As trade compliance gains more traction, US regulators have made it clear that having compliance policies in place is critical, regardless of the company size or the industry. The implementation of such compliance programs can save companies thousands of dollars in fines and penalties.
Trade compliance should be the goal of every importer and exporter as a risk-mitigation measure as well as a positive value proposition for most companies. A compliance program serves as a security blanket, whether it’s for a large financial institution accustomed to dealing with regulations, a small startup with a cloud-based platform, or an acquiring company conducting due diligence. A trade compliance program lays the groundwork for how to behave. With changing industry regulations, it is critical to keep up to date and have a compliance program that is effective. Failure to have a strong compliance program could result in increased legal exposure, potentially leading to fines and penalties. Trade compliance saves you money in the long run. For example, cargo firms could have protected themselves from the record $1.3 billion in penalties that the US government imposed on the shipping industry this year.
In addition to the cost of penalties, compliance violations or lack of a compliance program damages companies’ reputations and hinders or prevents business opportunities. Due to increased investigations and enforcement of violations, investors are conducting more extensive due diligence of companies’ trade controls to ensure their investment does not carry compliance liability. This due diligence can include extensive screenings of employees and customers as well as audits of company records for evidence of compliance controls and policies.
The Destination Risk
When exporting to sanctioned countries, some under a full embargo, it is important to understand the restrictions that are in place. Earlier this year, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) released guidance encouraging organizations subject to US jurisdiction to “employ a risk-based approach to sanctions compliance.” It is critical to tailor compliance procedures based on who is part of your international supply chain. Exporters doing business in regions such as Iran, North Korea, and Cuba must be aware of what shipments are allowed and what is prohibited, or else all the US entities involved run the risk of fines and penalties. Additionally, a restricted-party screening process should be a part of your regular compliance procedures. OFAC regularly updates its list of “restricted” entities and persons who pose threats to United States national security.
Effective compliance programs are predicated on five essential components of compliance: management commitment, risk assessment, internal controls, testing and auditing, and training. Maintaining an effective compliance program helps ensure that you do not risk violating US sanctions and can mitigate penalties in case something goes wrong.
The Product Risk
Product classification is an important part of the shipping business. Engaging in the global supply chain is crucial for maintaining a competitive business. However, without a deep understanding of the rules for export controls, your business could be at risk. Licenses are required to export certain items. Whether a license is needed is determined using a product’s Export Control Classification Number (ECCN). The Department of Commerce classifies items under ECCNs based on the nature of the product and its technical parameters. You can search for a product ECCN online at the Bureau of Industry and Security (BIS) website (https://www.bis.doc.gov/index.php/regulations/export-administration-regulations-ear). A key to determining whether an export license is needed from the Department of Commerce is knowing whether the item you intend to export appears on the Commerce Control List (https://www.bis.doc.gov/index.php/regulations/commerce-control-list-ccl).
Products that do not have an ECCN and do not appear on the US Munitions List are designated EAR99. EAR99 items are often commercial goods, like paper clips. Harmless, right? Not necessarily. Even EAR99 products are prohibited from going to sanctioned destinations.
You also should consider deemed exports. A deemed export is any release in the United States of technology or source code to a foreign person. Such release is deemed an export to the foreign person’s most recent country of citizenship or permanent residency. This poses an issue because if you release technology to someone from a sanctioned or restricted country, you could be liable.
The Customer Risk
Do you know every entity in your supply chain, from the customers placing orders to the end users receiving your shipments? Knowing such information is critical. If you fail to review everyone in your supply chain, the risks are high. For example, American Export Lines was fined $518,063 for violations of Iranian Transactions and Sanctions Regulations when it shipped automobile parts from the United States via Iran to Afghanistan. In January 2020, Eagle Shipping agreed to pay $1.125 million to settle its civil liability for violating the Burmese Sanctions Regulations by shipping sea sand on behalf of an entity identified on the OFAC Specially Designated Nationals and Blocked Persons list.
Recommended Steps for Ensuring Compliance and Mitigating Risk
The benefits of having a compliance program in place when a mistake happens are significant. If your company has not invested in a compliance program, it should – the sooner, the better. And when creating your tailored trade compliance policies and procedures, remember the following:
- Compliance programs should include a comprehensive, independent, and objective testing or audit function to ensure that entities are aware of how their programs are performing.
- Programs should be updated regularly in light of constantly changing regulatory and business environments.
- Ensure that your compliance program has comprehensive coverage to review all parties involved in import and export transactions.
- Even products that seem harmless can be used in ways that companies do not intend. As an organization, you are responsible for knowing how your products will be used and avoiding government-prohibited end uses.
Now more than ever, government offices and agencies are providing the industry with guidance on how best to comply with trade regulations. For example, in May 2020, OFAC issued guidance for the maritime shipping industry warning about deceptive shipping tactics used by embargoed countries and recommending compliance measures companies involved in all aspects of maritime shipping could implement to mitigate the risk of a violation. The US Department of Justice also released updated guidance in June 2020 on evaluations of corporate compliance programs. With all this information available, companies no longer can claim ignorance and must take preventive measures to ensure compliance, mitigate risk, and provide some cover for potential violations.
Doreen Edelman is Partner & Chair, Global Trade & Policy Practice, Lowenstein Sandler LLP. Abbey Baker is Counsel, Global Trade and Policy at Lowenstein Sandler LLP. Christian C. Contardo is Associate, Global Trade & Policy at Lowenstein Sandler LLP.
This article originally appeared in the Fall 2020 International issue of PARCEL.