avoiding common mistakes in global trade … common mistakes in global trade compliance september 9,...

Avoiding

Common Mistakes in

Global Trade

Compliance

September 9, 2014

Michelle Schulz, Partner

Elsa Manzanares, Partner

Gardere Wynne Sewell LLP

Brent Helms

Total Petrochemicals & Refining USA, Inc.

Agenda

‒ Case Example: Clydezilla Corp.

‒ Overview of Import and Export Compliance

‒ Common Import and Export Compliance Pitfalls

Clydezilla

‒ The early years…

A Cautionary Tale

‒ Clydezilla Corp. (not the real name) manufactures oil and

gas equipment and provides related support.

‒ Clydezilla was historically a domestic supplier.

‒ But Clydezilla began rapidly acquiring subsidiaries in the

last two years to expand its business internationally.

‒ The company dramatically increased its level of imports

and exports in the last two years.

4

Clydezilla Corp.’s Problems Begin

‒ Clydezilla ’s newly acquired subsidiaries don’t have

trade compliance programs

‒ … but they continue to import and export products like wildfire.

‒ As it grows, Clydezilla begins implementing a limited

export compliance program focused solely on product

classification to determine licensing requirements.

5

U.S. Customs Takes Notice

‒ Clydezilla Corp. has no import compliance program in

place.

‒ Clydezilla receives a Request for Information from U.S.

Customs and Border Protection (CBP, or Customs) regarding

claims for duty-free treatment on certain import entries.

‒ In responding, Clydezilla discovers that its limited trade

compliance program is wholly inadequate.

6

U.S. Dept. of Commerce Comes Calling

‒ One month after receiving the Request for Information

from Customs, Clydezilla receives a call from a Special

Agent from the Department of Commerce

‒ He asks questions about Noaske Notelle Inc., one of

Clydezilla’s U.S. customers.

‒ The president of Noaske was recently indicted for

violations of the export control laws and the Special

Agent is seeking information about Clydezilla’s sales to

Noaske.

7

What is Next?

‒ What will happen to Clydezilla?

‒ What is Clydezilla’s liability?

‒ How could Clydezilla have prevented this situation?

‒ What can we learn from Clydezilla’s mistakes?

8

Who Regulates Trade?

“DUAL USE” ITEMS

Bureau of Industry & Security

Export Administration Regulations

(EAR)

15 CFR

DEFENSE ITEMS

Directorate of Defense Trade Controls

International Traffic in Arms Regulations

(ITAR)

22 CFR

OTHER AGENCIES

OFAC, Census Bureau, EPA

U.S CUSTOMS AND BORDER PROTECTION

“Policemen” to Enforce Regulations

19 CFR

IMPORTS

What is an Import?

‒ Shipment from foreign supplier to

US facility caused by purchase

order

‒ Inter-company transfer from a

foreign facility to a US facility

‒ Return of merchandise for repair

or replacement from a foreign

customer to a US facility

‒ Foreign shipment to a third-party

US warehouse under US importer

of record number

Who is US Customs & Border Protection?

‒ Founded in 1789

‒ Formerly known as the US Customs Service under the Treasury Dept.

• Main purpose was revenue collection and enforcement of customs laws

• As a result of September 11, 2001, Customs was reorganized under the Dept. of Homeland Security

‒ Responsible to enforce regulations for more than 40 agencies

What Does Customs Expect?

‒ Reasonable Care

• Established under the Customs Modernization Act

in 1993

• Informed compliance. See www.cbp.gov.

• Partnering with Customs in good faith

o Example: classification ruling requests

What Are Common Pitfalls?

‒ Import:

• Tariff classifications (high percentage)

• Duty underpayment

• Valuation

• Free-Trade Agreements

• Record keeping

• Also country of origin, related-party

indicators, etc.

Common Pitfalls

Lack of communication among departments

Valuation errors

‒ Incorrect values declared (e.g., assists, royalties, commissions)

‒ Changes in prices paid not reported to Import Department

• Example: Assists

o Tools, dies, molds, foreign engineering o Free or reduced cost o Must be declared as part of dutiable value

Common Pitfalls (cont’d)

‒ People outside Import Department don’t think they need to worry about import rules or compliance

‒ Too much reliance on the Customs broker


‒ No required documents or out-of-date documents to support duty preference programs

‒ No analysis performed to determine preference eligibility

• Example: North American Free Trade Agreement (NAFTA)


‒ Agreements to use fixed exchange rates

‒ No documents to support deductions

‒ Record retention policies too short

‒ Not taking advantage of duty savings programs

• US-Australia

• US-Israel

• US-EU coming soon?


