Rule of Law

In today’s highly regulated business environment, compliance has become a full-time function for most companies. A host of new security rules following 9/11 along with reporting requirements mandated by the Sarbanes-Oxley Act have businesses struggling to keep up with labor-intensive paperwork. Our borders are abuzz with activity aimed at safeguarding North American national security. Border controls, in particular, pose new supply chain challenges that include the need to implement sophisticated U.S. Customs Service compliance systems. Whether you’re exporting or importing merchandise or shipping hazardous materials within or outside the country, you need to struggle through a whole lexicon of legalese that did not exist just a few years ago.

Still, companies already feeling the squeeze of competition should not take this as a sign that profit margins could be depressed further. While it is true to say that the task of compliance has become far more complex, it is also true that the changes are giving rise to opportunities to improve and streamline the supply chain process.

Since Sept. 11, 2001, laws and regulations have been implemented, hundreds of border guards and agents hired and trained, and state-of-the-art screening and monitoring equipment installed at all trans-shipment centers, including major container hubs as far away as Rotterdam and Piraeus in Europe, Durban in Africa, and Singapore, Shanghai, and Port Klang in Asia. With this new investment, the U.S. government has placed most of the onus on corporate America to ensure that it does not conduct business with individuals, companies, or countries categorized by the authorities as dangerous to the world.


As a manager, you will face compliance requirements that can totally sideline you with their complexity. But the first step in complying with any new rule is simple: Learn as much as possible about your clients both inside and outside the U.S. One of the main ways to accomplish this is to screen all customers against the government’s restricted-party lists. Another way is to use the “red flag” indicators system, a government checklist of suspicious circumstances that should ring alarm bells when they occur — if the customer was reluctant to talk about the end use of an item being bought, for instance, if the product’s capabilities did not fit with the buyer’s line of business or the purchaser was ready to pay in cash for an article that would normally call for bank financing.

Companies must also adhere to stricter export licensing requirements on military, high-tech, and dual-use items as well as on “deemed exports” — transfers of controlled technology and technical know-how to noncitizens, including those here in the U.S. Other measures to take into account include the advance electronic reporting rules of inbound and outbound cargo manifests, which require shipment details to be in the hands of customs officials before the cargo itself arrives at the border. The government has already put into place two electronic data systems, Automated Commercial Environment (ACE) for imports and Automated Export System (AES) for exports, to facilitate these requirements.


The second step in compliance is to familiarize yourself thoroughly with what happens if you breach the rules. Hefty fines and other penalties await wrongdoers. In the past two years, the government has significantly stepped up enforcement of the law. According to the U.S. Commerce Department’s Bureau of Industry and Security (BIS), since 2002 the fines levied against companies found guilty of breaching export laws have soared more than 3,000%, underlining the seriousness with which the government is taking its mission.

Keep in mind that under the Export Administration Act of 2001, the maximum penalty for contravening export laws is high — up to $10 million per violation or 10 times the value of the export, whichever is greater. Note, also, that apart from the BIS, there are at least two other government bodies that actively bring charges to bear against export violators: the State Department (Directorate of Defense Trade Controls and Bureau of Nonproliferation) and the Treasury Department (Office of Foreign Assets Control). Other agencies involved include the Bureau of Alcohol, Tobacco and Firearms (ATF); the Food and Drug Administration (FDA); the Drug Enforcement Administration (DEA); and the Environmental Protection Agency (EPA).

Fines aside, other penalties also play a major role in encouraging companies to comply. These penalties include revocation of trade privileges and closer government scrutiny of corporate activity through frequent audits and inspections. Worst of all is being placed on one or more of the restricted-party screening lists. Corporations on these lists cannot conduct business with “bona fide” companies or pitch for government contracts. Of course, another punishment, intangible but equally detrimental, is the violator’s tarnished reputation.

A preferred method of compliance is to join various government-funded supply chain security programs such as the Customs-Trade Partnership Against Terrorism (C-TPAT), the Container Security Initiative (CSI), and Free and Secure Trade (FAST). The qualification processes for these programs are demanding, but if your company meets all the criteria, it’ll score numerous points with the Customs and Border Protection (CBP) agency. Qualifying companies are able to move shipments across the border faster and are subject to fewer inspections and audits.


Some firms still believe that export controls apply only to domestic high-tech and defense industries and not to subsidiaries and distributors overseas. The reality is that these controls apply to all U.S. companies, including their overseas operations, foreign employees, and non-U.S. distributors and agents. The same goes if you’re shipping hazardous materials, or hazmat, abroad.

Even if you’re in full compliance with the U.S. Hazardous Materials Regulations (HMR; Title 49 CFR Parts 100-185), bear in mind that the law undergoes frequent modifications, “interpretations,” and updates. A recent amendment, for example, states that if a carrier knows that information accompanying a hazmat shipment is incorrect — that includes varying from the HMR in any respect, including packaging, labeling, and marking — the carrier cannot accept the shipment for transport until the problems are corrected. And last December the HMR was revised to accord with international standards. The revisions, which took effect Jan. 1, 2005, incorporate recent amendments to the International Maritime Organization’s Dangerous Goods Code, the International Civil Aviation Organization’s (ICAO’s) Technical Instructions for the Safe Transport of Dangerous Goods by Air, and the U.N. Recommendations on the Transport of Dangerous Goods.

