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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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Get a Year’s Worth of AES Filing Records for Free

Business man at desk in office

U.S. exporters can request 12 months of AES filing records from the Census Bureau for free every year.

Submitting the request is easy and recommended for companies that rely on a freight forwarder to file their Electronic Export Information (EEI) in AES.

By obtaining these records directly from Census, exporters have the advantage of seeing exactly what Census sees, including inaccuracies.

Our guide will walk you through it step-by-step. Download it here..

Interested in learning more about taking control of your AES compliance? Consider attending one of our AES Best Practices seminars this May in Upstate New York. Click the dates below for more details.

AES Best Practices

5/12 Albany, NY »

5/13 Syracuse, NY »

5/14 Rochester, NY »

5/19 Buffalo, NY »

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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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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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