Good Compliance is Good Logistics
ISE Magazine May 2019 Volume: 51 Number: 5
By Diana Berry and Francisco Ramirez
Whether you are a small company importing or exporting products between two countries or a large multinational corporation, the complexity of regulations applies equally. To ensure that all regulatory requirements are properly addressed and nothing is missed, successful companies should have a Trade Compliance Management Program. Most companies that have been in business for a long time have a well-established TCMP, such as those in the aerospace and automobile industries.
Though specialized logistics companies can assist with the development of a TCMP, companies new to importing and exporting goods or services should hire or develop internal resources to handle all compliance matters.
According to APICS, the premier association for supply chain management, logistics is the subset of supply chain management that controls the forward and reverse movement, handling and storage of goods between origin and distribution points. The European Institute of Export Compliance deﬁnes export compliance as a specialized multidisciplinary framework that provides support to organizations in compliance risk management – the risk of legal or administrative sanctions, ﬁnancial losses or a deteriorating reputation for failing to comply with laws, regulations and legislation, codes of conduct and good practice (laws, regulations and rules).
A TCMP varies between companies, but the concept is generally the same. The company should create a comprehensive TCMP explaining all the processes involving U.S Customs at all levels of the organization. Companies currently working toward certiﬁcation in the new version of the standard ISO 9001:2015 (ISO 9001 is an international standard that gives requirements for an organization’s quality management system) will beneﬁt from having a properly implemented TCMP to alleviate risk. ISO 9001:2015 presents the concept of risk management in its introduction. In general, ISO 9001 has always advocated mitigating and avoiding risk and addressing the issue through preventive actions.
The complexity of compliance management covering all import and export requirements may sound overwhelming but understanding the intricacies of the regulations can decrease legal exposure and reduce costs. A well-managed compliance program can mitigate risk and offer economic beneﬁts.
When a company imports or exports goods, sooner or later it will have to handle trade agreements. The United States has 14 free trade agreements with 20 countries. Trade agreements determine tariffs and duties that countries impose on imports and exports. One of the most popular FTAs is formerly known as the North American Free Trade Agreement, recently updated to United States-Mexico-Canada Agreement. The agreement certiﬁcate of origin is used by Canada, Mexico and the United States after determining that the goods are qualiﬁed for program eligibility. Goods imported into participant countries receive reduced or eliminated customs duties as speciﬁed by the agreement. The certiﬁcate is not necessary in all cases; however, it is common to see companies waste time and effort crafting incorrect or non applicable certiﬁcates. It is also common for manufacturers to receive customers’ re-quests for certiﬁcates with items not made in the participating regions.
In some instances, companies issue FTA certiﬁcates be-fore checking the import duty rate at the destination country. If there is no duty rate for a commodity, determining whether the item qualiﬁes under an FTA and issuing a certiﬁcate is a waste of time and effort.
Another way a company can beneﬁt from a well-man-aged compliance program is use of a duty deferment pro-gram such as duty drawback. If the company has exported or intends to export goods previously imported with duty paid, a refund of up to 99 percent of the duty can be obtained. Duty drawback is a monetary rebate that Customs and Border Protection (CBP) offers to allow importers, ex-porters or manufacturers a potential refund.
Following the latest increase in tariffs imposed by the U.S. government on Chinese steel and aluminum products, the duty drawback program has become more relevant, especially for companies manufacturing goods to export. Though the program is not applicable for raw steel and aluminum as listed in CBP section 232, it does apply for about 1,300 harmonized tariff schedule codes listed in CBP section 301, allowing exporters to recover up to 99 percent of duties paid for a product exported within a certain time frame.
Another way to mitigate costs is by using temporary duty free/tax free import and export programs such as the ATA Carnet. This international customs document permits tax-free and duty-free temporary import and export of goods for up to one year, and is also known as the “merchandise passport.” The ATA Carnet is administered by the World Customs Organization and International Chamber of Commerce through its World Chambers Federation.
The ATA Carnet is practical for companies wanting to show their products in foreign markets, such as trade shows, or for professionals carrying tools of the trade. It is currently in force in 85 countries and regions, and its usage applies to three broad categories of merchandise: commercial samples, professional equipment and goods for use at exhibitions and fairs.
The ATA Carnet has three main advantages:
- It reduces costs to the exporter eliminating value-added taxes, duties and the posting of security normally required at the time of importation.
- It simpliﬁes customs procedures because it allows a temporary exporter to use a single document for all customs transactions, plans or entry to many countries in advance, and does so at a predetermined cost.3. It facilitates re-entry into the U.S. because it eliminates the need to register goods with U.S. Customs at the time of departure.
Other ways companies can beneﬁt from a well-established TCMP is by checking duty rates of their products in different countries to identify the lowest rate applicable. This helps companies decide what market opportunities will be price competitive and ﬁnancially beneﬁcial for their sales and marketing strategies.
Difference in customs duty rates on similar products creates opportunities to reduce duty expenses for imported items by modifying their design. This strategy is known as tariff engineering, which is structuring products to achieve favorable duty treatment upon import. It is the process of product de-sign to reduce duties, taxes and fees associated with importing. When used effectively, tariff engineering achieves signiﬁcant cost savings.
An example of this is Converse sneakers. For years, the de-signers have added felt to the bottom of their sneakers to qualify for a lower duty rate of 3 percent instead of 37.5 percent.
Suppose your company manufactures two shirts with different blends of cotton and polyester. If a T-shirt is a 55 percent polyester and 45 percent cotton blend, it will be classiﬁed as polyester because its majority material has a duty rate of 32 percent. If you re-engineer the item as 55 percent cotton and 45 percent polyester, the result is a lower duty rate of 16.5 percent.
