or among different global jurisdictions, a company that receives notice of a government customs audit, investigation or enforcement action must fully review its operations and records to understand its own practices, specifically including the areas at issue; fully understand the government action at issue; ensure that the proper team of internal personnel are assigned and engaged in dealing with the issues and operational elements at stake; and promptly determine what is required substantively, procedurally and accordingly to schedule. If a summons or subpoena must be answered, this means fully understanding its scope and timing, often requiring an extension request at the outset. For all of the above, qualified counsel should be retained promptly to advise the company and to engage with the government agency or agencies involved.
Arvikar: Unless there is internal legal expertise, the use of external legal counsel may be needed and advised. Cooperation with the investigation authority is important in any audit. Audits can be extremely resource-draining and protracted depending on the type of violation and scope, especially since this may entail compiling volumes of data and paperwork that must be made available. This underscores the need for efficient data and record keeping systems in any transaction that involves regulatory compliance, particularly trade.
Rowden: Companies involved in global trade should have an in-house trade compliance professional – even if it is not that employee’s full-time duties – and a roster of outside trade experts – for example, trade lawyers, trade consultants, customs brokers, and so on – in every major market where the company operates. The in-house trade professional needs to coordinate the communications from the government, assemble the relevant company records, and engage the appropriate trade compliance professional for the type of government action. There are some types of government actions that require a local trade expert, for example, seizure of goods by a port, whereas others require a global trade expert, for example, validation of AEO status, audit involving transfer pricing, and enforcement action disallowing duty-free treatment under a free trade agreement. The good news is that trade compliance practice is becoming more harmonised internationally.
FW: Do you believe that firms place enough importance on understanding global trade and customs regulations? Do they accurately quantify the burden of compliance and customs duties on their profits?
Tewari: In the absence of any detailed, credible study available in the public domain on this subject, it is difficult to make any categorical statement about the general understanding of firms on customs-related issues. However, in our experience, we do come across firms that are focused and have invested in developing an evolved customs and trade compliance program manned by trained professionals who are suitably empowered and sufficiently resourced. At the same time, we come across instances of firms where the customs and trade compliance program is a work in progress. While the impact of customs duties on profitability has received sufficient attention and is suitably quantified and monitored, the same cannot be said for quantifying the impact of compliance burdens on a firm’s profitability.
Antonini: Unfortunately, the importance of trade and customs compliance is still often neglected, even by big multinationals. The growing complexity of trade rules introduces an element of uncertainty into firms’ global supply chains. Many companies are not sufficiently aware of these risks. This results in decisions being taken on the basis of incomplete or non-existent knowledge of certain matters. Often, these decisions – for instance, about the classification of certain goods – are applied for years without being questioned. It is not rare to see companies faced with a completely unexpected request for repayment of customs duties for several years as a result of the use of an erroneous customs code. In addition to a lack of analysis when starting up a supply chain, companies all too often do not carry out audits of their customs compliance or fail to set up a compliance program. Although the costs associated with such actions can be relatively important at the beginning, the cost is often a very small percentage of the amount that could be at stake if errors are discovered.
Levine: Generally, companies engaged in global trade seem to understand the risks and potential liabilities that could result from an inadequate focus on trade compliance. Unfortunately, some come to this understanding only after facing an enforcement action or a supply chain problem.
Arvikar: Unfortunately, many firms do not place enough importance on understanding global trade and customs regulations. These regulations can be complex depending on the scope of the trade. Large defence corporations may have the wherewithal to staff these activities appropriately, but small or medium companies do not recognise the effort it takes and the resources that must be allocated. Most companies are in the business of making money and these activities are often viewed as non-value added. Consequently, it does not get the attention that it deserves unless there is a compliance issue. Most people think export means calling UPS or FedEx to pick up a shipment.
Rowden: Like other corporate issues, leadership comes from the top. Firms that are caught violating the US FCPA or similar anti-bribery laws are certainly examples of companies where management has not placed enough importance on trade regulations. While not as sexy – principally because the CEO or top management is not hauled away in handcuffs – violations of both import and export laws immediately affects the ‘bottom line’ because it eviscerates the profitability of such transactions. More importantly, global trade has become ‘mainstream’ throughout corporate operations – it is pretty unusual for a product to be made in one country. As a result, companies must give commensurate priority to trade laws. Too often, companies still look at the trade compliance function only as a ‘cost’. Trade compliance programs go through ‘life cycles’ based on the priorities of corporate management, which change over time. AAEI seeks to lower transaction costs for companies by engaging policymakers to adopt a risk-based regulatory regime providing trade facilitation benefits for companies who invest corporate resources in trade compliance.
