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How Important is it to Screen Your Suppliers? Ask ZTE.

A smartphone being used as a GPS on a car dashboard.

I recently took an Uber in New York City and noticed that the drivers tend to have their smartphones mounted on their dash to allow them to use city maps. What humored me was seeing that my driver didn’t have the most common iPhone or Samsung Galaxy device, instead he had a Zhongxing Telecommunications Equipment (ZTE) smartphone. I chuckled at the irony and thought, “well that’s the last ZTE phone he’ll ever own,” at least for the next seven years.

ZTE is the fourth-largest smartphone vendor in the U.S. and sells to major mobile carriers such as AT&T, T-Mobile, and Sprint [1]. As the second largest telecommunication provider in China, they are a manufacturer and integrator of networking apparatuses and handheld devices [2]. The most common ZTE models include the Tempo X, Prestige 2, and Majesty Pro.

Not All Press is Good Press

Throughout the last couple of years, ZTE has made U.S. trade compliance news multiple times, but on April 20, 2018 they made headlines in bold font. ZTE had the unfortunate honor of achieving the highest export monetary penalty issued by the Bureau of Industry and Security (BIS) at $1.9 billion. This penalty was originally issued in March 2017 but ZTE was granted monetary deferrals and delays of suspensions, therefore April 20, 2018 was the official activation date.

Along with this hefty financial penalty, ZTE is no longer able to receive products from the United States. The impact of this on ZTE has been so substantial to its bottom line that they have had to halt operations [3].

So how does this apply to the Uber driver with his ZTE smartphone? Now that ZTE is frozen from receiving exports from the U.S.—or on behalf of the U.S.—his friendly retailer can no longer purchase from ZTE.

Why? Multiple exports occur in order to buy handheld devices from ZTE.

Export one: The retailer needs to request making a purchase, likely by email.

Export two: Then they will need to send a purchase order.

Export three: Finally, they must pay for the devices to be shipped from China, or a third party.

In between these transactions, there may have been additional communication by email or phone, which are all exports and are therefore banned.

While the Federal Communications Commission (FCC) grapples with the conflict between consumer interest and regulatory compliance, ZTE device owners have to wonder, will they be able to receive operating system downloads [4]?

Why ZTE Was Issued This Penalty

ZTE received components and equipment from the U.S. that were then transshipped to Iran and North Korea. In some cases, these products were not transformed but were shipped as is, and in other cases, they were put into telecommunications equipment to modernize the capabilities of the respective country—i.e. Iran and North Korea. This was a direct violation of U.S. sanctions.

Export compliance consultants and practitioners everywhere have been screaming, “screen your suppliers,” and now ZTE has given us a tangible example of why it is so crucial to practice export compliance within the supply chain.

The Nature of Their Deceit

It started back around January 2010, when ZTE began bidding on two Iranian projects where they would install cellular and landline network infrastructure. Through 2016 those contracts resulted in the illegal transfer of approximately $32,000,000 of U.S.-origin items, which were installed and used in Iran. During this time, it was also discovered that ZTE made 283 shipments of U.S. products to North Korea, these shipments included routers, microprocessors, servers, etc.

ZTE’s senior management knew they were in the wrong. In the summer of 2012, they required each employee involved with sales to Iran to sign nondisclosure agreements in which the employees agreed to keep all information related to the company’s exports to Iran confidential [5]. This resulted in employees providing false end user details to U.S. exporters and manufacturers.

During the two settlements in 2016 and 2017, ZTE had assured that all employees would be trained on compliance with U.S. export regulations and process updates. They also advised that internal audits would be conducted, and most importantly, top executives directly involved in the sales to North Korean and Iran would be disciplined for their actions, including the possibility of dismissal and at minimum a loss of bonuses. Earlier this year, the Department of Commerce (DOC) followed up with ZTE on the 2016 settlement requirements (internal audits, discipline of senior managers, implementation of compliance processes in line with U.S. regulations), as ZTE was allowed to continue business with the United States—a case of the U.S. attempting to maintain a flow of commerce—with the assumption that they would fulfill these requirements. However, ZTE failed to comply and falsely stated that all requirements were met, which has led to their current situation [6].

The Impact on U.S. Exporters

Not only is the ZTE ruling a hindrance to those who sell to or purchase from ZTE, but it is also impacting legal, legitimate, and profitable business for U.S. suppliers. As a manufacturer, ZTE has been involved in the modernization of telecommunication networks in many countries. For the U.S. exporter, sometimes ZTE is their customer and at other times, they are simply the middle man—the integrator, installer or operator. The ban on exports not only forbids new sales to ZTE, it also halts any pre-existing contracts, if ZTE is listed or known as an intermediary party on those contracts, mainly to entities that are based around Asia Pacific and the Middle East.

U.S. corporations must consider the impact this will have on ongoing services and maintenance requirements of existing telecommunications systems involving ZTE. If ZTE is the operator and has sold maintenance services to end users, ZTE is no longer able to purchase parts from the U.S.—directly or indirectly—or receive technical information to conduct that service or maintenance.

