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Commercial Invoice Checklist: Avoid Miscommunicated Requirements

Customs officer with commercial invoice faded in the background

At last count, your company is sourcing from 35 foreign suppliers, located on five of the seven continents, and the number is growing quickly. With the amount of suppliers increasing, it’s a good idea to create a foreign supplier database that can be used by a number of departments. To gather information for this task, you head to the accounts payable department to pick up some invoices.

What you find stops you in your tracks. The commercial invoices do not have consistent formats. Some invoices indicate Incoterms, whereas others do not. There are even invoices that are completely in Spanish, handwritten, or incomplete.

How can these inconsistencies be corrected to ensure more uniformity? Fortunately, there is a solution—send your suppliers detailed instructions of what is mandatory on the commercial invoice [1]. This may sound simple, but getting the supplier to adhere to the requirements could prove challenging.

Communicating Requirements

Liquidated damages—monetary penalties—can be assessed against an importer for failing to provide a commercial invoice [2]. This can happen if Customs is at your facility performing a formal audit or if they request a hard copy of the commercial invoice for any entry, at any time. A shipment cannot be cleared by Customs without an invoice. Therefore, it is imperative to have a proper commercial invoice to avoid penalties and delays in clearance.

The requirement for an accurate commercial invoice should be incorporated into your import compliance manual and processes. Your procedure ought to include a way to communicate the requirements to the supplier, a process for monitoring the supplier’s paperwork, and a protocol to follow for when the requirements are not met.

While obtaining an invoice for every imported shipment may seem an obvious requirement [3], suppliers often create their own version of the document. This could be in the form of a packing list to which pricing information has been added, a pro-forma invoice [4], or their own invoice template. They may tell you they have “always done it this way;” however, none of the above supplier-created documents are acceptable replacements for a commercial invoice. This is why it is crucial to make the requirements clear to your supplier, which can be communicated in the purchase order, shipping instructions, or sales contract.

Exceptions

While there are few cases where a commercial invoice is not required, at minimum a U.S. importer must still present some sort of confirmation of the value of a shipment. There are also circumstances where invoice requirements may be waived by U.S. Customs, but the process to obtain a waiver is cumbersome and can cause clearance delays.

As a compliance best practice, it is recommended that you require suppliers to provide a commercial invoice for all U.S. import shipments, regardless of exceptions. Advising your suppliers that it might assist in expediting the payment process, could motivate them to comply with this request.

The Importance of Correct Value

The most important requirement to be aware of is reporting the correct value of a shipment at time of entry. It is the importer’s legal responsibility to declare the correct value, classification, and rate of duty [5]. An accurate commercial invoice will help to ensure the correct value is reported to U.S. Customs.

One way to ensure this is to compare the entered value shown on the U.S. Customs entry, against the amount your company paid to the supplier for that specific shipment. Any mistake, damage, overage, shortage, etc. that creates a discrepancy between the amount paid to the supplier—no matter when it’s paid and when it’s discovered—and the amount reported to U.S. Customs, requires that the entry be amended to show the actual value imported. If the two values do not match, corrective action—which may include advising U.S. Customs of the error—is required. Your company may want to contact a Customs attorney to discuss the best approach to this.

You may be wondering why this matters in today’s electronic environment, where hard copy documents are rarely, if ever, presented to U.S. Customs at time of entry. Even with electronic documents, discrepancies between the declared value and the payment amount often remain out of sight, until U.S. Customs arrives for an audit. Should that happen, it will do no good to explain why a system of checks and balances is not in place and why no corrective action has been taken.

The regulations are unmistakable; unless your situation qualifies for an exemption or you wish to pursue a waiver from U.S. Customs, a commercial invoice must be provided in order to be cleared by U.S. Customs. However, an inaccurate or incomplete commercial invoice is one of the most common errors found during a U.S. Customs audit. In order to avoid penalties and fines, importers need to ensure that their commercial invoices, or pro-forma invoices—in certain cases—meet all U.S. Customs requirements. By issuing instructions to suppliers, importers can help ensure the commercial invoice is accurate.

Click here to download our invoice checklist.

We can help you develop or improve your import compliance programs. For guidance on incorporating procedures about commercial invoices into your current compliance program, contact Mohawk Global Trade Advisors at 1-800-996-6429.

Footnotes:

[1] See 19 CFR §141.81-141.90 (2017) for commercial invoice requirements.

[2] See 19 CFR § 171 App. B (D)(6) (2017)

[3] Per 19 CFR §141.81 (2017), “A commercial invoice shall be presented for each shipment of merchandise at the time the entry summary is filed.”

[4] A pro-forma invoice is acceptable only in certain circumstances as detailed in 19 CFR § 141.83(d) (2017). Many suppliers mistakenly provide a pro-forma invoice in place of a commercial invoice. Click here to see an example of a pro-forma invoice.

[5] See 19 USC § 1484(a) (2017)

By Adrienne Graddy, Senior Advisor

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©2016 Mohawk Global Trade Advisors

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Frustrated by C-TPAT? You’re Not Alone

Man with head under laptop, frustrated

Customs-Trade Partnership Against Terrorism (C-TPAT) has undergone numerous changes since its inception in 2001, the last major change being the release of Portal 2.0. Unfortunately, 2.0 resulted in a portal that was not intuitive, in addition to being plagued with glitches.

To add to the frustration, the security profiles in the portal contain criteria that do not belong to the business entity, which are the types of business permitted to participate in the program—for example, highway carrier, Customs broker, consolidator, importer, etc. One example of criteria that does not belong is the Record Replacement Seal, which is currently in the importer section but belongs in the highway carrier section. The security profiles also include criteria that are not part of the C-TPAT minimum security standards, such as the Record Replacement Seal. In addition, some of the notes provided as guidance in the security profile sections do not correspond with what is required in the section. It’s no wonder Portal 2.0 has created so much frustration with C-TPAT members.

To confuse members further, some Supply Chain Security Specialists have told their accounts to hold off on submitting their profiles until further notification. Meanwhile, other Specialists are sending out emails for partners to submit them.

Director of C-TPAT, Liz Schmelzinger, is well aware of the trade’s frustration and has multiple teams working behind the scenes to fix glitches, revise the security profiles, and make the portal more user-friendly. Director Schmelzinger and her teams regularly reach out to members of the trade community for input and very much appreciate the feedback and the insight provided.

What Are C-TPAT Members to Do in the Meantime?

Here are some suggestions to get you through this frustrating process in the meantime.

  • Continue to perform your annual review to ensure integrity within your supply chain. It is important not to neglect this review as it is required of all C-TPAT certified partners.
  • Know your partners and your supply chain vulnerabilities. The best way to do this is to forward comprehensive questionnaires—that touch on all of the security criteria—to your business partners. The questionnaires should be reviewed every year and a written vulnerability assessment should be created and forwarded to your partners for feedback. Ensuring your partners meet the C-TPAT criteria is a critical component of the program.
  • Map out your high-risk supply chains to ensure you know who is involved with your shipment from manufacturer to final distribution center. If you’re an exporter, create cargo mapping from manufacturing to foreign port.
  • Re-evaluate the risks for each country with which you do business. Countries we never thought of as high risk, such as Belgium, France, United Kingdom and Germany are now categorized as higher risk due to terrorist incidences in the last few years. MI5, the United Kingdom’s domestic counter-intelligence and security agency, has set the UK’s threat level as severe. France has announced their terrorism threat as imminent. A country’s threat level should be taken into consideration as it is a major factor when determining risk in a supply chain.
  • If you’re a consolidator, reach out to your agents and the container freight stations they use for co-loading. Agents, container freight stations, and co-loaders are part of a consolidator’s supply chain. Since this is a supply chain security program, you will need to reach out to all of the business partners in your supply chain.
  • Take a stab at rewriting your security profile, even with all of the redundancies. For example, highway carriers will see the same criteria reworded in multiple sections, such as Access Controls, Container Seal, and Container Security. For importers and exporters, you will see sections that do not apply to your business entity. Go through the process of rewriting your profile; and if you know a section does not belong, enter “not applicable” and state why.

If you are a C-TPAT certified importer and exporter, you are in luck. Your security profiles have been revised and should be forthcoming from Customs in the C-TPAT portal public library. In the meantime, if you don’t want to wait for the release, the upcoming changes are listed below [1]. For sections that are scheduled to be removed, be sure to enter “to be removed” in the section.

