Head in the sand

Some companies leave compliance with trade regulations to chance, studies say.
  
By Eric Kulisch
  
   Companies engaged in international trade are concerned about shipments falling victim to customs enforcement at the border, but many frequently fail to take adequate steps to mitigate compliance risk, cut corners or simply ignore the rules, according to three new surveys.
   A large portion of importers undercut the effectiveness of their trade compliance activities by not using the correct management structure or automated systems, concludes a benchmark study on import operations just released by American Shipper.
   Small and midsized companies are typically the least prepared to manage the complexity of cross-border transactions.
   A survey of 500 U.S. import/export professionals in that category sponsored by Canadian customs brokerage Livingston International found 82 percent of firms are worried about customs delays and penalties impacting their business, but almost a third said trying to comply with ever-changing government trade regulations is so intimidating that they’re willing to ignore new requirements and hope they don’t get caught. 
   Livingston is the largest pure customs broker in North America.
   More than a third of companies surveyed engage in trade with Canada and Mexico, but are uneasy about expanding into new international markets because they don’t have the in-house expertise to effectively clear goods across the border.
   A minimum of 43 pieces of data are necessary for a single import transaction and 45 pieces of information are needed for export documentation in the United States.
   By not exploring overseas opportunities companies “are leaving a lot of money on the table,” Roy Coburn, president of Livingston USA, said in a conference call with reporters about the survey.
   About three-quarters of the participants are concerned about customs agencies canceling out potential profits by detaining shipments or issuing penalties for incorrect classification of products, as well as unforeseen fees and taxes due upon delivery that can create a negative customer experience, the survey said.
   Many importers and exporters, customs experts say, assume their supplier, reseller, transportation intermediary or carrier will take care of any customs filing requirements for them, even though they are ultimately responsible in the eyes of the government.
   “Leaving compliance up to everyone else besides the importer of record is a huge risk,” Cora Di Pietro, Livingston’s vice president for consulting, said.
   A Canadian company that has lost its ability to claim duty preferences under the North American Free Trade Agreement is an example of the potential pitfalls that can harm those that ignore trade regulations, she said.
   Under NAFTA, finished products must include at least 60 percent content from North America to be eligible for duty-free status. Importers need to obtain certificates from their suppliers attesting to the origin of the goods. The firms were audited by U.S. Customs and Border Protection, which found fault with how the supplier was claiming duty preference without proving it. CBP instructed the company to correct the problem and provide a document trail, but it continued to issue certificates of origin the same way. CBP eventually revoked its NAFTA privilege, making its products more expensive than those of competitors that comply with the documentation requirements.
   In another case, a large U.S. retailer sourced textiles from another country and had them delivered to an offshore manufacture for final production prior to importation into the United States. The importer used the amount on the manufacturer’s invoice as the declared value of the goods, but failed to include the value of the material itself. It received a stiff penalty from CBP, which is reviewing an appeal to reduce the size of the fine, Di Pietro said.  
   Overlooking “assists” — items that the buyer directly or indirectly provides free of charge for use in production or sale of imported merchandise to the United States — is a common error made by importers.
   Twenty-eight percent of those questioned said they had no idea how much it cost to clear international shipments. And 46 percent of respondents said their company does not have an up-to-date international trade compliance manual. Di Pietro said she believed the figure is actually low because many manuals businesses use are more geared to standard operating procedures than compliance.
   Livingston is using the survey to demonstrate why international traders should hire a qualified customs broker, such as it, to organize their customs compliance system, process entries and protect their international operations.
   A recent survey by Amber Road, a provider of global trade management software and data, similarly revealed that many exporters don’t understand their responsibility to exercise reasonable care involving international shipments.
   Twenty percent of 150 mid-market respondents said their companies did not have an export compliance program, while 39 percent recognized that their programs needed improvement. 
   Two-thirds relied on paper manuals or manual research over the Web to classify their products according to the Harmonized Schedule for countries outside the United States, and 42 percent used spreadsheets and paper copies to store the information. When it comes to screening for parties to which exports are restricted, 30 percent said they manually check Websites and 23 percent said they don’t screen at all. 
   One explanation for the limited focus on compliance is the level of engagement by senior management. A majority claimed top executives had little to no awareness or involvement in export compliance. 
   Beth Peterson, president of trade compliance consultancy BPE Global, said many shippers don’t tighten customs controls until a large potential client comes along that requires its business partners to be compliant with all government regulations. 
   “The earlier they do it the easier it’s going to be for them,” she said in an interview.
   Plus, Customs is getting smarter at targeting violators and making it more difficult for traders to fly under the radar.
   Staying abreast of customs rules not only helps avoid negative consequences, but allows companies to take advantage of revenue opportunities such as duty drawback and reduction programs, experts say.
   A small U.S. pharmaceutical company started selling in a foreign market but didn’t bother to figure out that by listing its products in a Pharmaceutical Appendix created through a multilateral agreement it could import its products duty free into many countries and paid duties for 15 years that it didn’t need to pay, Peterson said.
   “Just because you’re not getting caught doesn’t mean you’re running an efficient, cost-effective company,” she said. “Besides, it’s not about not getting caught. It’s about being strategic.” 
  