The Moral of the Story

We all understand that diverting goods to Iran or North Korea is against U.S. sanctions, but why was there such a hefty penalty? Well, ZTE had its own Hollywood-style-drama of lies and deceit which included making false statements to U.S. and Chinese attorneys and investigators, falsifying customs documentation, and mixing U.S. product with Chinese origin product in attempt to hide it.

What all of this tells us is just how important it is to ensure your vendors are compliant with U.S. export and import regulations. It also tells us to avoid single-sourcing providers, integrators, installers, etc. to help avoid major impacts to your business, if a situation like this arises.

A Chance for a Third Strike

After the April 20, 2018 penalty activation, ZTE did file documentation with the DOC again, stating they will train and audit their staff and processes, as well as discipline their senior team. The DOC has stated they are willing to see evidence.

Will ZTE have an opportunity for a third strike? With U.S. component—or chip—manufacturers suffering from a significant drop in export sales due to the inability to ship to ZTE, and the realization of possibly losing 75,000 jobs in Beijing China, we can expect ZTE to stay a topic of trade news for months to come. Also, due to the ongoing fear of a trade war with China, the BIS’s decision may be overturned by the Executive Branch.

President Trump has offered his assistance in resolving the issues between ZTE and the U.S. government [7]. How that help will be facilitated is unclear but does assure that ZTE will be a household name throughout 2018, with constant media attention. It is imperative for U.S. importers and exporter to stay current on trade news to assure compliance, as well as understand how these issues may impact their organization and bottom line.

MGTA’s import and export audit services can help you to uncover gaps in your compliance procedures. Contact Mohawk Global Trade Advisors to discuss how we can help you develop or improve your current import and export compliance programs.


Footnotes:

[1] “Company Overview,” ZTE USA. Retrieved on May 17, 2018 from <https://www.zteusa.com/about-us/>.

[2] Meyer, David, “One of the World’s Biggest Phone Firms Is Stopping Operations Because of a Ban on Buying U.S. Parts,” Fortune, May 10, 2018. Retrieved on May 17, 2018 from <http://fortune.com/2018/05/10/zte-components-china-technology-denial-order/>.

[3] Jiang, Sijia, “China’s ZTE Says Main Business Operations Cease Due to U.S. Ban,” Reuters, May 9, 2018. Retrieved on May 17, 2018 from <https://www.reuters.com/article/us-zte-ban/chinas-zte-says-main-business-operations-cease-due-to-u-s-ban-idUSKBN1IA1XF>.

[4] Dave, Paresh, & Shepardson, David, “China’s ZTE May Lose Android License as U.S. Market Woes Build,” Reuters, April 17, 2018. Retrieved on May 17, 2018 from <https://www.reuters.com/article/us-usa-fcc-china/chinas-zte-may-lose-android-license-as-u-s-market-woes-build-idUSKBN1HO2BD>.

[5] “ZTE Corporation Agrees to Plead Guilty and Pay over $430.4 Million for Violating U.S. Sanctions by Sending U.S.-Origin Items to Iran,” The United States Department of Justice, March 7, 2017. Retrieved on May 17, 2018 from <https://www.justice.gov/opa/pr/zte-corporation-agrees-plead-guilty-and-pay-over-4304-million-violating-us-sanctions-sending>.

[6] “Secretary Ross Announces Activation of ZTE Denial Order in Response to Repeated False Statements to the U.S. Government,” Department of Commerce, April 16, 2018. Retrieved on May 17, 2018 from <https://www.commerce.gov/news/press-releases/2018/04/secretary-ross-announces-activation-zte-denial-order-response-repeated>.

[7] Trump, Donald J., Twitter, May 13, 2018. Retrieved on May 17, 2018 from <https://twitter.com/realDonaldTrump/status/995680316458262533>.


By Kristen Morneau, Senior Advisor

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©2018 Mohawk Global Trade Advisors

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Canceled: Robert Stein to Speak in Watertown, NY on Nov 19

This event has been canceled and will be rescheduled for another date.

MGTA’s Robert Stein will speak on November 19 at a half-day seminar on import compliance at the Comfort Inn & Suites in Watertown, NY. The seminar is sponsored by Jefferson County Economic Development and Mohawk Global Trade Advisors.

Importing 101
November 19, 2014
9-11:30 AM
Comfort Inn & Suites, 110 Commerce Park Drive, Watertown, NY
Price: Free

Keeping up with importer rules and regulations is a lot like walking through a minefield. The wrong move can have dire consequences. Get in-the-know by getting a grip on the right way to handle import compliance during this half-day seminar.

This workshop will cover:

  • The role of classification and valuation
  • How to spot the most common invoice errors
  • Must-haves for any free trade agreement claims
  • The ins-and-outs of import marking

There will also be plenty of time for Q&A on issues of specific concern to your company.

About the Speaker

Robert Stein

Robert Stein
Vice President, Mohawk Global Trade Advisors
Click here to read more about Robert.

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How Do You Prove Transaction Value?