Importer Security Profile: Importer Questions

Section Question ID Changes
Container Security Record Replacement Seal (2205) Removed
Container Security Reporting Structural Changes (2501) Removed
Procedural Security Shipment Risk (4201) Removed
Container Security Conveyance Inspections (7620) Removed
Container Security Trailer Inspection (7651) Removed
Security Training
and Threat Awareness
Training Documentation (7991) Removed
Access Controls 2800 Added: “An employee identification system must be in place for positive identification and access control purposes.”

 

Exporter Security Profile: Exporter Questions

Section Question ID Changes
Container Security Conveyance Inspections (7620) Removed
Container Security Tractor Inspection (7651) Removed
Container Security Reporting Structural Changes (2501) Removed
Container Security Record Replacement Seal (2205) Removed
Container Security Conveyance & Trailer Integrity (7840) Moved Responses to 7842
Container Security Predetermined Routes (7860) Moved Responses to 7842
Container Security Route Delays (7820) Moved Responses to 7842
Container Security Storage Area Security (2500) Moved Response to 8610
Procedural Security Export Security Program (8860) Removed
Procedural Security Corporate Support (8870) Removed
Physical Security Physical Barriers at Cargo Facility (8840) Moved Responses to 5700
Security Training and Threat Awareness Training Documentation (7991) Removed
Business Partners 740 Added: “Written procedures must exist for screening business partners, which identify specific factors or practices, the presence of which would trigger additional scrutiny by the C-TPAT partner.”
Access Controls 2800 Added: “An employee identification system must be in place for positive identification and access control purposes.”
Physical Security 5700 Added: “Cargo handling/storage facilities and storage yards for instruments of international traffic throughout the supply chain must have physical barriers and deterrents that guard against unauthorized access.”

Customs will be reviewing all other security profiles for the various business entities and will attempt to make the necessary revisions in 2017.

Need Help?

If this process seems overwhelming, reach out to Mohawk Global Trade Advisors for help with your annual review. We have consultants who have been helping companies with their annual reviews since the inception of C-TPAT and we can help you too.

Footnote:

[1] Customs and Border Protection. (Producer). C-TPAT Importer and Exporter Update Internet Webinar [Video webinar]. Webinar presented in December 2016.

By Beverley A. Seif, Vice President & General Manager.

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©2016 Mohawk Global Trade Advisors

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Antidumping and Countervailing Duties Coming Back to Haunt You?

American bill faces over cargo ship

 

After a relatively quiet week, your CFO calls you into his office to discuss a $280,000 bill received from U.S. Customs for antidumping duty on entries made seven years ago. You were not with the company at that time, you don’t have the money, and all of the profit made on this particular imported product has not only evaporated, but is now the largest loss on any product sold by your company in its history. Most of your imported products are either duty free or at a very low duty rate. How could this have happened?

When required, the imposition of antidumping (AD) or countervailing (CV) duties on U.S. imports levels the playing field by protecting U.S. industries against unfair trade practices. AD/CV duties exist in many countries and include U.S. products exported to other countries. According to the Anti-Dumping Act of 1974, when a foreign manufacturer sells a product in the U.S. for less than the price in their own market or at a price lower than the cost of production, an AD duty is imposed. When a foreign manufacturer receives a government subsidy lowering their local production cost, a CV duty is imposed to eliminate the unfair pricing advantage that the foreign manufacturers have due to the subsidy. In FY 2015 alone, “approximately $10.1 billion of imported goods were subject to an AD/CVD order” [1]. Imported products can be subject to either antidumping or countervailing duty, or both in some cases.

AD/CV duty rates can vary significantly and are specific to the manufacturer and country. The following are examples of this variance.

  • Green widgets manufactured in China by Sapphire Manufacturing Inc. may be subject to an AD margin of 65%.
  • Green widgets manufactured in China by Emerald Manufacturing Inc. may be subject to an AD margin of 98%.
  • Green widgets manufactured in China by all other manufacturers (except Sapphire and Emerald) may be subject to an AD margin of 125%.
  • Green widgets manufactured in Korea by Sapphire Manufacturing Inc. may not be subject to any AD/CV margin.
  • Green widgets manufactured in Korea by Emerald Manufacturing Inc. may be subject to a CV margin of 13.6%.
  • All Green widgets manufactured in Brazil may be subject to an AD margin of 3.2% regardless of manufacturer.
  • Green widgets manufactured in Germany by Ruby Manufacturing Inc. may be subject an AD margin of 13% and a CV margin of 2.1%.

Petitioning Injury

U.S. manufacturers may file a petition with the International Trade Commission (ITC) alleging that imported goods cause injury to their industry, including reduction in demand for the U.S. product, job losses for U.S. workers, and closure of production facilities. Once the petition is filed, a lengthy and complicated review takes place to allow the ITC to determine whether the U.S. industry is suffering. The investigation includes volumes of written documentation from foreign and U.S. manufacturers, U.S. importers, and considers (among other elements) pertinent economic factors such as, U.S. industry’s output, sales, market share, employment, and profits. Generally, the investigations are completed within 12-18 months of presentation of the petition.

If the ITC makes an affirmative preliminary determination of dumping and injury, then a preliminary AD/CV margin is assessed and paid at time of entry. You could be looking at AD/CV margins as high as 500%. These margins are calculated based on the value of the imported product and is in addition to the usual duties, fees, and taxes due. When the investigation is complete, the final AD/CV margin is determined. Because the preliminary margin can be different than the final margin, entries subject to AD/CV are not settled or liquidated by Customs until the final margin has been determined. This brings us back to how the hypothetical scenario from the beginning happened. In that case, the preliminary margin assessed was lower than the final margin, resulting in that $280,000 bill your CFO received from Customs.

The Difference Between Margins and Rates

Margins are assessed, they become rates, and then duty is paid on those rates. These two things happen at two different times in the process. The International Trade Commission conducts investigations to determine the margin to be assessed, advises Customs of the margin, and then it becomes a rate to be paid. The difference between these two words indicates where the process is at the time.

With that being said, even after you have paid the duty based on the preliminary margin at time of entry, you are still not out of the woods. It could be several years down the road before the final margin is determined. At that point, you could be subject to paying much more than you had originally anticipated. There are instances where the final margin is lower than the preliminary margin, meaning you will be refunded the difference by Customs, but those are a rarer occurrence. It is important to be aware that just because you feel that you can afford to pay the AD/CV duties initially, years down the road you may not be able to afford the final margin.

How to Prepare Yourself

It can be difficult to determine whether your specific imported product is covered by an AD/CV order. A comprehensive review and understanding of the scope of the AD/CV order will delineate differences or conditions that will allow you to determine whether your imported product falls inside (meaning you will pay AD) or outside the scope, (meaning you will not pay). Some conditions stipulated within the scope may not be easily discernable. A hypothetical example would be,

flange bearings are classified under 8482.10.5016; some flange bearings are manufactured with two holes and some are manufactured with four holes. It is possible that a flange bearing with two holes is subject to AD and a flange bearing with four holes is not subject to AD.

An importer cannot rely solely on the 10-digit HTS classification to make this determination. It is crucial to understand your product’s scope in order to prepare yourself for the AD/CV duties.

U.S. Customs continues to dedicate significant national resources to target the circumvention of AD/CV and has done so for many years. This includes reviewing and auditing, in high risk circumstances, and testing of imported products. This exceptional focus has led to an increase in identification and disruption of supply chain operations that attempt to circumvent AD/CV, resulting in over $51 million in importer penalties (fraud, gross negligence, and negligence), and seizures valued at over $5.1 million in FY 2015 [2].

It is imperative that you are knowledgeable about your product and to prepare yourself if it is covered by an AD/CV order. Here are some questions to consider:

  • As the U.S. is the only country where AD/CV is handled on a retrospective basis (all other countries handle their AD/CV on a prospective basis), how do you manage profitability and margins on products after you imported and sold and the final margin is higher (or lower)?
  • Do you question whether your product falls within the scope of the order, or you really believe your product does not fall within the scope of the order, what are your options?
  • How long does your organization retain records on your AD/CV shipments?
  • What is your process for raw materials subject to an AD/CV order that are integrated into your finished product?
  • What type of vetting and review process do you have for your current and future products?
  • How do you determine if any new AD/CV cases are applicable to your products?
  • What is your company policy on AD/CV?

Do you want help with your antidumping duty processes? Ask us about our Import Compliance Programs.

Footnotes:

[1] “Antidumping and Countervailing Duties Brochure,” CBP Publication Number 115-0417; U.S. Customs and Border Protection. Retrieved on 07/14/16.

[2] Ibid.

