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
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
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. Willful violations are not only met with monetary
penalties. Individuals found guilty can receive up to twenty years
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 licenses. 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
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,”
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.
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About QAD Precision – Trusted Global Trade and Transportation Execution
QAD Precision, a division of QAD Inc., provides industry-leading
trade compliance, and multi carrier transportation
execution solutions from a single, integrated platform. An
ISO-certified company, QAD Precision assists companies to
streamline their import,
and transportation operations, optimize deliveries, and increase
logistics ROI. QAD Precision’s scalable and extensible solution
easily integrates with existing ERP and WMS solutions. Industry
leaders in every region of the world rely on QAD Precision’s
global support centers to leverage thousands of carrier services
and manage millions of global trade and shipping transactions
every day. For more information about QAD Precision, visit www.qadprecision.com.