Determining the price actually paid or payable for your Customs entry can be quite tricky. Transaction Value rules, pursuant to 19 USC 1401a(b), place responsibility on the importer to exercise reasonable care and accurately provide Customs and Border Protection (CBP) with the proper declared value.

It’s important to assure that all lawfully mandated payments (additions) and allowable deductions (subtractions) are accounted for in the total entered value on the Entry Summary.

If you are an importer that purchases goods under an INCOTERMS® rule starting with C or D (CIF, CFR, CPT, CIP, DAP, or DDP), you may deduct the freight transportation and other costs (insurance, etc.), provided they are included in the price payable and you have supporting documentation. To help guide importers, CBP has published the Informed Compliance Publication, Proper Deductions of Freight and Other Costs from Customs Value.

Keep in mind that Customs doesn’t consider amounts shown on the commercial invoice as proof of freight transportation paid by the shipper.

What is CBP’s position?
Customs requires transportation and insurance to be deducted as actual—not estimated—costs paid to the international carrier, freight forwarder, insurance company, or other appropriate provider of such services. Again, declaring these amounts without the proper backup may result in CBP disallowing the deductions during an audit or review of the Customs entry.

So what does CBP consider proof?
To prove actual price paid, CBP requires evidence, such as a rated bill of lading, from the service provider showing the actual freight/insurance charges. CBP may allow other types of substantiation as well.

Finally, it’s important for importers to be able to produce the required Customs entry documentation and the supplementary information showing the actual costs to support the entered value. This should be part of every importer’s recordkeeping program.

By Jim Trubits, Vice President, of Mohawk Global Trade Advisors. Jim is a licensed Customs broker. Read more about Jim here.

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5 Tips to Remember the Next Time You Classify Using CROSS

CROSS is a search engine of U.S. Customs rulings on tariff classification, country of origin, marking, and trade programs/agreements. See it in action here.

CROSS can be an invaluable compliance tool for U.S. importers—if they know how to use it correctly. In this article, we will focus on search tips for classification rulings.

You may be wondering what all the fuss is about. It’s just like a Google search, right? WRONG. If you’re not careful with how you complete a classification search in CROSS, key rulings could be left out of your search results, making it all the more likely that you will misclassify your product.

How do I effectively search CROSS?

1. Start by searching with as many keywords as possible.

2. Don’t include article words (such as like, with, the, etc.) or you won’t get any search results. For example, searching with the phrase, gun rifle cleaning kit with brushes, returns 0 search results because the word with is ignored by CROSS.
cross-ignoredwords2

Omitting the word with and searching with the phrase, gun rifle cleaning kit brushes, returns 1 result, N206317.
cross-ignoredwords3

3. Complete a second search using less keywords. This will usually return results not included in your first search. In our previous example, we searched using the phrase, gun rifle cleaning kit brushes, which returned only one result (Ruling N206317, classification 9603.90.8050). However, if we perform a secondary search with less keywords, using the phrase, gun cleaning kit, we find another ruling not listed in the previous search results, Ruling K88087.

cross-secondsearch

This second ruling confirms the classification of the gun/rifle cleaning kits as 9603.90.8050. So, based on our CROSS search, the cleaning kits would be best described on the commercial invoice as, gun/rifle cleaning kits including brushes and mops, with the HTS classification 9603.90.8050.

4. Use the most recent binding ruling to support your tariff classification decision. Make sure it describes your product closely. The same applies to any discrepancies between a relevant Informed Compliance Publication for your product and past rulings. The importer should defer to the rulings if they were written after the Informed Compliance Publication.

5. When in doubt, seek a binding ruling from U.S. Customs.

Managing your reasonable care

In Informed Compliance Publication: Reasonable Care,U.S. Customs & Border Protection recommends that importers have procedures in place to use CROSS for fulfilling two important components of reasonable care. They are:

  1. Using CROSS to assist in correct tariff classification of imported products.
  2. Using verbiage from CROSS rulings to more accurately describe goods on Customs documentation and to meet importer invoice requirements pursuant to 19 CFR 141.86 and 141.89.

CROSS

By Jim Trubits, Senior Advisor. Jim is a licensed Customs broker and certified Customs specialist.

 

 

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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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Import Compliance and Customs Assists: What’s the Real Cost?

Many of our clients produce molds as part of their manufacturing process.

Did you know?

US Customs requires that importers not only pay duty on the physical product, but also pay duty on “assists” that aided in the production of that product.

According to US Customs, these listed assists should be reported as part of the import value of your products.

  1. Tools, dies, molds, and similar items used in producing the imported merchandise.
  2. Materials, components, parts, and similar items incorporated into the product.
  3. Merchandise consumed in producing the imported merchandise.
  4. Engineering, development, artwork, design work, plans and sketches that are undertaken outside the United States.

Remember: The lump sum value of any assist is considered part of the transaction value of the merchandise. First, the value of the assist is determined; then the value should be declared on the first shipment or alternatively prorated to the unit cost of the imported merchandise.

Stay compliant and avoid unnecessary fines!

Contributed by Jim Trubits, Senior Advisor. Jim Trubits is a licensed Customs broker and certified Customs specialist.

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