By Adrienne Graddy, Senior Advisor

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©2016 Mohawk Global Trade Advisors

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Changes Allow for Duty Free Return of Foreign Goods

Faded containers and professional man writing

For years, U.S. buyers have found it difficult to return imported articles when products come in damaged or erroneously shipped. In the case of a return, importers have been required to pay additional duties and Merchandise Processing Fees (MPF) upon re-importation.

With that being said, there is good news for importers. Recent changes to U.S. tariff number 9801.00.10 allow for duty free return of foreign goods, according to the Trade Facilitation and Trade Enforcement Act of 2015 [1].

Conditions to Qualify

It is important to meet the following conditions to avoid paying duties a second time.

  • Goods must be returned within 3 years of initial export.
  • Duty drawback was not claimed on the original export.
  • The goods were not entered under bond or produced in a Foreign Trade Zone (FTZ).
  • The article was not advanced in value or improved in condition while abroad [2].
  • The U.S. importer has proper documentation to support the claim.

Support Documentation

U.S. Customs is in the process of defining the required documents more clearly for 9801.00.10. In the meantime, it is vital for importers to have these documents on hand at time of entry to support their claim. These documents include

  • A Foreign Shipper’s Declaration and U.S. Importer’s Declaration
  • Some form of proof to demonstrate that the goods have been returned within 3 years, such as

- Export invoices
- Export bill of ladings
- Electronic Export Information filings (EEI)

On the bright side, these documents are already required records for exporters, making the process easier.

By meeting these conditions and having the supporting documents, the change to this tariff provision will save importers significant duties and MPF for their returning goods.

For assistance with developing processes and procedures for returning goods, contact Mohawk Global Trade Advisors.


Footnotes

[1] “Products of the United States when returned after having been exported, or any other products when returned within 3 years after having been exported, without having been advanced in value or improved in condition by any process of manufacture or other means while abroad.” Harmonized Tariff Schedule of the United States (2016).

[2] The article was not altered in any way that might have made it into a new product or might have improved it while overseas.


By Jim Trubits, Vice President.

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©2016 Mohawk Global Trade Advisors

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Manufacturing with Dies and Molds: What’s the Real Cost?

When outsourcing production overseas, U.S. companies will often rely on a foreign vendor to fabricate custom dies and molds to use as part of the manufacturing process. Typically, the vendor will invoice the U.S. buyer separately for the work. Sometimes it’s provided to the buyer at a reduced rate or free of charge. Although this type of billing arrangement may seem beneficial on the surface, especially in terms of convenience, many U.S. importers would be surprised to learn that it’s leading them to undervalue their incoming goods and exposing their company to steep penalties from U.S. Customs & Border Protection.

Plastic parts or components made from molds

Did You Know? By law, duties must be paid on imported goods. They must also be paid on any “assist” that aided in the production of the merchandise [1].

An “assist” is an article or design that meets all of the following criteria.

  • It’s provided by the buyer directly (purchased and shipped to the foreign manufacturer) or indirectly (built to order by the foreign manufacturer).
  • It’s supplied free of charge or at a reduced cost.
  • It’s used in the production of merchandise for export to the United States.

Types of Assists

Assists can take on many different forms, such as

  • tools, dies, molds, and similar items used in producing the imported merchandise
  • materials, components, parts, and similar items incorporated in the imported merchandise
  • merchandise consumed in producing the imported merchandise
  • engineering, development, artwork, design work, plans, and sketches undertaken outside the U.S. and necessary for the production of the imported merchandise

U.S. Customs & Border Protection requires the value of an assist (plus any costs to transport it to the place of production) to be reported as part of the merchandise’s import value [2]. This can be done by

  • reporting the value as a lump sum on the first shipment
  • reporting the value over the number of units produced up to the time of the first shipment
  • prorating the value to the unit cost of the merchandise based on anticipated production [3]

In addition, should the tools, dies, molds, or similar assists undergo subsequent refurbishment, modification, or other improvements, the importer must use one of the apportioning methods above to declare these additional costs as part of the transaction value.

Penalties: A Sobering Reality
Failing to declare the value of an assist is a serious matter in the eyes of U.S. Customs and Border Protection. It’s also easy for the agency to spot, given the sophistication of their monitoring tools. Shipments from any American industry that commonly makes use of molds or dies, such as manufacturers that import plastic products and components, would be watched closely by Customs for indications of an undeclared assist. If Customs expects a violation, they may send the importer a Request for Information (CF28) or worse, a notice for an impending audit. Depending on the veracity of the violation, an importer could face penalties from two to four times the amount of duties, taxes, and fees previously lost by the agency or 20-40 percent of the merchandise’s dutiable value if there was no monetary loss to the agency [4].

Recordkeeping
When declaring assists, the importer must retain all related records (such as invoices, entry documentation, etc.), as long as the assist is in use, to serve as proof of valuation and proper declaration. Failure to produce records for Customs upon request can result in recordkeeping penalties, which could be up to $100,000 for the most egregious of violations [5].

Stay compliant and avoid unnecessary fines!

For assistance with how to properly value your imported goods, contact Mohawk Global Trade Advisors.


Footnotes

[1] Per 19 C.F.R. § 152.103(b)(1)(iii) (2016).

[2] Per 19 C.F.R. § 152.103(d)-(e)(1) (2016).

[3] If the entire anticipated production is not destined for the U.S., the value needs to be apportioned consistent with Generally Accepted Accounting Principles (GAAP). The value declared in the U.S. should be determined based on the anticipated production destined for the U.S.

[4] Per 19 C.F.R. § 162.73(a) (2016).

[5] Per 19 C.F.R. § 163.6(b)(i)-(ii) (2016).


By Cindi Kavanaugh, Senior Advisor.

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©2016 Mohawk Global Trade Advisors

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How to Get Senior Leadership Invested in Export Compliance

Do you ever imagine it’s just the two of you, alone on a tropical island? Just the two of you relaxing under a palm tree, basking in the warmth of the sun. Just the two of you, together at last; just you and your beloved set of export regulations.

Export compliance officer making the case to upper management As your company’s compliance officer, you live, breathe, and even daydream (although probably not quite so vividly) about those regulations. It’s in your blood. Unfortunately, it’s rarely a sentiment shared company-wide. Instead of feeling your toes in the sand, you may feel as though your cubicle has been set adrift with nothing but the Export Administration Regulations (EAR) or International Traffic in Arms Regulations (ITAR) to guide the way. You have the knowledge, experience and skill to steer your company around those export reform buoys, but you lack the support of your senior leadership to drive the boat. In a whole-hearted effort to keep management in the loop, you’ve tirelessly forwarded countless emails about changes due to export reforms, attempted to demonstrate the inadequacies of your software, and begged them to budget additional funding for your compliance program. Despite your best endeavors, management has only responded with their usual:

“We can’t afford it.”

“This doesn’t benefit the bottom line.”

“Show me the money!”

If you’ve tried the soft sell by asking for help and explaining the importance of what you do, it might be time to fire some more strategic shots across the bow. Be assured that you aren’t alone anymore. Let’s roll up our sleeves and swab this deck.

First of all, the government is here to help. Now I know you may scoff; but if they are the policy makers and enforcers, then who better to draw on for inspiration to convince management?

If you sell ITAR goods

In prepping your appeal, if you are under the jurisdiction of the ITAR, you can do no better for a qualified reference than the U.S. Department of State, which considers an effective compliance program as one that includes written documentation of who in management is directly involved in export controls and senior management’s commitment to comply with the Arms Export Control Act and ITAR.[1] In other words, your company must have compliant, committed leadership. Use this premise to remind management that they too must have a stake in your compliance program. Then, just to bring home the seriousness of what you are telling them, you may want to reiterate the Department of State’s stance on the need to emphasize compliance throughout an organization “to avoid jeopardizing corporate business and severe sanction against the corporation and responsible individuals.”[2]

While you are pointing this out, shore up some gangplank-worthy facts from Violations and Penalties, 22 CFR § 127 (2016), quoting that everything—from an honest misrepresentation of an export’s value to a willful act of misconduct—can lead to penalties, debarments and consent agreements. Now there’s some help from the government you really don’t want.

If you sell EAR goods

Of course, you may not have any military goods or services; and instead, your items fall under the EAR. If you’re in this boat, relate to your leadership that, according to the Bureau of Industry and Security (BIS), which has jurisdiction over EAR regulated goods, “management commitment” is the first element you need in order to build an effective export compliance program.[3] In addition, make sure to mention the BIS declares “maintaining a program for handling compliance problems, including reporting export violations” as equally necessary.[4]

For some added cannon-fire, explain to management the incentives of maintaining a standard level of export compliance, such as avoiding 20 years imprisonment and, in some cases, a $1 million penalty per violation.[5] Remember, your company is in business to make money. Likewise, your leadership is bound to take interest in any mention of the bottom line being affected.