Schwechter: While most companies seek to comply with applicable international trade regulations, in many cases, those efforts fall short because compliance staff are viewed as cost, rather than cost-saving, centres. As a result, senior management may not pay enough attention to compliance requirements or dedicate sufficient resources to compliance activities. While most chief financial officers can identify with precision the amount of income and other taxes their companies pay, in many cases they have no idea of the total amount of customs duties their companies pay, and therefore, they fail to pay sufficient attention to the many opportunities that frequently exist to save customs duties on imports.
FW: What advice would you give to companies on developing a global customs compliance management strategy? How important is it to carry out internal compliance checks and regular reviews?
Antonini: The ideal customs compliance management strategy depends on the kind of business. A compliance program of a company focused on the exports of dual-use goods and having customers in Iran or Syria will be different from a company producing normal textiles and selling these mainly to the US, since the main objectives of both compliance schemes will differ. However, for both types of companies, a global customs compliance strategy is key to optimising the supply chain and decreasing costs and risks. Generally speaking, compliance should be centralised, so that one person or team is perfectly aware of what is going on worldwide and can coordinate actions. This centralised compliance unit should be complemented with compliance officers in the different key jurisdictions. Internal and external audits and updates of the compliance program should take place on a regular basis.
Levine: Just as there are companies of all sizes and in various industries with vastly differing risk profiles, there is no one-size-fits-all compliance policy. Many model compliance policies and practice guides exist; the US Bureau of Customs and Border Protection (CBP) itself offers valuable guidance and models for companies to craft and implement a good, basic customs compliance policy and procedures. Any policy and plan of procedure must be customised for the particular company to be effective and, as stated earlier, a policy is worth no more than the paper it is written on unless implemented properly – with full management support and encouragement, with proper training of all relevant personnel, and with full internal review and auditing procedures maintained.
Arvikar: Any company wishing to develop a compliance management process needs to establish a comprehensive management system. Similar to any ISO9001 or similar management system it means defining a management structure with an overall policy, defined roles and responsibilities and training. Key processes must be defined with controls which would mean documented procedures for the critical processes with periodic audits to ensure processes are effectively implemented. Many regulatory agencies may have recommended guidelines for setting up such a system. One needs to keep up to date with changes by attending conferences and ‘refresher’ training programs. Many governments have outreach training programs and material that can be obtained for free.
Rowden: Traditionally, trade compliance professionals have received management support by showing the costs for non-compliance – for example, penalties. As trade compliance programs have matured, they have been a victim of their own success – they only get noticed when there is a failure. Companies should stop thinking about trade compliance programs as something externally imposed by government regulation and switch to a mindset of trade compliance as conducting a global business in a legal and transparent manner to protect the company’s most important asset – its corporate brand. Companies need to be able to defend their brand from government audits and enforcement actions, competitors, dissatisfied customers, human rights and consumer groups, all of whom use Facebook and Twitter. Internal compliance checks, audits and reviews, are the best ways for companies to create a narrative to defend their corporate brand.
Schwechter: In order to ensure proper compliance, it is critical for companies to have outside experts periodically perform import and export self-assessments in which compliance procedures and individual representative transactions are reviewed in detail. These self-assessments, which governmental authorities expect companies to conduct, allow companies to correct compliance problems before they are identified by the authorities. They should include attorney-client privileged written recommendations for compliance improvements, and provide companies the opportunity to respond with the specific measures they plan to take to implement the recommendations and the deadlines by which such implementation will take place. Follow-up self-assessments promote continuing accountability by identifying whether or not such measures have indeed been taken by the responsible persons.
Tewari: The continuous training and development of in-house compliance teams, and continuous engagement and brainstorming with global customs compliance professionals, is an equally important part of developing soft infrastructure for the implementation of the customs and trade compliance strategy. Regular reviews and periodic internal compliance checks are a non-negotiable part of an implementation strategy, which throw out important data points to help the firm fine-tune its strategy, plan voluntary disclosure of unintended non-compliance, and thus save the company from continuing penal interest burden and other penal consequences.
FW: How do you expect the global trade and customs environment to develop over the coming years, against the backdrop of increasing globalisation and advancing technology? Will we continue to see legal and regulatory changes that increase the compliance burden on companies?
Levine: Just as there is a very meaningful reform effort underway in the US export controls system – now in its fourth year and proceeding full-speed ahead – there will continue to be changes and reforms of other aspects of regulatory trade requirements. Governments necessarily will continue to listen to the needs of business, businesses based in various jurisdictions will continue to look for support and relief from their governments, disputes will continue to arise, and factors such as the environment and labour interests will continue to influence political decisions in the area of global trade regulations. Economic and political interests, ultimately, will continue to influence greatly how global trade is regulated.
