Best-in-class companies leverage trade compliance as a competitive advantage. Here we look at the current state of global trade, discuss risk factors such as uncertainties around trade agreements, hybrid sanctions and political upheaval and argue that trade compliance should be an integral part of your overall strategy.

Global trade had a better than expected 2017. Across the developed world, including the United States, the European Union and Japan, global imports increased 3.4 percent last year, while exports rose 4 percent. The World Trade Organization noted that growth in China and the US spurred the demand for imports. This in turn boosted trade across regional supply chains throughout Asia. Although we are still in the first quarter, international trade looks set to grow by around 3.2 percent over 2018.

Any company that trades globally knows the importance of compliance. However it is fair to say that not all companies are equal when it comes to mitigating risks. Some areas of compliance, such as classification and record keeping, may be given priority over equally important factors, such as denied party screening.

“With global economies and trade soaring, corporate Trade Compliance departments are equally challenged with both the growing complexity of trade laws and regulations, as well as effectively managing the sheer increase in shipment volumes. As a result, more companies are turning to automated solutions for support,” says Jerry Peck, Precision Software’s international trade expert.

Mitigating Risk

Keeping up with Denied Party Lists is a Full Time Job

An uneven approach to trade compliance may be partly down to what a company is able to do in-house. Companies have control over their own record keeping activities, after all. However, without dedicated personnel, it can be almost impossible for a company to keep current with Denied Party Lists. The lists are subject to frequent changes — thousands every year. As a result, what was perfectly legal today may be a violation tomorrow.

Even with in-house capabilities, making sure all staff are aware of current DPLs, and act accordingly, is frankly daunting. Warehouse staff responsible for shipments may be knowledgeable, but the front office is often less aware of regulation changes. Staff training is essential however. If, for example, admin staff ship a sample to a denied party, your company would be in violation. Even sharing information by phone or email with certain foreign entities may breach export regulations.

Standardized procedures can certainly help a company avoid accidental violations. However, this has limitations. After all, regulations are not standard across the world. That means a one-size-fits-all policy simply won’t work for many companies. If you have international locations, your compliance program needs will vary. This is also true if different company sites ship to different parts of the globe.

Compliance programs need to take into account the depth and breadth of your enterprise. If not, your procedures could be lacking in countries regarded as high-risk — with the possibility of potential violations. Furthermore, a compliance program that is too restrictive in low-risk locations can mean lost business opportunities and lost revenue.

The Long Reach of US Enforcement Authorities

The rules governing import and export are complex, and compliance is an ongoing process. Trade rules change and existing trade agreements — such as NAFTA — come under review.

US officials are dogged in their pursuit of violators. Furthermore, if they  find breaches in one company, enforcement officials are likely to scrutinize the entire industry.

Companies may fully comply with their home country laws and regulations and still fall foul of compliance laws. A company in Dallas, for example, knows well that it is subject to US regulations. But what about a company in Dusseldorf or Dubai? If they have an American bank account, if they make payments in US dollars, or if a US person was involved in the deal then these companies too may feel the full weight of US enforcement authorities.

European banks know this well. Before 2015’s Joint Comprehensive Plan of Action — the Iran nuclear deal — the US imposed strict sanctions on Iran. This included denying Iran access to the US financial system. European banks who helped Iran turn oil revenue into US dollars fell foul of American authorities. More than $16 billion in fines were imposed.

The Uncertainty of Sanctions

JPCOA has been in jeopardy since the 2016 election of Donald Trump. After the deal, the US relaxed sanctions, although restrictions remained in place. However, Trump has repeatedly criticized the deal as well as threatened to withdraw. Adding to the uncertainty is the US law regarding sanctions. Every 120 days the president must decide whether the US will continue to suspend sanctions or reimpose them. European politicians are keen that the JPCOA remains in place. There has been much diplomatic wrangling, but not a whole lot of clarity. Whatever concessions the Europeans suggest, President Trump is unlikely to reverse his opposition. Furthermore, it is doubtful that Russia or China will accept any changes.

There is also uncertainty surrounding Russia. In summer 2017, the US Congress passed a new sanctions bill against Russia. This February, Treasury Secretary Steve Mnuchin announced that the administration was working on the scope of these. What the extent will be is unclear.

This lack of clarity is impacting commercial activities with Russia. In February, Russia’s En+ Group invited international banks to pitch for shares. A number of US banks worked with En+ on its initial public offering last November. Russian businessman Oleg Deripaska and his family own 76.6 percent of En+. On 29 January US officials added Deripaska’s name to a list of oligarchs. While this is not a sanction, it is a black mark. Given this, and with Russian sanctions in the offing, US banks are reportedly keeping away.

In recent years, the US and the EU have moved away from outright bans on trade with certain countries and individuals. Instead they have increasingly used hybrid sanctions that incorporate different types of measures. Hybrid measures allow certain commercial activities to continue, but doing business while remaining compliant becomes an increasingly arduous task.

High Risk and High Penalties

The penalties for violations of US law are steep. From August 2016, the US Treasury Department’s Office of Foreign Assets Control (OFAC) increased the maximum civil penalty for violations of the International Emergency Economic Powers Act (IEEPA) from $250,000 to $284,582 per violation, or twice the value of the transaction, whichever is greater. Furthermore, from January 2017, the US Department of Commerce, Bureau of Industry and Security (BIS), increased its penalties for violations of IEEPA from $284,582 to $289,238 per violation, or twice the amount of the transaction, whichever is higher.

Those are the penalties for negligence. If authorities decide that a violation was wilful, companies can pay $1 million per violation. Wilful violations are not only met with monetary penalties. Individuals found guilty can receive up to twenty years in prison.