Pull the wind from their sails with a self-audit

Do you think you need more help in convincing management to pay attention to the gravity of adhering to export control laws? Why not steal another bullet from the best practices of an effective compliance program and perform a self-audit? See what the results produce, where your company is performing well and where water might be trickling in unnoticed.

If Customs and Border Protection knocked on your door to conduct an audit, they would ask for five years of transaction documents. While this depth of analysis would be the most accurate picture of your company’s adherence to regulations, you may not have enough time to take such a prolonged plunge through your records. If that’s the case, then dive into at least a full year’s worth of documents and remember what your goal is—procuring those precious resources.

What (and how) to present to your leadership

Your management may not understand the intricacies of the law as you do; after all, they hired you to do that job. Believe it or not, there are some simple things you can do to improve your chances of winning over their hearts and minds. Here are a few tips to consider when preparing to make your case to the c-suite.

  • List the export rules, regulations or compliance program elements (in simple terms) as demanded or highly recommended by the government. Then counter them with your audit results.
  • Think about how your audit results could hit the company’s bottom line. What might happen in the way of fines and penalties per issue or incident? Tally up the potential fines.
  • Remind management that export reform has taken place and quantify the number of hours needed to incorporate those changes into the company’s daily/monthly/quarterly activities.
  • List every regulation (in simple terms) you cannot adhere to because of inadequate staffing, software, resources, etc.
  • Include charts, graphs and statistics in your presentation. Be more visual and less wordy.

If you find yourself bailing seepage with buckets, or worse—you can’t even identify the source of the leaks—then it may be best to ask someone outside the company to conduct a gap analysis. Reach out and anchor yourself to an impartial, experienced specialist. Consultants can not only help you find the holes, but can also guide you through building new processes and procedures that you and your leadership will be proud to call your own.

MGTA helps companies across the U.S. with export compliance program development and gap analysis. Contact us today for a free quote or for more information about our services.

By Sue K. Nans, Senior Trade Advisor. Click here to read more about Sue.

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Footnotes

[1] Directorate of Defense Trade Controls, Bureau of Political-Military Affairs, U.S. Department of State, “Compliance Program Guidelines” retrieved 21 January 2016 from www.pmddtc.state.gov/compliance/documents/compliance_programs.pdf.

[2] Ibid.

[3] Bureau of Industry and Security, U.S. Department of Commerce, “Core Elements of an Effective Export Management and Compliance Program (EMCP)” retrieved 20 January 2016 from www.bis.doc.gov/index.php/compliance-a-training/export-management-a-compliance/24-compliance-a-training/export-management-a-compliance/227-core-elements-of-an-effective-export-management-and-compliance-program-emcp.

[4] Ibid.

[5] Violations of the Export Administration Act (EAA) of 1979, as amended, 50 USC App. §§ 2401-2420 (2000), and the Export Administration Regulations, 15 CFR Parts 730-774 (2007), may be subject to both criminal and administrative penalties. When the EAA is in effect, criminal penalties can reach up to 20 years imprisonment and $1 million per violation. In cases involving item controlled for national security reasons, administrative penalties can reach $11,000 to $120,000 per violation. When the EAA is in lapse, the criminal and administrative penalties are set forth in the International Emergency Economic Powers Act.

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If My Cargo Is Not Adequately Insured, What Is My Exposure?

Insuring cargo for international transport is very different from other forms of property insurance. There is an entire body of law, known as Admiralty Law, that has evolved around marine transportation. The coverage found in a marine cargo policy (which also covers international shipments by air) is written to insure against the many perils that may be faced during international transport. These include perils specific to case law that has been developed and tested throughout history. Most marine policies therefore add clauses to cover concepts unique to Admiralty law. Many of these risks are not contemplated by riders attached to property covers that attempt to protect goods in transit. As such, these riders fall short of the mark.

De Facto Self-Insurance
Self-insurance is a common fallback position for companies that move international cargo without the benefit of a marine policy. Whether mindfully done or not, moving cargo without adequate insurance coverage is de facto self-insurance; or at the very least, co-insurance—in cases where minimal insurance is in place but not written on the broad-form needed to provide truly adequate coverage. Even when using Incoterms correctly, where the responsibility to insure is with the other party, there may be exposure regarding difference in coverage for perils not specifically named in the transactional policy. Importers and exporters are cautioned to assess the risks and evaluate for adequate marine coverage.

General Average
A good example of an arcane concept fully covered by only a marine policy is General Average. It commonly occurs in cases where something happens to the conveyance, necessitating sacrifice of some of the cargo in order for the voyage to successfully continue. This might happen if a vessel is grounded or if a fire breaks out onboard. In either case, tugboats may need to be employed or the vessel may need to be taken to another port for repairs and inspection. Under such circumstances, the carrier would declare General Average as a mechanism to attach risk-sharing to all cargo interests aboard the vessel. After declaring General Average, a vessel operator would typically ask each cargo owner for a deposit based on their cargo’s prorated value to the venture, with the goal of covering the cost of any other cargo damaged or extraordinary expenses incurred by the operator while saving the voyage. The self-insured cargo owner and the vessel operator would then continue correspondence on this issue for an average of about ten years, until all expenditures have been discharged. Based on this scenario, General Average could prove very costly and time consuming for the self-insured. Not so for the shipper covered by a broad-form policy, who would have their insurer attend to these matters on their behalf.

Other Types of Coverage
Other types of marine coverage include:

  • Institute Cargo Clauses A, B, and C; with A being the broadest coverage and C being the most restrictive.
  • Free of Particular Average, which is bare-bones insurance, covering total loss only. Without the benefit of a broad-form marine policy, such ex tensions or limitations might not be adequately addressed or defined, leaving the cargo owner with substantial exposure.

A good risk management program will usually uncover these idiosyncrasies of international transport and protect against them. Many companies employ the services of a marine insurance broker to set up the right program. Other companies may rely on the services and expertise of their freight forwarder or Customs broker to secure adequate coverage.

Mohawk Global Trade Advisors can help you identify the many risks involved in international cargo transportation, the extent of liability that might be incurred, and the possible solutions available to minimize that risk. Click here to learn more about our risk management services.

By Rich Roche, Vice President. Click here to read more about Rich.

©2014 Mohawk Global Trade Advisors

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Stop Importer Identity Theft

We’ve all heard of identity theft, and the first thought that comes to mind is having our personal identity stolen. Yet, there are other kinds of identity theft. Many do not realize that corporate identity theft is an issue on the rise.

In particular, reputable importers, who are well known to the public, are having their identity stolen; and unbeknownst to many importers their names are being used in many instances to import contraband and intellectual property rights (IPR) goods. By the time an importer discovers the ruse, the thieves have long closed up shop and moved on to their next victim.

Victims of importer identity theft are often slapped with various lawsuits from the companies that own the intellectual property rights to the illegitimate goods (designer/brand name shoes, handbags, electronics, and pharmaceuticals, etc.) shipped under the importer’s name. Even if the lawsuits are not successful, the legal fees spent to resolve the litigation can be incredibly expensive. An importer’s time will also be taxed, as they will need to be involved in providing information to help U.S. Customs investigate the incident.

As an importer, you are probably asking yourself how this is possible. How easy can it be to steal your corporate identity? Believe it or not, it’s fairly easy to do. Much of an importer’s information is publicly available, some even for sale, through organizations that sell copies of vessel manifests‒which is perfectly legal. Obtaining a company’s federal ID number is easy enough, since it is often widely shared within an organization and with other companies. Company logos can often be copied from web pages or advertising material, making it easy for an imposter to create a company letter head, purchase order, etc. Disgruntled employees have also been known to share information for a price.

What can importers do to help protect their corporate identity? While you may not be able to stop an imposter from stealing your corporate identity, you can take steps to stop them in their tracks and prevent them from using your identity for multiple shipments.

File a manifest confidentiality request with U.S. Customs.
This procedure prevents vessel manifests containing your shipper information, products, marks and numbers, etc. from being copied and sold to the public.

Apply for an online ACE account and check it weekly.
An ACE account allows you to view:

  • entries filed in your company name
  • your shipments’ ports of entry
  • names of customs brokers who have filed entry on your behalf

If you see an unfamiliar port, entry number, or broker and can’t match this information with any of your entries, immediately contact the Port Director of the port where the unidentifiable entry was filed. The port will launch an investigation to track down the identity thief.

