Compliance pros

How top companies structure their trade compliance infrastructure for success.

By Eric Kulisch

   Opinions vary about how to structure trade compliance operations within an international company and to what extent interactions with customs authorities should be controlled from a central point. Some say the legal or finance department is the logical place to house compliance functions, while others prefer the supply chain department.
  
But the best spot for the trade compliance team is wherever it will have the most influence ensuring compliance throughout the organization, three trade professionals said during a June 17 panel at the American Association of Exporters and Importers annual conference in Washington. And wherever compliance sits in the organizational chart matters less than the education and communication the company provides to operating units about following import and export regulations, and who to contact for guidance when purchasing or transportation decisions are being made with regulatory implications, they said during a discussion of best practices for managing trade compliance.
  
“The bottom line is put compliance in whatever function is going to give trade the clout, the visibility and the budget to get done what it needs to do,” Shanna O’Brien, vice president of global trade management for Eaton Corp., said.
  
Her position is under the supply chain organization, which is part of Eaton Business Systems, along with quality control and Environment, Health and Safety.
  
O’Brien said members of her compliance team are aligned with, and completely responsible to, each business unit. Direct reporting lines to unit leaders help push through educational programs and hold workers accountable for following policies and procedures.
  
Regal Beloit, the world’s second largest motor manufacturer, a year ago moved the trade compliance unit from logistics to the legal department because of the exposure and support it would receive, and the perception within the company that instructions from the legal team need to be taken seriously, Kathleen Neal, the director of global trade compliance, said.
  
The legal department isn’t a good fit for compliance at Eaton because it’s disengaged from operations and simply acts as an advisory group after a problem arises, according to O’Brien. A finance department, depending on the internal dynamics of a firm, can be a good home for trade compliance because it has a culture of internal controls and usually controls the budget, she added.
  
Jeremy Page, a trade attorney and founding partner of Chicago-based Page Fura, LLC, said he never advocates that compliance report to corporate counsel because — with some exceptions — legal officials are not actively involved in disseminating the compliance message through the corporation and may not be current on the latest regulatory intricacies.
  
“I know people who work in logistics, transportation and even purchasing, who actually have been given a lot of power and have a good reporting structure to high levels in the company that can stamp out any deviation from policy,” he said.
  
Some purists believe there is a conflict of interest between compliance and supply chain because the mentality of operators is to maximize shipping speed and get sales out the door, while meeting regulations might compromise efficiency. But, they say, any potential conflict can be managed if there is good communication across the organization.
  
In the latest benchmark study on import operations produced by American Shipper in partnership with BPE Global, 41 percent of 343 respondents said import-related policies are set by the supply chain department, while 33.5 percent of companies placed import controls under the direction of the compliance team. Only 5.3 percent of companies placed import policy and compliance within the legal department. In September’s third annual export operations study, 53 percent of 177 export teams said they report to transportation, logistics, traffic and operations despite guidance to have export personnel report to a function that is risk mitigation.
  
Compliance works well in supply chain at Eaton because the board of director’s audit committee has an interest in trade and receives compliance updates once or twice a year, O’Brien said.
  
“There’s power in that. And that translates into a CEO who gets it” and has announced a number of initiatives as being mandatory across the company, she said.
  
Some clients are similarly using the audit function and the Sarbanes-Oxley financial accounting process to effect change and enforce compliance, “because that’s the vehicle that has the eyes and ears at the board level,” Page said.
  
“So we worked with them to put a controlling environment around customs so they can then evaluate the effectiveness of their policies and procedures,” he explained.
  

Management Style. Managing trade compliance has become much more complex over the past decade as new free trade agreements come into existence, export control regulations change and shippers expand into more foreign markets. Some companies have combined import and export compliance. Others have added to the job’s complexity by putting International Traffic in Arms Regulations, anti-bribery (Foreign Corrupt Practices Act) and anti-Israel boycott rules, the Iran trade embargo, Customs-Trade Partnership Against Terrorism/Authorized Economic Operator certification, conflict minerals, wood packaging rules aimed at stopping the spread of pests, and even hazardous material handling, under one roof.
  