Compliance Tune-up. Meanwhile, companies that do take trade compliance seriously may be going about it the wrong way, according to the study by American Shipper in cooperation with BPE Global. (It is available online here.)
   One of the report’s key findings is that a third of companies (335 surveyed) are structured for customs compliance personnel to report to the supply chain division. About a quarter are part of the corporate legal or compliance department and the rest report to operations, finance, manufacturing/purchasing or other divisions.
   “On paper, placing the customs compliance function parallel to an operations team in the middle of a supply chain organization appears to create a conflict of interest as these other teams are focused on efficiency in their activities, not compliance,” the report said. “Supply chain and operations may share similar goals, but both teams are laser-focused on efficiency and are incented to meet shipment revenue goals. Accordingly, the concern by pure compliance-minded advisers is that attention to cross-border transactions and ensuring correct classification, valuation, documentation, declarations, and all things related to compliance may end up taking a back seat to achieving a quick turnaround time and meeting demand. Therefore, to ensure that compliance remains an unbiased function, Customs authorities and customs professionals advise placing the customs compliance team away from supply chain and operations and instead in a finance, legal, or corporate compliance division.”
   The authors qualified their conclusion by saying that properly managed compliance offices can still function well within the supply chain group and sometimes can improve internal visibility to product flows as long as there is good communication. Proximity to in-country teams may enable compliance staff to catch problems before they need to be escalated to legal or finance departments that are removed from the goods movement process. It is important with this kind of reporting structure for compliance teams to regularly update the legal and finance departments on developments in the compliance area, they said.
   The study recommends companies do a better job integrating trade functions within the entire company so that other departments, such as purchasing and sales, understand how their decisions impact logistics and compliance and can better share information. 
   At most companies, trade-related training is only encouraged, not required. Only 10 percent of large shippers mandate trade-related training for new employees, with the number dwindling down to about half that figure for midsized shippers, and almost none for small shippers. Few companies encourage trade-related training or even require a refresher course on topics previously delivered as employees continue their careers. 
   Trade-related training at large companies tends to be aimed at jobs with trade functions. Only about 30 percent of small shippers regularly provide training to employees with trade-related duties. Instead, more than 40 percent of small shippers wait until someone with a trade function requests some training to help them perform their job.
   Many companies fail to take advantage of automation to help stay on top of trade compliance requirements, according to the survey.
   Sixty-eight percent of all shippers, and 88 percent of small businesses, rely solely on manual processes to manage trade compliance even though using spreadsheets and similar tools can increase costs, shipment delays and the potential for customs audits.
   About a quarter of shippers use homegrown or installed software, or rent software services by the sip and only 2 percent outsourced their compliance program management to a logistics provider or customs broker. However, the vast majority of companies do use third parties to handle filing of their regular customs entries.
   Automation works best when it supports efficient processes and procedures, according to the report.
   Respondents said the accuracy of their customs filings, whether using manual or automated systems, was good. But roughly 25 percent of manual-based companies said they had an error rate of 20 percent or less — compared to a low-single digit threshold that compliance experts consider acceptable. Worse yet, 11 percent of shippers do not perform any audit of their entry filings to detect recurring problems with internal processes or oversight of brokers that can lead to costly penalties or suspension of trade privileges, according to the study.
   Specifically, 15 percent of small shippers and about 5 percent of midsized and large shippers do not audit their entries. 

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   “As part of any solid internal controls program, it is important for all companies to identify and resolve gaps in their compliance programs. At a minimum, companies can do this by ensuring that any statements made to government authorities on their behalf are accurate and verifiable,” the report said.
   It recommended that small shippers should pick a single free-trade agreement for duty avoidance or refrain entirely from participation in these programs because the administrative burden of managing them is very high and the potential for costly mistakes is greater without proper resources and expertise.
   “Based on the lack of auditing and manual processes, it seems companies are taking on risk that far outweighs the benefit of any special trade program. Missing records, omitted documentation, relying on tribal knowledge rather than recording data in a system, etc., are common mistakes found in audits of manual-based systems. A single inquiry by a government official can result in fines and penalties detrimental to the corporate bottom line,” the report said.
   American Shipper and BPE also recommended that importers assume all responsibility for classification rather than outsource it to a customs broker or allow brokers to change classifications because of the potential for misinformation and mistakes. For entry filing, the number of brokers used should be very limited.
   About 15 percent of small shippers, 10 percent of midsized shippers, and 8 percent of large shippers outsource classification completely to a broker or allow another means of broker intervention in classification, the study showed. 
   Companies that tend to follow best practices for compliance also frequently belong to the Customs-Trade Partnership Against Terrorism because the voluntary program’s requirements force companies to tighten security controls across the enterprise, which forges partnerships among various departments to achieve the necessary certification, the report said.