Register your trademark and apply for e-recordation with U.S. Customs.
Once you’ve completed these steps, Customs uses the information you provide on your trademark and branded products to try and stop the flow of illegitimate cargo into the United States. Although this is not a full proof way of preventing counterfeit goods from getting into the country, it decreases the odds of it happening.

Shred, shred, shred.
Anything that has identifying company information (stationery, invoices, packaging material, etc.) should be shredded. Dumpsters can be a major source of information for identity thieves.

Wipe electronics before recycling.
Make sure that you wipe smartphones, tablets, computers, copiers, and any other electronics clean before recycling. Identity thieves can easily retrieve company information from old files on discarded devices that haven’t been wiped.

Set up IT controls to secure your company’s network.
It’s important to implement IT controls such as,

  • requiring passwords to be changed every 90 days
  • securing your server in a locked room or by password
  • installing firewall and anti-virus software
  • having software that tracks user access and assigns accountability for transactions

Implementing these recommendations will put your company on track to protect its identity from the ever growing number of thieves out to make a quick buck on your company’s hard earned reputation.

Mohawk Global Trade Advisors offers on-site training for Protecting Your Corporate Identity. See Import Compliance Training for more information about this and other training sessions that we offer.

By Beverley A. Seif, Vice President & General Manager. Click here to read more about Beverley.

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It’s Raining… Inside My Container!?

Have you ever encountered this scenario? “My container arrived and the cargo inside is wet. There are no holes in the container and the interior stinks of mold and mildew. It also looks like it’s raining from the ceiling of the container. How did this happen?”

Container rain drips onto boxed cargo.

Container rain drips onto boxed cargo.

If your container was loaded in a tropical environment, where the air was warm and humid, then shipped to the United States, where temperatures were far cooler, your cargo may have experienced a phenomenon known as “cargo sweat” or “container rain.” Differences in temperature of as much as 50°C can occur at certain times of the year between tropical regions and the cooler, temperate climate of the U.S. As the outside temperature drops, the container’s contents cool, causing hygroscopic or moisture absorbing cargo and packing materials to release water vapor. The cool temperature inside the container prevents the water vapor from being absorbed into the air. This happens as the temperature of the container’s top and side panels falls below the dew point of the air trapped within the container, and like the dew running down a glass of iced tea on a hot summer’s day, condensation or “sweat” begins to form on the cargo and the inner ceiling and walls of the container. If there is enough moisture riding along with your cargo and packing materials, given the right heating and cooling cycles in the container, the vapor release could be so significant that it would seem to be “raining” from the ceiling.

"Sweat" appears on the inside of a shrink wrapped pallet.

“Sweat” has formed on the inside of a shrink wrapped pallet.

As warm, moist air is cooled below its dew point, water vapor in the air is transformed to condensation, sometimes in large enough amounts that it penetrates the same packing materials the vapor was released from. Water from the ceiling may fall directly on the cargo or drip down the walls, pool on the floor, and be reabsorbed by the cargo or packing materials. The resulting damage will be attributed to the inherent vice of the cargo or packing materials, and may not be covered by filing a cargo claim.

To avoid cargo sweat/container rain, there are several factors that must be considered. First, if you are loading cargo in warm and humid environments, you should understand the temperature fluctuations that your cargo may be subjected to for any given voyage. Next, you should understand the hygroscopic or moisture absorbing properties of your cargo and the material used to package it. Cargo with a high fibrous construction (such as cotton, apparel, jewelry boxes, etc.) will hold a certain amount of moisture at origin that can be released under the right cooling conditions. If your cargo and packaging are not hygroscopic, then you have little to worry about. Lastly, the type and amount of cardboard used can greatly contribute to moisture release.

If your factors are such that there is a high probability of sweat or rain, you may want to consider using desiccant in the container to wick moisture from the air before it becomes a problem for your cargo. For the best results, desiccant bags should be hung evenly throughout the container. Most desiccant manufacturers have guidelines for their products that will help you determine the type and number of units to deploy.

Ventilation is another fix; although ventilated containers are hard to come by and typically committed to specific bulk cargo that originates in the tropics, such as coffee, seeds, beans and nuts. If transporting retail goods, you will be better served by hanging desiccants.

Plastic barriers used to enclose inner packing can help prevent damage from cargo sweat or container rain, but must be used with caution since they may also trap moisture inside—particularly if they enclose hygroscopic cargo or packing materials. The best policy is to use a plastic barrier on the innermost confines of cargo that is not hygroscopic. An example of this would be electronics wrapped in plastic, supported in styrofoam, and contained within a carton. Since the electronics are not hygroscopic, the plastic barrier protects against water coming from the outside without fear of trapping vapor on the inside.

You may not be able to prevent cargo sweat or container rain, but by paying attention to the details of your shipment, you may be able to reduce the likelihood of their occurrence.

MGTA helps companies identify, manage, and mitigate risk in their supply chain. Click here to learn more about our risk management services.

By Rich Roche, Vice President. Click here to read more about Rich.

© 2013 Mohawk Global Trade Advisors

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Not All Risks Are Created Equal: Why You Need a Risk Management Plan Now More Than Ever.

In 2012, an explosion at a resin plant in Germany shut down production of nearly half the world’s supply of a critical polymer used in automotive fuel and brake lines, sending auto manufacturers scrambling to identify and qualify alternate sources (1). In 2011, a tsunami and nuclear disaster in Japan forced the shutdown of nearly 40% of the world’s 12-inch semiconductor wafer production (2).

A few months later, massive flooding in Thailand disrupted production of a critical high-tech component supplier, forcing Honda Motor Company to cut vehicle production rates by 50% for several weeks (3). Labor unrest at a major electronics supplier in China, piracy in the Indian Ocean, freight and fuel cost volatility–it hasn’t been easy managing global supply chains recently. Although the practice of supply chain risk management has been around for many years, events and headlines of the past 18 months have moved discussion of supplier risk to the top of the agenda in many companies.

In addition to delivery disruptions, these events can carry devastating financial implications for suppliers and buyers. Munich Re, one of the largest global re-insurance companies, reported that 2011 was the highest ever loss year on record for commercial insurers (4). These losses force insurers to raise premiums and reduce coverage for shippers that are already operating under financial strains associated with the global economic slowdown. As a result, more and more suppliers–especially smaller suppliers–are forced to renegotiate contracts with customers or go out of business altogether. Supplier financial risk and continuity of supply have become major concerns for many companies.

So, what should companies with global supplier networks do to manage risk?

1) Define Risk Criteria

Supply chain risk can originate from a range of sources, including demand, product, transportation, compliance, and supplier risks. Companies need to carefully evaluate their supply chains to determine what factors can create risk in these categories and define what constitutes acceptable and unacceptable levels of risk for each. Not all risks are created equal. So, the risk definitions should be closely tied to the company’s strategic business objectives. For example, if business objectives depend on quick fulfillment of customer orders, then risk factors that can create stock-outs may be deemed more critical than cost risks related to inventory levels.

2) Identify All Risks

For each supply network, it’s important to identify all possible risks that could impact the operation, not just the obvious ones. Oftentimes, it can be an unexpected issue with a second or third tier supplier that creates a supply disruption. Had the auto industry recognized how collectively dependent their car makers were on one supplier in Germany, they likely would have developed additional supplier capacity to mitigate the risk of a production stoppage. Flow charts and process maps can be useful tools for visualizing the physical flow of materials and goods through the network.

3) Evaluate and Prioritize Risks

The next step is to assess the risks and classify them in an organized manner, usually in terms of likelihood of occurrence and impact on operations. Once the risk criteria are prioritized, they should be used commonly across the entire enterprise. The risk classification system does not need to be complicated. Experience has shown that a simple system of risk classification (e.g., critical, high, medium, low) is preferable, in that it is easier to communicate and will be used more consistently across the organization. Once the various risks are classified, the focus should shift to identifying root cause factors for the most critical risks.

4) Develop Risk Management Plans

A risk management plan is simply a documented plan that describes a particular risk or risk category, and provides alternatives and steps to be taken to eliminate or mitigate that risk. Detailed risk management plans should be developed for the most critical risks identified in the prioritization process. For supply chain risks, the plans should include elements such as alternate suppliers and transportation modes, contact information, internal and external notification requirements, inventory classification and control measures, and other tasks needed to ensure a smooth transition and continuity of supply. Best-practice companies use cross-functional risk assessment teams to develop plans for the most critical risk scenarios. Failure modes and effects analysis can be used for assessing the potential effectiveness of such plans before they are required to be put into action. This systematic process identifies potential failures in a process design and the countermeasures that could be applied to reduce or eliminate the effects of such failures. Whichever methods the organization decides to use, the plans need to be fully documented so that various functions in the company can be briefed on their roles should the plans be put into action.