‒ Country of origin determination

‒ Chapter 9801 and 9802 used incorrectly

• U.S. goods returned

• Manufacturer’s Affidavit

Customs Brokers

‒ What is their role?

‒ Agent for the Importer of Record (IOR)

‒ Enters information provided by IOR

‒ The IOR is liable for mistakes by the broker!

EXPORTS

What is an “Export?”

‒ Tangible Exports

• Shipments through a US port via air, ocean, truck, rail,

mail, etc.

‒ Intangible Exports

• Electronic transfers (including email, fax and Internet

downloads)

• Technical reports, drawings, data or source code

released to foreign nationals through visual or oral

disclosure

• Also includes “deemed” exports

What is an “Export?” (cont’d)

‒ Re-Exports

• Shipments from one foreign country to another of

US-origin goods or foreign made goods

containing certain US-origin parts, components or

materials.

‒ Transfers (in-country)

• Shipment from a party in one country to another

party in the same country.

Who Controls U.S. Exports?

‒ US Department of Commerce, Bureau of

Industry and Security (BIS)

• Enforces the Export Administration Regulations (EAR)

• Regulate the export of “dual use” items, or items

having both a commercial and military application.

‒ US Department of State, Directorate of

Defense Trade Controls (DDTC)

• Enforces the International Traffic in Arms Regulations

(ITAR)

• Regulates the export of defense articles, or items

listed on the United States Munitions List (USML)

Who Controls U.S. Exports? (cont’d)

‒ Homeland Security, U.S. Customs and Border

Protection

• “Police” the borders

• Enforce exports at all U.S. borders

‒ Department of Commerce, Census Bureau

• Collects and reports trade statistics

‒ Department of Treasury, Office of Foreign

Assets Controls

• Enforces U.S. mandated embargoes and sanctions

What Are Common Pitfalls?

‒ Export:

• Incorrect product and technology classification

(high percentage)

• Failure to identify exports of technology (high

percentage)

• Insufficient due diligence on end-use and end-

users

• Lack of familiarity with Foreign Trade

Regulations and export data reporting

• Recordkeeping

Common Pitfalls – Export

Classification

Lack of knowledge of regulations reliance on other parties

export classification errors

‒ Leads to incorrect licensing determination and reporting

violations for your products

‒ Also leads to incorrect classification of controlled

technology

Common Pitfalls – Export

Classification (cont’d)

‒ First step: determine which regulations control your

product.

‒ Assistance is available:

• Commodity Jurisdiction (CJ) determinations.

• Commodity Classification Automated Tracking System

(CCATS) determinations

o binding product classifications

Do not ship product unless you know your export

classification!

Common Pitfalls – Technology

Controls

‒ Technical information or “technology” relating to a

controlled products is also controlled under the export

regulations

• Drawings

• Manuals

• Blueprints

• Photographs

• Instructions


Controls (cont’d)

‒ Sharing of technical information with foreign nationals

(in the U.S. or abroad) is considered an export and

should be reviewed for licensing requirements.


Controls (cont’d)

‒ What technical data/technology do you have in your

possession?

‒ Where is it located?

‒ Who has access (even potential access)?

‒ Do you need a license to share with foreign nationals

in U.S. or abroad?

Common Pitfalls – Unauthorized End Uses

or End Users

‒ Lack of procedures for conducting due diligence to ensure export is not destined for prohibited end-use, end-user, or destination.

‒ You cannot proceed with a transaction with knowledge that a

violation of the export regulations is occurring or is about to

occur.

‒ “Knowledge” does not always mean “you knew”

• It also means “you should have known”

• Cannot “self blind”


or End Users (cont’d)

‒ What if you are not the exporter?

‒ You STILL have an obligation to conduct “due

diligence” on domestic sales if you know that

product is destined for export.


or End Users (cont’d)

‒ Conduct denied party screening

‒ Implement procedures requiring employees to

conduct due diligence and identify potential red

flag transactions.

‒ Obtain end user certificate from customer prior to

export.

