How to do international business & stay out of jail !!!

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Merriam-Webster defines the word reasonable as:

a: being in accordance with reason <a reasonable theory>

b: not extreme or excessive <reasonable requests>

c: MODERATE, FAIR <a reasonable chance> <a reasonable price>

The United States government has a very different definition when it comes to what they call reasonable care in the movement of goods and services into and out of the country. Consider the case of a T-shirt marketing firm that had been buying from a supplier in the Caribbean for several years. Before every shipment, they asked if the cotton in the shirts was produced locally, and they were assured that it was.

But, in the case of one shipment, the government claimed that the cotton was actually made in China, and because the company could not produce the required Certificate of Origin, the shirts were seized and the company was fined. There are countless examples of these types of infractions, where the offender is just doing business as it always has, but the world it does business in has changed. In the United States, international trade is controlled by a multitude of agencies and bureaus under the Department of Commerce, the Department of the Treasury, the State Department, and others. Violations can result from the shipment of goods, services or intellectual property to denied parties and/or embargoed countries or they can stem from acts deemed to be harmful to national defense. Just one such agency, the US Customs and Boarder

Protection (CBP), can impose fines, seize goods, curtail or eliminate import/export privileges and initiate criminal proceedings that can result in prison sentences.

You dont have to be shipping to anyone outside the country to run afoul of these agencies. When any US company (or individual) has their export privileges revoked, they are automatically placed on the Denied Parties List themselves, making it a violation to ship to them. Currently, there are over 550 such parties listed by the US Department of Commerce, all of which have a domestic shipping address.

Below are the types of penalties associated with common infractions of US requirements:

  • Errors: $10K per negligent violation, $100K per willful violation
  • Negligence: Twice the governments revenue loss or 20% of the dutiable value if no revenue loss occurs
  • Gross Negligence: Four time the governments revenue loss or 40% of the value if no revenue loss occurs
  • Fraud: Market or resale value of the goods or the forfeiture of the goods themselves
  • Criminal Behavior: Goods seized and forfeited, a $500K fine, and five years in prison

An example of a negligent error would be if your company does not keep accurate records for the required period of five years. Every import or export of goods that your company makes is logged against your Employer Identification Number (EIN). It is a simple matter for an inspector to look up your EIN, review the activity and then ask to see the file for a specific transaction. If you can not produce this, you are guilty of negligence in this area, and a ten thousand dollar fine could be levied against you for each occurrence.

Ten thousand dollars is the low end of the spectrum. In February of 1996, the Loral Space & Communications Ltd. agreed to help the Chinese government determine the cause of the failure of one of their rockets launching a communications satellite. Unfortunately, they did not seek the approval of the

US government as required when dealing in this type of technology. That failure resulted in a $20M fine (later reduced to $14M). Lockheed Martin was also fined over their relationship with the Chinese government, but in this case, they did apply for approval. Unfortunately, the approval was for a high level document to be passed to the Chinese concerning a rocket motor, but what was actually turned over was a highly detailed fifty-page document. That transgression cost the company $13M.

You dont have to be in the high tech industry or even dealing with countries like China. Morton International (Morton Salt) was recently fined $647,500 for exporting a common chemical to Mexico. The chemical involved was thiodiglycol, a high volume product (>1M pounds annually) that is used as an antioxidant. However, it can also be used in the preparation of mustard gas, and its export is controlled by the Department of Commerce.

Parcel shippers must be particularly careful in how they prepare their documentation. Because it is so easy to simply pack up small items and send them out via any of the major carriers, companies may be tempted to manifest their contents as things like hand tools or spare parts. It is always critical to include complete descriptions, including part numbers and, if available, serial numbers. Not following this practice cost one company dearly: they had made a seemingly legitimate shipment of some machined parts, which they sold as spares, except, they neglected to record their serial numbers. When those parts turned up as components in a terrorist weapon, and their origin was tracked via the serial number, the company was investigated for a violation of US export regulations by the Bureau of Industry and Security. Because they could not provide an audit trail back to the original shipment they were cited and fined.

The concept of due diligence is key when the government becomes involved; they want to know what steps were taken to avoid the creation of the violation. As noted above, the difference in the penalties assessed for negligent violations and willful violations can be as much as a factor of ten. If the company can show processes that are in place, with a clear audit trail, that proves they were followed, then they are much more apt to be viewed as being only negligent by not staying on top of current rulings. Without that process and an audit trail, it is much easier to assume that the violation was willful. Implementation of systems that force employees to follow procedures, capturing the time, date and owner of each step, go a long ways toward proving the companys sincerity in following the rules.

This proof of due diligence is one of the primary factors that is driving growth in the market for automated systems to support International Trade Logistics (ITL), or Global Trade Management (GTM), as it sometimes called. According to ARC, a leading supply chain consulting firm, the ITL market is expected to almost double in the next few years, growing from $90M this year, to $152M in 2008. ITL software is available in modules designed to support different types of activities. However, when buying modules that fit your companys needs, care must be taken to insure that they actually talk to one another, even if they come from the same company. The rapid growth in this market has caused many of the smaller players to merge, and the resulting product lines may not be fully integrated.

Another affect of the volatility in the area of International Trade Logistics is the number of companies that are entering and exiting the market. AMR, an industry analyst in the supply chain space, has just completed an in-depth survey of the ITL market. They noted that in the time it took to complete their study, three of the companies reviewed were acquired, went bankrupt, or disappeared from the marketplace. They advise that you access their financial viability as well the functionality of their product. The good news is that today, there are a lot of choices available to companies that are considering stepping up to play in the global market place. The bad news is that in the post-9/11 world, there are a lot of new requirements, and the penalties for not meeting them have become much more severe. Anyone considering such a move needs to exercise the governments form of reasonable care when choosing a software vendor.

Things to consider when choosing an ITL software vendor:

  • Can they supply references in your market?
  • Do they run on your companys platforms(s)
  • Do they have a team dedicated exports to support the content of their product?
  • Are they financially secure?
  • Is it truly integrated?
  • Did the company write all of the components of the system, or was it bolted  together through acquisitions?
  • Does it communicate bi-directionally with your host system in real time?
  • Does it utilize the host systems customer lists and product master tables?
  • Can it drill down to the part number and serial or lot number level?

About Precision Software

Precision Software, a division of QAD Inc (NASDAQ: QADI) provides industry-leading global transportation and trade software. Our knowledge and expertise extends to over 1000 customer sites in more than 57 countries worldwide. Precisions solid customer base across multiple verticals (including healthcare, pharmaceutical, chemical, CPG, electronics, manufacturing and food & beverage), has established TRAXi3 as a proven domestic and global trade logistics solution. 

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