5) Exercise & Maintain Plans

As with any form of contingency or back-up plan, risk management plans are only useful if they can be successfully executed. If a key component of plan is to activate an alternate supply source for a critical component or material, it makes sense to occasionally place orders with the alternate source to test the supplier’s ability to deliver to specification and on schedule. An alternate supplier who is never used may well turn out to be no supplier at all, just at a time when they are most needed. All risk management plans should be reviewed and refreshed at least annually by the cross-functional team, to ensure that the plans and assumptions are still viable. Forward-looking companies that rely on international sourcing networks are wise to take a proactive approach to supply chain risk management in the near term.

MGTA can help your company develop or improve a risk management plan. Click here to learn more about our risk management services.

Footnotes

(1) Nathan Bomey, “Auto Supply Chain Seeks Other Sources of Chemical,” Detroit Free Press, April 24, 2012: A14.
(2) Rick Becks, “Risky Business: Re-thinking Supply Chain Risk and Resiliency,” Supply Chain Brain, February 24, 2012.
(3) Mike Ramsey, “Honda to Restore Some North American Production,” The Wall Street Journal, November 8, 2011.
(4) Rick Becks, “Risky Business,” Feb 24, 2012.

© 2012 Mohawk Global Trade Advisors

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Don’t Overlook Reasonable Care

One common misconception among U.S. importers is that they don’t have to worry about what’s on their commercial invoice and other import documentation. These importers will often neglect to provide their Customs broker with a truly complete product description or accurate country of origin because they don’t think they have to sweat the details. What they may not realize is that these types of requirements fall under the umbrella of what U.S. Customs & Border Protection (CBP) refers to as “reasonable care.” Importers who do not attend to these crucial requirements risk delays in release of their goods, audits, and penalties.

Defining reasonable care

CBP expects all importers to exercise some form of caution (i.e. reasonable care) when dealing with [1]

  • import documentation
  • country of origin verification, marking, and labeling
  • tariff classification, valuation, and duty rates
  • quantity
  • free trade agreements
  • other government agencies
  • recordkeeping

Although this is by no means an exhaustive list, importers must be careful with all details relating to these areas, as well as have written procedures to document their approach. In other words, as an importer, you should be able to prove to Customs that you provided and obtained the right information to meet these regulatory standards.

Is there a right way to manage my reasonable care?

CBP allows you flexibility in how you manage your reasonable care responsibilities. You can manage them yourself, use an expert (a licensed Customs broker, attorney, or accountant), or a combination of the two.

If you decide to use an expert, it is important to choose wisely. CBP expects you to qualify your expert by asking if their firm is a licensed Customs broker or, in the case of an attorney or accountant, if they have specialized knowledge or expertise in CBP matters. When in doubt, avoid taking advice from unregulated or unlicensed “experts,” as it will not serve in your defense during a CBP audit.

Once you’ve qualified your expert, it is crucial to provide him or her with complete and accurate information about the import transaction. Falling short of this requirement will lead CBP to view your company as lacking reasonable care.

What steps can I take?

Prior to import

  • Familiarize yourself with U.S. import requirements by reading informed compliance publications like, What Every Member of the Trade Community Should Know About: Reasonable Care [2].
  • Determine if there are any other government requirements for your imported products, such as an FDA Prior Notice for food products or additional labeling requirements for wearing apparel.
  • Bookmark the link to the online Harmonized Tariff Schedule for quick classification reference [3].
  • Consult with a licensed or certified expert, such as a Customs broker, attorney, or accountant.
  • Search CROSS, CBP’s online ruling database, to see if Customs has previously ruled on a product similar to yours [4]. Use this ruling as a guide for classifying, valuing, and marking your goods.
  • If after consulting with an expert and reviewing CROSS you are still in doubt of your product’s correct classification, origin, value, etc., seek a binding ruling from CBP. The beauty of a binding ruling is that it provides CBP and the importer with a definitive answer on these aspects of the product.
  • Document your processes for classification, origin verification, valuation, marking, etc. and provide employees with step-by-step instructions to achieve compliance. Keep procedures simple and easy to follow and them with your vendor and Customs broker.
  • Create a tariff database and share it with your broker to cut down on entry errors. Periodically review the database and provide your broker with any updates.
  • Issue purchase order instructions to your vendor that match your invoice requirements.

After import

  • Attend trade seminars and read newsletters to stay informed of changing requirements.
  • Review your commercial invoice or proforma invoice to make sure all requirements are met [5].
  • Verify that entries prepared by your broker are correct. If you find an error during a post entry review, correct it and work with your vendor and broker to prevent it from happening again.
  • Establish a recordkeeping program. Verify which documents should be kept, how long they should be retained, and how they should be stored.

Keeping up with your reasonable care responsibilities is not easy but with continued effort you will be able to show CBP that you’ve done your homework.

MGTA’s import audit service can help you to uncover gaps in your import procedures. Click here to learn more about our import audit services. Our import compliance programs can assist you in developing, improving, and enhancing your reasonable care policies and procedures. Click here to learn more about our import compliance programs.

Footnotes

[1] per U.S. Code Title 19, Section 1484(a)(1).
[2] See the list of Informed Compliance Publications, including Reasonable Care (A Checklist for Compliance), on U.S. Customs & Border Protection’s website, www.cbp.gov.
[3] View the Harmonized Tariff Schedule at www.usitc.gov/tata/hts/.
[4] See rulings.cbp.gov.
[5] For a complete list of requirements see 19 CFR 141.86-141.89 and 142.6.

By Jim Trubits, Vice President. Click here to read more about Jim.

©2012 Mohawk Global Trade Advisors

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7 Ways to Harness the Power of Foreign Trade Zones

More and more U.S. companies are using Foreign Trade Zones (FTZ) to better manage their global supply chain costs. Here are seven advantages that showcase FTZ as a competitive alternative to a domestic distribution center.

1. Duty Deferral. Duties are only paid when imported merchandise enters U.S. Customs territory. Goods may be held in an FTZ indefinitely and without duty payment, allowing for improved cash flow.

2. Duty Avoidance. There are no duties on FTZ merchandise that is destroyed, exported, or transferred to another zone. This eliminates the need to manage costly and time consuming duty drawback programs.

3. Duty Inversion. The user may elect to pay the duty rate applicable to the component materials or the finished goods produced from raw materials, depending on which is lower.

4. Inventory Tax Incentives. Companies that hold goods in an FTZ are exempt from inventory taxes. Also, certain tangible personal property is generally exempt from state and local ad valorem taxes.

5. No Duty on Value Added. There are no duties on labor, overhead, or profit to operations performed within an FTZ.

6. Save with One Weekly Entry. Customs allows for weekly entry processing, which benefits importers because they pay Merchandise Processing Fees capped at $485 per week, versus paying on a per shipment basis.

7. Enhanced Security. By using an FTZ, the internal controls requirements of the  Sarbanes-Oxley Act (Section 404) are met. Participants in the Customs-Trade Partnership Against Terrorism (C-TPAT) program are eligible for additional Customs benefits.

By taking advantage of Foreign Trade Zones (FTZ), U.S. companies can save on duty, improve their market competitiveness, and reap the rewards of a more secure supply chain.

By Jim Trubits, Vice President. Click here to learn more about Jim.

MGTA can make FTZ a worry-free process for your company by helping you with Foreign Trade Zone application prep, employee training, activation, and compliance reviews. Click here to learn more about our FTZ services.

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How to Survive an Export End-Use Check

Finding out that the government wants to do an end-use check on your export is a lot like finding out that you’re being audited by the IRS. Anxiety begins to take over. You may ask yourself, what did I do wrong?

The reality of the situation is that you may have been selected at random, so don’t panic. Through the U.S. Bureau of Industry and Security—the agency that performs these checks—the government is attempting to verify that your exported goods are not being used by the wrong people or for the wrong reasons. Ultimately, end use checks are a proactive way to protect national security. They help the government inhibit the proliferation of weapons of mass destruction, limit support of terrorism, and identify unauthorized end users.

Behind the scenes

Although the government performs two types of end-use checks, one pre-license and one post-shipment, the majority of checks are post-shipment.

Fifty percent of post-shipment end-use checks are conducted by Export Control Officers in U.S. embassies and consulates in Moscow, Beijing, Hong Kong, New Delhi, Singapore, and Abu Dhabi [1]. The other fifty percent are conducted by U.S. investigative officials.