EU penalties may not be quite as onerous, but they are enough to cripple small and medium businesses. The EU has imposed fines of more than $10,000 per violation.

Civil and criminal penalties are not the only issue. Under US law, companies in breach risk the suspension or loss of their operating licences. The EU can impose 20 year denials of all export privileges. Violating companies are also likely to face additional audits and may have to hire a long-term monitor to insure future compliance. Finally, a violation is a severe blow to a company’s reputation.

Recent Cases and Penalties

When all violations are added up, companies can face cripplingly hefty fines and, in some cases, prison sentences for executives. Last year the Chinese telecoms manufacturer ZTE Corp. received a $1.19 billion penalty. ZTE was found guilty of illegally exporting to Iran and North Korea. This was the largest civil penalty ever imposed by US authorities. ZTE received a reduction and finally paid $892 million to BIS, the Department of Justice (DOJ) and others.

In June 2016 Erdal Kuyumcu, chief executive officer of Global Metallurgy, LLC, of Woodside, New York pleaded guilty of exporting speciality metals to Iran. For this violation of the IEEPA, Kuyumcu received 57 months in prison.

Schlumberger Oilfield Holdings, Ltd. pleaded guilty to violating the IEEPA in May 2015. The company was charged with facilitating trade with Iran and Sudan. It is important to note that Schlumberger did not ship directly to either country. However, facilitating trade with countries sanctioned by the US from a US-base is prohibited. Schlumberger Oilfield Holdings is a subsidiary of Schlumberger, Ltd. with headquarters in Sugarland, Texas. The company agreed to pay over $232.7 million.

In 2013 BIS levied a heavy civil penalty against Weatherford International Ltd. in Houston, Texas, and four of its subsidiaries. The company agreed to to pay $100 million. Weatherford violated regulations related to the export of oil and gas equipment to Iran, Syria, Sudan and Cuba. The company also flouted regulations regarding the export of items controlled for nuclear non-proliferation reasons to Venezuela and Mexico. In addition to the fine, Weatherford agreed to hire a third-party compliance monitor.

Global Supply Chains Add Complexity

Deliberately circumventing sanctions is both criminal and risky. But your compliance obligations do not end there. Globalization within your supply chain adds another level of compliance complexity.

Firstly, when your supply chain crosses international borders, the opportunities for mistakes multiply. Your procedures must meet the regulations of all the political entities and geographic areas where you trade. That means keeping abreast of developments and new regulations in every country across your supply chain. Political changes in one country — such as Brexit — may impact how you do business in another. Supply chain professionals thus have to devote significant time and energy to monitor international trade laws to ensure ongoing compliance.

Secondly, and equally importantly, your compliance responsibility extends across your entire supply chain. That means you are responsible for ensuring that all your trading partners act in accordance with all the relevant regulations as well. Claiming ignorance — whether real or feigned — is no defence. Neither is passing the buck. If your trading partners breach regulations, you are culpable too.

Trade Compliance As a Competitive Advantage

Make Trade Compliance Part of Your Overall Strategy

For many companies, compliance is seen simply as the cost of doing business. As a result, they do the minimum necessary.

“Even though trade compliance is a critical component of the international supply chain, some companies continue to view it as both a negative cost and hindrance to their operations,” explains Jerry Peck, Precision Software’s international trade expert.

Investing in compliance results in new efficiencies, better shipment visibility and decreased trade related costs — as well as improved risk management. Automated trade compliance software allows a company to ensure that their shipments meet international regulations and country-specific rules. This includes verifying that a trading partner is not on a Denied Party List and validating the destination country. A robust solution will alert shippers if a shipment or trading partner is subject to special regulatory controls and vet key elements of the transaction, including determining the end-use.

Companies using data driven visibility tools have access to operational statistics, metrics and trends and can respond accordingly. Done right compliance leads to improved profit margins and competitive advantages.

Equally importantly, trade compliance software creates an electronic audit trail. This audit trail demonstrates that the exporter exercised the necessary due diligence for all shipments. Without an audit trail, exporters may face penalties for poor record keeping. Worse still, authorities may decide that this lack of visibility is due to wilful flouting of the law, not negligence.

Companies should also make compliance a part of their overall strategy, argues Peck.

“Best-in-class companies have learned how to integrate trade and customs considerations into the earliest stages of new product design and sourcing, or to support import/export sales orders. Thus, they generate competitive advantages for themselves through identifying lower-cost sourcing, avoiding regulatory landmines, and achieving better on-time predictability for their customers,” he says.      

Serial System Ltd. Chooses Precision

It was these considerations that lead Serial System Ltd., a Singapore-based distributor of electronic and electrical components, to select Precision Software’s Trade Compliance and Global Trade Management solution.

“Regulatory compliance is a critical consideration for a global distributor of electronic components and Precision’s solution helps ensure we are compliant in all markets we serve,” explained Serial System Ltd.’s Sidney Thong.

“Global distributors of electronic and electrical components must comply with regulations from the various jurisdictions in which they operate or risk suspended operations,” added Precision Software President Steve Gardner.

“The Precision solution automates screening processes and provides the audit trail necessary for any required audits which addresses a major concern for companies operating in multiple markets.”

The implementation of the Precision Trade Compliance and Global Trade Management solution has helped the company meet trade compliance requirements for Serial System’s Line Card suppliers and local customs authorities. All orders are screened through the Precision software when shipped from warehouses across Asia. This was a critical factor as Serial System Ltd. required a scalable solution able to maintain regulatory compliance with markets throughout Asia, Europe and the United States.