That can be a problem when the compliance department doesn’t have the expertise to handle some or all of these new responsibilities. Page said senior management frequently doesn’t understand why the arrangement won’t work since the company is still dealing with the same supply chains and customers.
  
“It’s a delicate discussion because you don’t want to make it sound like the people you work with are incapable,” he said.
  
Compliance managers need to engage leadership when a company is considering entry into new markets or lines of business so they can understand up front the regulations that will need to be followed and the potential cost, such as the need to hire a security officer and have strict internal controls when involved in military sales, Page said.
  
As with setting up reporting lines for compliance, there is no consensus about whether companies with far-flung operations should centralize global compliance policies and procedures in one office, with oversight carried out by regional directors, or follow a decentralized model in which each region, or business unit, has its own structure.
  
At Eaton, the Americas, Asia-Pacific and Europe-Middle East regions have a similar structure and report to corporate, O’Brien said.
  
Eaton is a $22 billion manufacturer of parts and machinery that manage electrical, hydraulic and mechanical power for automobiles, trucks, heavy-duty vehicles, aircraft, industrial equipment, electric utilities, and oil and gas applications. It operates in more than 50 countries and sells products in 175 countries. In the United States, export volume and value ($1.3 billion) is almost triple that of the company’s imports.
  
But an internal dichotomy between two of the Cleveland-based manufacturer’s largest business units underscores the challenge of settling on a single compliance approach. One president believes compliance isn’t a core capability of the business unit, which is willing to pay for the corporate compliance team to take over all import and export regulatory matters.
  
“The other president says, ‘Hold my businesses accountable. We own this. We’ll do it. It’s part of what we do as an operator. You do the governance and hold us accountable,’” O’Brien said.
  
Eaton essentially has a hybrid compliance model. Although control is maintained at the corporate level, execution of customs activities is distributed globally. But last year the company pooled its expertise for classification into an office in Mexico with about 14 specialists. The staff is responsible for classifying all products and ensuring shipments qualify for privileges associated with free trade agreements. The “center of excellence” currently supports trade to and from seven countries, including the United States, Canada, Mexico, Brazil, the Netherlands, and Germany.
  
Eaton “is ahead of the curve” by centralizing a skill as a go-to resource, Page said in an interview. Page, who helps clients develop and implement compliance programs, said a couple of people in the audience asked afterwards if they should float the idea in their own organizations.
  
Rules and data sets are essentially the same around the world, so regardless of the variation by country classification experts know what queries to run against a company’s enterprise systems that store cost, production and other data, to make the right call, Page said of the rationale behind centralizing a particular task.
  
Mexico is an excellent site to consolidate classification, Neal affirmed, because the economic downturn and a quirk in the law have helped create a huge talent pool, as well the fact that importers and brokers have joint liability for customs compliance.
  
Eaton is expanding its unique shared-service model by setting up another global team to handle export licensing for military sales, O’Brien said. Specialists will be located in countries such as the United Kingdom, Germany and the United States.
  
Regal Beloit’s trade compliance group is split into three areas: a North American audit team, which is being expanded globally, that checks on import and export activity as well as how well the company is meeting security plans under C-TPAT; a North American trade compliance team that oversees classification, FTA qualification and record keeping; and a compliance team for the rest of the world.
  
Valuation is an extremely important aspect of their work because most of the company’s imports are from related parties.
  
Regal Beloit’s import volume is worth $1.1 billion, while it exports $250 million worth from the United States.
  
There are challenges with either approach, according to the compliance experts. Even companies with a decentralized approach need a consistent corporate message throughout the organization, which is manifested by the rise of the chief compliance officer in recent years. The central template can then be applied locally based on the different rules and interpretations in each country.
  
“You need that common message, common practice, because the potential harm to a company is so severe” for violating trade rules, Page said. Mistakes can result in unprofitable transactions, civil penalties, criminal penalties and sometimes loss of import or export privileges, not to mention bad publicity in some cases.
  