During each check, the exporter will be asked for all documentation related to a particular shipment. The Export Control Officer will then take steps to verify that the item is being used as intended by the end-user, at the stated location, as noted in the shipment’s documents. This may involve physically visiting the foreign consignee’s operations to verify location and correct use. If the officer discovers that the item is not in the location stated on the documents or is being used improperly, the check’s results will be considered “unfavorable” and the exporter’s future shipping activities will be monitored more closely by government officials or, in some instances, completely prohibited.

Avoiding unfavorable results

Loss of export privileges is a death sentence for U.S. companies that sell their products overseas. So how do you avoid “unfavorable” end-use check results? The answer lies in how well you complete your screening, know your customer, keep your records, and review your documentation.

Complete your screening
This one is simple. Don’t attempt to ship your exports without knowing your screening requirements and completing them in full. If you export EAR99 goods, you are not exempt from these requirements.

Know your customer
Let’s assume you’ve completed all of your screening requirements. Your foreign consignee didn’t appear on any of the prohibited end-user lists. However, this doesn’t mean that you truly know your customer and your customer’s operations. The best way to do this is to actually visit your customer. So, plan a visit to the customer’s facility. See with your own eyes what kind of operation your foreign customer is running.

Keep your records
Federal regulations require exporters to keep all transaction records for five years [2]. Some of the documents that may be requested during a government end-use check include:

  • commercial invoice
  • purchase order
  • international bill of lading
  • copy of the EEI (Electronic Export Information) filing
  • screening documentation, if available
  • Shipper’s Letter of Instruction (SLI) and other supporting documentation
  • technical specifications

Review your documentation
It is important to review any export documentation prepared by you and on your behalf. Your freight forwarder can help you with this process but make sure that you take time to carefully inspect the documents yourself. As you review each one, look for incomplete and inaccurate information. If the same information appears on multiple documents (such as a serial number), make sure the data matches on each one. If your goods require a destination control statement, make sure it appears on all the required documents [3].

Does the commercial invoice…

  • identify all parties to the transaction (ship to, sold to, price payable to, etc.)?
  • include a commodity description sufficient enough to correspond to the Schedule B number used?

If a forwarder filed your EEI, did you…

  • receive a copy? If not, did you request a copy from the forwarder? Does your compliance program include a procedure for obtaining a copy of every EEI from your forwarder?
  • provide the forwarder with a Shipper’s Letter of Instruction (SLI) to help prevent AES filing errors?
  • independently review the EEI for accuracy?

The Bureau of Industry and Security expects every exporter to know their compliance responsibilities and abide by them. It is up to you, the exporter, to determine how that will happen. Protect your company from an unfavorable end-use check by completing your screening, knowing your customer, keeping your records, and reviewing your documentation.

Need guidance for an imminent end-use check?

MGTA can help. Click here to learn more about our export audit services.

Footnotes

[1] Statistic taken from an online transcript of a presentation given by Jose Rodriguez on July 20, 2011 in Washington D.C. during the 2011 Update Conference on Export Controls and Policy.

[2] See 15 CFR 762.2.

[3] See 15 CFR 732.5, 758.1, 758.6, and 762.

By Jim Trubits, Vice President. Click here to read more about Jim.

©2011 Mohawk Global Trade Advisors

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My Goods Are EAR99. Why Do I Have to Screen?

One afternoon I get a phone call from a frantic export client who is desperate to meet with me. He’s just been informed by the Bureau of Industry and Security (BIS) that he’s being penalized $250,000 for failing to do proper export screening.

He tells me that the Bureau has made a huge mistake. His goods are harmless commodities with no specific ECCN, so they are classified as EAR99.

Since his goods don’t need a license, he was under the impression that he didn’t have do any screening.

Not exactly, I tell him.

***

Additional Screening

It is in an exporter’s best interest to document the process for each of the following screens as well as keep the records for each completed screen for five years.

Denied Party Screening. This screen involves checking a number of lists to ensure that an export or reexport is not being shipped to a prohibited end-user. Exporters can invest in software to perform this screen or use the Lists of Parties of Concern on the Bureau of Industry and Security’s website.

The first part of the screen involves checking the Denied Persons List and Debarred List. It is illegal for an exporter to conduct a sale with any individual or entity on these two lists, regardless of whether the end-user is located in the U.S or overseas.

Next, exporters should check all parties against the Unverified List, Entity List, Specially Designated Nationals List, and Nonproliferation Sanctions List. Export transactions involving certain parties on these lists may be completely prohibited or only allowed with a license.

Red Flags Check. This is a check for any abnormal circumstances in an export transaction that cause a reasonable suspicion of a potential violation of the Export Administration Regulations (EAR). The Bureau of Industry and Security refers to such circumstances as “red flags.” Examples of red flags include the customer insisting on paying with cash for an expensive item when normally the terms of sale would call for financing OR the products don’t fit the buyer’s line of business (e.g. an order of sophisticated computers for a small bakery).

Sanctioned or Embargoed Countries Check. Exporters must verify that the destination is not a sanctioned country. The U.S. restricts shipping to Sudan, Syria, Cuba, North Korea, and Iran. Exporters should carefully review embargo provisions for license requirements.

End-Use Check. For goods subject to 15 CFR 744, exporters must check for prohibited end-uses, such as chemical, biological, and nuclear applications; as well as those used to transport them (e.g. a vessel, aircraft, or rocket system).

If any of the above screens results in a prohibition, the exporter must request a license from the Bureau of Industry and Security or ensure the export is eligible for a license exception.

The Real Cost of Noncompliance

It’s important that U.S. exporters understand and comply with all screening requirements to avoid losing export privileges and hundreds of thousands of dollars in penalties [2]. In 2010, the Bureau of Industry and Security completed 708 end-use checks, resulting in over $12.2 million in criminal fines and $25.4 million in civil penalties [3].

MGTA’s export audit service can help you to uncover gaps in your procedures that could lead to the scenario described at the beginning of this piece. Click here to learn more about our export audit service. Our export compliance programs can assist you in developing, improving, and enhancing these procedures too. Click here to learn more about our export compliance programs.

By Jim Trubits, Vice President. Click here to read more about Jim.

Footnotes

[1] See 15 CFR 736.2.

[2] See 15 CFR 766.

[3] Amounts for fines taken from page 9 of the Bureau of Industry and Security’s “Annual Report to Congress for Fiscal Year 2010.”

©2011 Mohawk Global Trade Advisors

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Case Study: Better Transportation Management & Customs Compliance

The client is a leading U.S. garment importer with distribution facilities in Oklahoma and California. The company currently imports from over 14 countries.

Client Challenge
Mohawk Global Trade Advisors (MGTA) was introduced to the garment importer as a supply chain consultant and was tasked with uncovering gaps in their supply chain, evaluating their logistics providers, auditing their Customs compliance programs, and identifying cost savings opportunities. At the time, the garment importer worked with several freight forwarders and had a long standing relationship with a Customs broker in Texas.

After a six month on-site evaluation at the importer’s corporate headquarters in New York and their distribution facility in Oklahoma, MGTA presented its findings, identifying several deficient areas in the company’s supply chain. As a result, the importer signed a one year consulting agreement with MGTA.

Our Solutions
The MGTA team presented the importer with solutions for transportation management, Customs compliance, and Foreign Trade Zone implementation.

Transportation Management – Import Ocean Freight
MGTA found that the importer was paying above market for import ocean freight service into Los Angeles and Dallas. In response, MGTA administered an ocean freight Request for Quotation (RFQ). The results of the RFQ suggested that the importer should enter into service agreements directly with ocean carriers. This would provide the importer with fixed pricing and capacity for a twelve month period, as well as additional“free time” at the port or rail yard. The results of the RFQ also suggested that the importer should select two forwarders, based on service coverage and pricing, to manage all bookings and customer service in Asia and the U.S. Once the carriers and forwarders were in place, the importer was able to take advantage of the “spot” ocean freight market to further drive down cost. The RFQ generated an annual savings of over $500,000 on 1,500 forty-foot containers.

MGTA has saved the importer over $3.5 million in import ocean freight, demurrage, and per diem charges. Today, the importer ships over 3,000 forty-foot containers a year, with MGTA managing and negotiating new carrier and forwarder contracts every year. MGTA also reviews and approves all ocean freight invoices before sending them to the importer for payment. This saves the importer approximately $30–50,000 in over-charges every year.