Arvikar: With increasing globalisation, one would expect trade to grow and therefore a greater need to ensure regulatory compliance and manage supply chain security. The recently launched US export reform will reach maturity, and so we will need to monitor how this evolves over the next few years. One would expect closer cooperation and data sharing through connected networks. One would not expect the compliance burden to increase – companies just need to ensure that they stay current and periodically update their systems and knowledge base.
Rowden: Efforts are ongoing to promote harmonisation of trade compliance practices around the world, to reduce the costs to both companies and governments. Hopefully, we are at an inflection point where governments realise that they do not have the resources to maintain an enforcement oriented compliance posture. Additionally, companies cannot sustain the costs of separate compliance programs in all the countries where they operate. What we are working toward is harmonisation of trade practices through a common trade agenda for trade compliance with the goal of facilitating global trade.
Schwechter: Over the coming years, because of shrinking governmental budgets and personnel dedicated to trade compliance enforcement, the rising numbers of import and export transactions, and increasing governmental regulation of foreign trade, governments are likely to continue to shift compliance burdens onto importers and exporters over which they have jurisdiction. This burden shifting trend, as well as the imposition of increasing penalties on violators who do not take compliance requirements seriously enough, is likely to result in increased focus on trade compliance by importers and exporters.
Tewari: The global customs and trade environment will continue to be a dynamic and evolving field which will need continuous attention to detail so as to keep pace with global changes. Increasing globalisation and the need for ensuring end-to-end supply chain compliance will require a global world view and the visibility of compliance requirements across the length of the supply chain. This is a big change in mindset compared to the past, where customs compliance only required professionals to be aware of the compliance requirements at their end of the supply chain. Changing technology and the shift of trade patterns towards to the South and East of the globe will require a focus on developing an adaptive and flexible supply chain, which can deliver goods effectively and efficiently in spite of limitations posed by poor infrastructure and surprises in the flow of goods across the supply chain. An increasing focus on developing end-to-end supply chain thinking in international trade is a must, which may trigger discussions on developing supply chain policy frameworks at the national and international level.
Antonini: In the last few years, new technology has been applied to already existing processes, which has improved those processes and decreased the workload and burden on customs authorities and traders. More and more, legislators are, often further to requests from companies and customs authorities, realising that this is not sufficient but that certain processes need to be changed fundamentally in order to reflect today’s world. This is likely to result in more legal and regulatory changes, but I am optimistic about the potential for this to lead to reduced burdens in the medium term. I also applaud initiatives such as the AEO status within the WCO Framework of Standards to Secure and Facilitate global trade (SAFE). This initiative has already, and will increasingly, significantly reduce the administrative burden on certain companies.
Marianne Rowden is president and CEO of the American Association of Exporters and Importers (AAEI) following years of service as the Association’s General Counsel. Ms Rowden has testified before Congress on trade legislation because of her extensive background practicing international trade law. Ms Rowden serves as an adjunct professor at The John Marshall School of Law and speaks widely to US and international audiences.
Mel Schwechter is a partner at BakerHostetler and the National Team Leader of its International Trade Compliance Practice. He is Chambers recognised in both Customs and Export Controls and Economic Sanctions. Earlier in his 30-plus year career, Mr Schwechter served as the staff attorney responsible for the Commerce Department’s export control program, and as a past president of the Customs and International Trade Bar Association.
Himanshu Tewari specialises in the practice area of Customs and International Trade Compliance. He has 20 years of experience in the customs and trade compliance field as a customs officer, as an industry professional and as an adviser in a consulting role. His areas of specialisation include customs valuation planning, customs duty planning, risk identification and risk mitigation in the movement of goods across international borders, foreign trade policy, and free trade agreements.
Renato Antonini is a partner at Jones Day, Brussels. Mr Antonini focuses on EU trade and WTO laws relating to trade protection measures and dispute settlement. He has extensive experience in EU and Italian customs and export control law. He also advises clients in EU and Italian competition law, particularly in cartels, state aid and abuse of dominance issues.
David J. Levine is a partner in the International Trade Practice in the Washington, DC office of McDermott Will & Emery, LLP. He practices before international trade organisations, federal agencies and courts regarding international trade and related regulatory matters. Mr Levine counsels clients on customs, export controls, trade sanctions, anticorruption (FCPA), antiboycott, and related trade laws and procedures, including enforcement actions, regulatory audits, and the development of compliance programs.
Ram Arvikar is Director of Global Quality & Compliance at Vectron International. Prior to assuming his current responsibility, he was a Distinguished Member of Technical Staff and a Technical Manager at AT&T Bell Laboratories. Dr Arvikar holds M.S. and Ph.D. degrees in Mechanical Engineering from the University of Wisconsin-Madison where he served on the faculty. He has produced several publications in the area of biomechanics.
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