Decentralization can be effective, he added, if a company is acquired that has its own compliance infrastructure and skilled personnel or a conglomerate is involved in diverse types of industries requiring specialized expertise to deal with issues a central compliance office isn’t exposed to on a daily basis.
  
Regal Beloit has grown rapidly the past eight years through acquisitions, but melding smaller companies that may have paid little attention to properly following import and export regulations requires extensive training and education of the new personnel, Neal said.
  
Turnover that occurs when people are promoted to new positions, leave the company for other opportunities or through corporate divestiture, go on vacation, or get added through acquisitions is the biggest concern for some clients with multiple business units that have completely centralized their compliance function, Page said in his presentation. Constant education is required to let operations personnel know about available internal resources that can answer compliance questions, he stressed.
  
Without consulting the compliance group, for example, a buyer might make the erroneous assumption that sourcing a product from an overseas location is a good deal because it saves a few cents, but not realize the transaction will actually cost the company much more in duties, fees, taxes and other hidden expenses.
  
Neal said Regal Beloit’s audit teams will often instruct on compliance procedures that need to be tightened. The company also conducts an annual export conference attended by everyone who handles any export documentation to go over best practices and requirements. It is also in the process of obtaining what will be a mandatory, online export training tool.
  
“I hate general awareness training,” O’Brien countered. “I’m a firm believer that people who take it walk away with very little” and it is a big productivity drain when thousands of employees need to be coached. “Is it worth the cost? What we’re pushing this year at Eaton is function-specific training” aimed at topics a person needs to know depending on whether they are in finance, procurement, engineering, shipping or other departments, “so what they walk away with is very actionable and tailored to them,” she said.
  
Companies with a centralized approach to compliance also need to be careful not to run afoul of regulations that limit the conduct of customs business to licensed entities, Page said. A ruling by U.S. Customs and Border Protection several years ago loosened rules prohibiting large corporations from providing compliance support (advice and documentation) to subsidiary and sister companies as long as both companies are majority owned by the same company, thereby enabling more centralization of the compliance function. But related corporate entities still can’t communicate with Customs officials, file entries, respond to requests for information or directly represent the sister company in an audit. Those are tasks restricted to importers themselves, their customs brokers and trade attorneys.
  
The primary challenge for companies with a decentralized model is whether autonomous offices will follow the same corporate rules, according to Page.
  
Some of his clients have business units “that have gone rogue” and don’t even report back to headquarters with updates about their work, he said.
  
“You really need a rabbi at a very high level of the business unit, who will be sort of your guide to the business unit and says, ‘thou shalt not,’” the attorney added. “If you don’t have someone within that organization who can be effective at a high level, have some clout to make that an effective message, then decentralization will fail” because there still needs to be a common approach for implementing written procedures.
  
In some decentralized settings, Page said, business units may not want to share information with a business unit they feel does unrelated work even though it may have captured the compliance function.
  
Even with the best organizational approach, how do executives know if their trade compliance work is benefiting the firm? The simplest answer is if the company is avoiding fines and penalties.
  
“But that doesn’t tell us if we’re doing it right. It just tells us that we haven’t gotten caught,” O’Brien said. “And, it’s a trailing indicator by a long shot. It’s not what we’re shooting for.”
  
Eaton is working to develop data analytics that will allow it to proactively test if it is properly classifying and valuing goods and getting the right export licenses in a timely manner, she said.
  
But it first needs a global trade management system that can interface with its 37 different ERP systems and standardize the data before crunching the data is useful, she added.
  
In the meantime, the company uses several anecdotal measures such as the number of people that received compliance training, the number of functional points of contact in the different businesses, whether there are site coordinators in all plants, and how site coordinators conduct their annual self-assessment on audits, which are then tabulated on a scorecard to assess its effectiveness.

Clarification:   The story “Compliance pros” in the August issue characterized trade attorney Jeremy Page as opposed to placing corporate trade compliance departments in the legal department. The co-founder of Page Fura, LLC, said it is more accurate to say that compliance should not necessarily report to corporate counsel because – with some exceptions – the trade area is oftentimes not one they are familiar with to the degree necessary to be effective.