Transportation Management – Ocean Drayage RFQ
MGTA found that the importer had been relying on one main drayage provider without renegotiating rate levels based on the company’s substantial growth. MGTA administered a local drayage RFQ in response, resulting in additional service providers and nearly doubling the driver capacity from 145 to 245. The savings from the RFQ was over $100,000. The drayage project also established a network of transloading and warehousing services on the West Coast for delivery to large customers like Wal-Mart and Target. To this day, MGTA continues to administer an annual drayage RFQ on the importer’s behalf. The total savings to date is $750,000.

Customs Compliance
MGTA found that the importer’s Customs compliance manual and program had not been updated in years. Working with the importer’s in-house broker, MGTA updated the manual that is used today to ensure that best practices are implemented and followed. MGTA currently performs an annual audit of the importer’s Customs compliance program, product classifications, and record keeping. MGTA also introduced the importer to ACE, assisted in establishing an ACE portal account, and helped the company apply for Periodic Monthly Statements. Due to the nature of the importer’s product, there were large outlays for duties and taxes. Periodic Monthly Statements helped to optimize cash flow and administer payments to Customs.

Foreign Trade Zone Implementation
MGTA identified the opportunity to use a Foreign Trade Zone (FTZ) in Oklahoma to defer duty payments, as well as reduce import taxes and Customs clearance fees. MGTA assisted the importer in applying for FTZ operating authority and selecting FTZ inventory management software. The FTZ in Oklahoma has been up and running for the past two years; and the company is now working to expand the program to their California facility. The FTZ saves the importer $250,000 a year.

© 2011 Mohawk Global Trade Advisors

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It’s All in the Details: AES Filing and State Department Licenses

AES filings are critical in that they not only convey to the government what has been exported from the country but also who exported the goods, where they were exported, the value of those goods, and who received the goods overseas. All of these details are critical pieces of information that by law, must be filed accurately.

AES filings are even more critical for ITAR goods. In addition to the previously mentioned criteria, a filing for ITAR goods must include:

  • license type
  • license number or exemption used
  • ITAR registration number
  • Significant Military Equipment (SME) indicator
  • U.S. Munitions List (USML) category code

For exporters who rely on a freight forwarder to file on their behalf, it is vital to confirm that the forwarder understands where to find the information required for the filing. Therefore, the exporter must supply the forwarder with a Shipper’s Letter of Instruction (SLI) and a copy—or the original, if necessary—of the ITAR license. In the event that some of these items are incomplete or not provided, the exporter should instruct the forwarder to not proceed with the shipment until all items are provided.

As someone who deals with these filings on a day-to-day basis, I know of several instances in which AES filings were processed incorrectly (missing license information, for example) and worse yet, cases where it was not filed at all. Yes—it happens. Exporters need to be aware of these possibilities and should have procedures in place for double-checking filings made on their behalf. They need to be certain to receive a copy of each filing to verify accuracy and successful submission by the forwarder. By law, the forwarder must provide the exporter with this information if requested.

As the U.S. Principle Party in Interest (USPPI), the exporter is also responsible for verifying that the information filed is correct. After all, the exporter is the first one that the government goes to when an errant filing is discovered. Eventually they will get around to asking the forwarder why it was filed incorrectly and possibly levy a fine to them. Regardless of the forwarder possibly being at fault, the exporter will be responsible for paying a penalty.

Exporters should also be mindful of the decrementation of the ITAR license. This means keeping track of the quantity and value of licensable goods as they are shipped. Each time a licensable good is shipped, it depletes or decrements the quantity and dollar value on the ITAR license. Once the quantity listed on the license is reached (the value is flexible to +/-10%), the license is exhausted. Any remaining items require a new ITAR license before they can be legally exported from the U.S.

ITAR licenses and AES filings should be dealt with the utmost care. Exporters need to work with their forwarder to ensure that both parties understand what information is required, where that information can be found, and what should be done in the event of incomplete or missing information. It is also important for the exporter to obtain copies of their filings and to double-check the forwarder’s work. In today’s export world with the increasing fines, penalties, and government oversight, one can never be too careful.

By Michael Frail, Senior Advisor.

Mohawk Global Trade Advisors helps U.S. companies adapt, enhance, and improve their export compliance programs through AES, ITAR, and export licensing audits, program development, and on-site staff training. Contact us to learn more about these services or to schedule an initial consultation

©2011 Mohawk Global Trade Advisors www.mohawkglobalta.com

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Potential Pitfalls for Exporters Using Ex Works

Many exporters like to sell under the Incoterms rule Ex Works (EXW) because it seems to require the least obligation or responsibility for the seller. Taken at face value, Ex Works may appear to be the best, no-hassle choice for exporters that don’t want the added burden of arranging transportation and ensuring export compliance. However, appearances can be deceiving. Exporters should use caution when selling under Ex Works, due to these potential pitfalls.

Loading
Ex Works assigns the buyer with the risk for loss and damage to the goods during loading. Though the seller normally loads the merchandise as common procedure, under Ex Works, it is the buyer who’s at risk if the goods are damaged during loading. At first, this scenario may seem preferable from the seller’s standpoint. In reality, it leaves the sales relationship very vulnerable. If goods are damaged during loading, it could cause serious conflict between seller and buyer, possibly jeopardizing the sales relationship.

Export Controls
Under Ex Works, the buyer is responsible for arranging export formalities and clearance. Again, one would assume this to be preferable for the seller/exporter, who perhaps sees these obligations as too much of a hassle. However, most exporters don’t realize the potential compliance issues that this arrangement creates.

Let’s start with the most obvious issue: if the buyer is overseas, one can assume that this person is not familiar with the U.S. Export Administration Regulations (EAR). Therefore, it’s going to be very difficult for that foreign buyer to understand how to comply with U.S. export laws and regulations. This increases the possibility for incorrect or insufficient export filing. Why should the exporter be concerned about this? As the U.S. Principal Party of Interest (USPPI), the exporter is still responsible for the shipment’s compliance, regardless of whether a foreign agent/buyer arranges the export formalities (see 15 CFR 758.3). Failing to obtain the proper export license, for example, could mean stiff penalties or loss of export privileges for the exporter.

Another disadvantage to Ex Works is that it increases the chances of the exporter being audited or penalized for violations. Under Ex Works, the foreign buyer arranges transportation of the goods. In the U.S., when a foreign entity controls the transportation of exported goods, the government considers the shipment a routed export transaction.

Due to the potential security risks involved, all routed export transactions are carefully scrutinized by the Bureau of Industry and Security and U.S. Customs and Border Protection. While exporters are required by law to maintain full compliance with U.S. laws and regulations for all shipments, routed export transactions must be all the more compliant because they are so closely examined by the government. Thus, in the case of routed transactions, Ex Works actually adds to the exporter’s/U.S. seller’s compliance burdens.

Payment
If selling using a letter of credit, documentary sight, or time draft, exporters need to maintain control of the international bill of lading in order to get paid by the bank. Unfortunately, under Ex Works, the exporter has no say in how these documents are prepared. If a bill of lading has a mistake, the exporter has no recourse for obtaining corrections, as the forwarder who prepared the document is employed by the buyer. The buyer’s forwarder is under no obligation to make corrections on the seller’s behalf. Without a correct bill of lading to present to the bank, the exporter will be charged discrepancy fees, or worse, not be paid at all.

Better alternative to Ex Works: CPT

For the compliance-savvy exporter, Carriage Paid To (CPT) is a better alternative to Ex Works. The advantages are many.

1) The seller/exporter controls the transportation all the way to the named destination point, with risk for loss passing to the buyer when the goods are handed over to the first carrier in the U.S. In many cases this happens at the seller’s warehouse, as the goods are loaded on the truck.

2) The goods are loaded by the seller, at the seller’s risk, removing this burden from the buyer.

3) The seller or exporter controls the export formalities and export compliance—such as filing the Electronic Export Information (EEI)—thereby minimizing the potential for penalties and sanctions.

4) The shipment is no longer considered a routed export transaction, eliminating the additional compliance burdens that such a designation would require.

5) If selling under a letter of credit, sight, or time draft, the exporter will control international transport, and thus, the documentation needed to receive payment from the bank.

6) An added benefit of controlling the international freight under CPT is that the exporter can choose the freight forwarder. Working with a preferred freight forwarder gives the exporter the advantage of additional expertise regarding export compliance, best routing, and required export documentation. This is extremely helpful for smaller and less experienced exporters but can also be beneficial for larger exporters.

Exporters should consider the benefits of selling using CPT, which actually reduces risk and allows for peace of mind on export compliance.

Want to know about strategies for using Incoterms for your export sales? Click here to learn more about MGTA’s on-site Incoterms training.

By Jim Trubits, Vice President. Click here to read more about Jim.

©2011 Mohawk Global Trade Advisors

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