Common Pitfalls – Foreign Trade

Regulations

‒ Most tangible exports from the U.S. require

Electronic Export Information (EEI) to be filed in

Automated Export System (AES)

‒ EEI consists of mandatory and conditional data

elements

‒ Exports can self-file in AES, or delegate that

authority to a freight forwarder

35


Regulations (cont’d)

‒ Exporters without trade compliance program rely

heavily on freight forwarders for classification and

export data reporting in AES.

‒ Under export regulations, the exporter is primarily

liable for data incorrectly reported by the freight

forwarder.


Regulations (cont’d)

‒ U.S. Customs and Border Protection (CBP)

enforce FTR

‒ CBP is currently heavy handed in FTR

enforcement

Common Pitfalls - Recordkeeping

‒ Must maintain records for a minimum of five years

from the date of the transaction.

‒ For example

• Exports under a license, compliance with the terms of the

license, and documenting use of license exemptions

• Air waybills, bills of lading, purchase orders, invoices, and

other documentation

Companies often rely on freight forwarders to maintain

records.

38

Why Invest in Trade Compliance?

‒ Where global expansion occurs over a short period

of time without corresponding increase in resources,

compliance risks multiply.

‒ Significant increase in import and export volumes

raises risk profile from perspective of enforcement

agencies

• Higher likelihood of audits and reviews

Why Invest in Trade Compliance? (cont’d)

‒ Enforcement continues to rise

• Customs uses Focused Assessments, inspections,

seizures, requests for information

• Export agencies use investigations, seizures,

directed disclosures

• Competitors are sources of information for import

and export agencies

‒ Enforcement continues to rise

‒ Agencies monitor import and export data

‒ Project Shield America

‒ Large Oil Company example:

• Penalties over $252 million in 2013

• Foreign Corrupt Practices Act (FCPA)

o Includes $87.2 criminal penalty

o Compliance monitor on-site


‒ Exports

• $100 million in fines – highest the

Commerce Department ever issued in a

civil export case

• Mandatory third-party export audit


‒ Successor liability in mergers and acquisitions

• Companies acquire the violations of the target

company

• Acquiring companies without a trade compliance

program are at greatest risk of inheriting

liabilities of target companies

• Trade compliance issues easily overlooked when

parties are in a hurry to close the deal and

expand the business


‒ Whistleblowers

• Company employees may notify authorities and

file action under False Claims Act

• Recent example: Otterbox Settlement

o $4.3 million settlement with DOJ and CBP

o Underpayment of Customs duties by failing to include assists

in value of imports

o Employee in trade compliance department alleged she

warned company about undervaluing of imports and was

ignored

o Otterbox voluntary disclosed violations to CBP one year

before whistleblower suit filed

o Employee received payment of $830,000 from settlement


Best Practices for International

Expansion ‒ Know your import valuation

method

‒ Learn how to track assists for

Customs purposes

‒ These are complex and time-

consuming. Inexperienced

importers with large import

volumes are frequently targeted

for audits in these two areas.


Expansion (cont’d)

‒ Be aware of what affiliates are doing

• Any engineering assists?

• Any risk of transshipment?

• Any shared technology that could be controlled?

o Have you properly classified your products and

technology?

o Do you have a technology control plan?

o Mark controlled drawings to flag them as restricted

information

‒ Solid trade management systems

‒ Effective broker and forwarder oversight

‒ Enough staffing for day-to-day compliance

‒ Include import and export compliance language

in contracts and documents



‒ All departments play a role and communication is key:

• Engineering

• Finance

• Human Resources

• Sales & Marketing

• IT

• Operations

• Supply Chain



‒ Investigate any potential violations immediately

and disclose if violation confirmed

‒ Implement remedial measures

‒ Conduct regular internal auditing

‒ Ongoing training/education at all levels of

organization



Message to Industry

Your five-year plan for managing compliance risks is just as

important as your five-year plan for managing expansion of

products and services.

- Glenn Smith

Directorate of Defense Trade Controls

U.S. State Department

Clydezilla Corp. Board of Directors

Chairman of the Board

Questions?

So you’ve tackled the tariff code!

‒ Key Concepts – tariff classification

‒ Duty Rates

‒ Nuts and Bolts of Tariff Classification

‒ Schedule B

‒ Binding Rulings

Elsa Manzanares

[email protected]

Michelle Schulz

[email protected]

avoiding common mistakes in global trade … common mistakes in global trade compliance september 9,...

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