Another application of tariff engineering is the Ford Transit Connect Van. Gasoline-powered vans can be classiﬁed under two different duty codes for 2.5 percent or 25 percent duty rate, depending on the description of the item. Ford applies tariff engineering (see accompanying article on Page 38). In the imported condition, the vans have front seats, a rear bench seat and rear side windows. Ford classiﬁes them as passenger vans with a duty rate of 2.5 percent. Shortly after entry, Ford transports the vans to a nearby facility, where the rear windows are removed and replaced with solid panels, the bench seats are removed and cargo bays are installed. Ford then sells the transformed Transit Connect to customers as cargo vans.
Tariff engineering is not always a viable option, such as when technical speciﬁcations or contractual requirements require speciﬁc product design details. However, it may be beneﬁcial to analyze whether similar products made from different materials or from a different country of origin might be subject to a lower duty rate.
An effective TCMP is a good business investment. The program is used to optimize a company’s import- and ex-port-related activities to ensure compliance with govern-mental regulations, reduce costs and allow for intercompany consistency.
To be successful, a TCMP should include the following elements: management commitment, continuous risk assessment, documented compliance policies and procedures, ongoing compliance training and awareness, pre- and post-export compliance security and screening, record keeping, compliance monitoring and auditing, and compliance problems and violations handling.
Management commitment. Senior management commitment is key in successful implementation of a TCMP. Like other company initiatives, such as a quality management program, without management support the effort will not be embraced by the rest of the organization. Strong management support should be communicated through a management policy statement voicing the company’s expectations and commitment to overall compliance. This communication should also address company associates as well as all third-party providers and contract business partners.
Continuous risk assessment. A successful TCMP assumes the worst can happen at any time. It anticipates what could happen, plays it out and establishes mitigation strategies. The company should establish a strategy to mitigate the risk and develop risk reduction processes and procedures. The risks that pose the greatest threats are those with no controls in place and should take priority.
One example is a manufacturing company that screens its international customers before shipping and has implemented a standard operating procedure to regularly check the Denied Persons List and the Consolidated Screening List. The CSL is a list of parties for which the U.S. government maintains restrictions on certain exports, re-exports or transfers of items. The Denied Persons List includes people and companies whose export privileges have been denied by the Department of Commerce’s Bureau of Industry and Security.
Documented compliance policies and procedures. The company should have a written compliance manual including policies and procedures available for all employees to follow, to be used as a basis for the compliance training program. The current processes and procedures should be in the manual. It should be widely distributed and kept up to date.
Ongoing compliance training and awareness. The trade world is constantly changing. As international regulations change, so do a company’s needs and requirements. The company should assess the organization’s current training program and develop a compliance training plan to avoid being left out of important changes in compliance. The training should be tailored to the audience and should focus on the areas of greatest risk.
Pre- and post-export compliance security and screening. The organization should manage the process from the ﬁrst point of regulatory risk through the sup-ply chain process. The initial determinations should be accurate (e.g., classiﬁcation and license determination). The post-shipment activities (e.g., re-exports, re-imports, transfers, warranty returns and post entry reconciliation) should be monitored.
Record keeping. Effective records-retention procedures and easy retrieval are critical for successful record keeping. If the company makes a mistake, record keeping can keep it out of trouble. A formal records management program should be developed and the physical or virtual locations where records are kept should be identiﬁed.
In general, maintaining accurate record keeping helps companies prevent ﬁnes and penalties when U.S. Customs and Border Protection decides to perform an audit. By law, companies are required to keep records for at least ﬁve years.
Suppose you work for a company exporting parts on a regular basis to Mexico and Canada. Former NAFTA certiﬁcates are issued every time the parts are shipped. The certiﬁcates from the same year for the same part can be used throughout the year. Maintaining accurate record keeping of all the certiﬁcates used during the year will help the company save time by not having to issue a new certiﬁcate every time the part is shipped. Keeping all certiﬁcates on ﬁle will also help the company gather the necessary information at the end of the year to determine how many dollars have been saved due to the applicable trade agreement.
Trade compliance monitoring and auditing. Compliance audits can help uncover issues and discover vulnerabilities and potential violations. Companies are recommended to perform audits annually or semiannually to ensure consistency in compliance practices. It is also recommended they monitor the audits to discover weak areas and provide insights into areas that need future auditing.
According to the Sandler, Travis & Rosenberg Trade Re-port in May 2017, the Court of International Trade assessed a penalty of more than $691,311.54, plus pre- and post-judgement interest, to a company importing sugar into the United States. The shipments of sugar were misclassiﬁed under an incorrect harmonized tariff code. The CIT concluded that the company classiﬁcation constituted a false statement. In addition, the misclassiﬁcation resulted in $345,655.77 in lost revenue to the U.S. government.
In cases like this, if the company would have conducted an internal or external audit on a regular basis for all of its classiﬁcation codes on ﬁle, it could have detected the incorrect classiﬁcation code, reported it to customs and saved lost revenue and damage to its reputation.
Compliance problems and violations handling. The company should provide guidance to employees on how to report violations or suspected violations, and how to obtain advice on compliance requirements. Policies and procedures should be addressed in employee compliance training. The compliance management chain should be clearly deﬁned and empowered, and appropriate corrective actions should be documented and taken in response to ex-port and import violations.
Companies with successful trade compliance management programs have incorporated all the key elements above and have a strong trade compliance management team with representatives from different areas of the business (engineering, legal, purchasing and logistics). Good compliance is good logistics because it reduces the legal exposure of the company, reduces costs, improves documentation and record-keeping compliance, improves collaboration and communication among different departments in the company and external partners, increases operational efﬁciently and reduces adverse publicity.