According to the U.S. Department of Transportation, the final rule amends the U.S. hazardous materials table, which lists proper shipping names, hazard classes, and packaging requirements for hazmat; revises the list of marine pollutants; adds a “Keep Away From Heat” marking requirement for some materials shipped by air; changes the criteria for classifying materials as corrosive to metal; and revises the packaging requirements for organic peroxides (carbon-containing compounds that pose severe fire and explosion hazards).

While it is true that controlled goods and technologies, and their proper Harmonized Schedule (HS) classifications, are the focus of government monitoring efforts, they are only part of the story. Even the release of technologies and sensitive information to unauthorized foreign nationals via e-mails or telephone conversations can be subject to U.S. export controls. Banking and securities companies are also required to undertake screening to ensure that money is used only for legal commercial activity.

Even when goods have long left American shores, they are still subject to U.S. jurisdiction because those items retain their U.S. identity. The fact that goods went through a firm in the European Union before ending up in Iran, which is under a comprehensive trade embargo, does not let the U.S. company off the hook. While the World Wide Web is not under the jurisdiction of any one country, doing business with a restricted entity via the Internet — whether it is selling products or offering items for download free of charge — is illegal under export laws.


Given that noncompliance can be very expensive, even cripplingly so, there is ongoing debate over how to set up a cost-efficient customs management and compliance infrastructure. Amid the ever-increasing complexity of customs compliance requirements, doing nothing or relying on traditional methods to ship goods can add to the cost of manufacturing and shipping.

In Canada, for instance, the Coalition for Secure and Trade-Efficient Borders — a group of more than 55 business associations and companies — recently issued a report in which it highlighted a number of what it described as “disturbing trends” affecting businesses in the U.S. and Canada. These include lack of uniform enforcement of customs rules and increasing delays at the border. The coalition estimates that for the auto industry, the delays and additional reporting and other compliance requirements translate into the cost per vehicle jumping by $800. The group adds that the processing time for shipments entering the U.S. from Canada by highway has surged 300% per truck since the U.S. and Canadian governments’ Smart Border Declaration of 2001, which aimed to strengthen the security of North America.

Although the specifics of each compliance issue may seem daunting, you’ll make considerable headway if you realize that compliance is a long-term and ongoing journey. Conduct a proper needs analysis that will help you formulate a best-practices strategy. Meticulously document all processes and procedures, along with any updates, so that your staff can more effectively share the knowledge and their training can become more productive. In addition, put in place regular audits to make sure that the compliance system is working as it should.


A key question often raised in boardrooms across the U.S. today is how to implement a solution to manage regulatory compliance. Outsourcing the entire task is not an option, because the corporations are ultimately responsible in the event of noncompliance. Exporters, for example, cannot pass on the responsibility of compliance to a third party such as a freight forwarder. The exporting company is responsible for exercising oversight of the forwarder’s handling of its shipments. Neglecting this duty can result in charges being laid for any violations.

This is important because under the Sarbanes-Oxley Act, companies must have strong internal controls in place at every level of the organization to ensure the highest degree of financial accuracy and accountability. With customs compliance representing a more crucial component in today’s business world, Sarbanes-Oxley applies to import and export operations as much as it does to other departments. With penalties for violations rising as high as $5 million and 20 years in prison, it makes sense for corporate chiefs to directly oversee all their internal controls, including customs compliance, rather than outsource these functions.

Importers and exporters — and their clients — must start, if they haven’t already done so, to restructure their international trade processes so that they will be able to comply with changing laws and regulations as their businesses grow regionally and globally. Customs compliance is the new reality of doing business, and companies involved in international trade must actively participate if they want to grow and thrive in this new business reality.

Jackson Wood is the corporate business manager of MSR eCustoms, a Buffalo, NY-based provider of trade management and customs compliance solutions in North America.

Compliance software

Because of the growing complexity of meeting customs requirements, such as the need to supply accurate cargo information in an ever-tighter timeframe, the most efficient way to ensure compliance is through software programs.

The best applications are those that put the company directly in control of its compliance process — systems developed inhouse or created by a specialized software vendor. The former can be costly if the company doesn’t have sufficient budget or, more important, the necessary expertise. The latter is a cost-effective alternative because such vendors’ core competency lies in developing solutions that can sharply reduce the cost of compliance or even offset it over time.

Whatever you choose, make sure to integrate your solution into your operation’s enterprise resource planning (ERP) system to pull relevant data for automated processing. The restricted-party screening process highlights the importance of being able to do this.

There are more than 60 screening lists, but the government strongly advises that at least five be used on a regular basis. The overwhelming challenge, however, lies in keeping up with changes in the content of the screening lists, because names and their associated details undergo frequent, even daily, updates, and manual checks are time-consuming and unreliable.

Your compliance solution must also interface with customs electronic infrastructure such as the Automated Broker Interface (ABI), the Automated Commercial Environment (ACE), and the Automated Export System (AES). ACE is gradually becoming a mandatory compliance system for all the major modes of transport — highway, air, sea, and rail — and AES is expected to follow suit. If you begin your software implementation now, you can rest assured that when all the mandatory systems are up and running, you will have the necessary infrastructure to be compliant.