The Importance of Compliance
Companies Can’t Afford to Underestimate It

By Joan Padduck and Philip Spayd

Over the past 3 decades, more and more companies have recognized the importance of customs and regulatory compliance. In the United States and the rest of the developed world, national customs organizations have developed formal programs to encourage, and also to require, a high degree of regulatory compliance. There are, to varying degrees, incentives in terms of reduced customs inspections for companies with high rates of compliance. Much changed, but much remained the same, in the aftermath of the terrorist attacks of September11. While there is now an international emphasis on supply chain security, compliance remains the foundation on which security is built.

The importance of compliance has changed in another important respect. In a legal sense, corporate officers of publicly held companies are responsible under the Sarbanes-Oxley Act for the accuracy of their books, and for disclosing material weaknesses that could adversely impact on the company’s performance. Failure to comply with government regulations covering the importation or exportation of goods by negligence can result in substantial monetary penalties against the company, and could affect the bottom line. Failure to comply when intentionally done can result not only in monetary damages but in criminal prosecution. In the social setting, corporate executives are being held accountable for the actions of their firms by the media and the public. A compliance breach in which the health or safety of a product is called into question or where a product was made by prison labor will quickly become public knowledge in our era of news blogs and instant media. There are no longer any company secrets.

Most medium to large size importers now have a Compliance Department comprised of at least a middle management level person (Manager or Director) with support staff sufficient to ensure correct classification and value of their imports, adherence to the US customs and tariff regulations, and the myriad requirements of other government agencies. Some smaller importers still rely on a Traffic Manager or other logistics or purchasing staff to ensure customs and regulatory compliance. In the past this may have been adequate, but no longer. In the post 9/11 global trade environment, there are complex and numerous customs, regulatory and other legal requirements that must be met. Compliance is increasingly difficult when it is an adjunct to someone’s primary responsibilities. Third parties are often employed by small to medium size companies, but the importer needs to remember that compliance is ultimately their responsibility. Just as a senior executive can not longer dodge compliance issue by saying she was uninformed, neither can a company presume that its broker or legal advisor has everything under control.

Due to the legal and public relations implications of non-compliance, many of the largest Fortune 500 multinational companies have centralized their global customs and regulatory compliance responsibilities within the US corporate headquarters structure. Take, for example, a US based company which has business units in Europe. What if one of their business units starts sourcing from or selling to a Cuban company? Depending upon the relationship between the US based company and their European business unit, the US based company could very possibly be subject to penalties imposed by the US Government under the “Trading With the Enemy Act”. If the European business units are permitted to operate without the oversight or involvement of the US based headquarters office, this trade could occur without the knowledge or consent of the US based company, but would still expose the US based company to severe penalties. Criminal penalties for violating the sanctions of the Trading With the Enemy Act range up to 10 years in prison, $1 Million in corporate fines, $250,000 in individual fines and civil penalties up to $55,000 per violation. What corporate executive wants to see his picture in the media after he and his firm have been convicted of “trading with the enemy?”

By centralizing global customs and regulatory compliance responsibilities within the US corporate headquarters structure, these types of transactions could be identified when the purchase order is placed, presuming proper internal controls are in place, and stopped before any violations could occur. This may appear to be an extreme example of the benefits of centralization, but note that Spain, France, Italy, Russia, and The Netherlands are some of Cuba’s largest trading partners. If your company has subsidiaries or divisions operating independently in any of those countries, are they aware of the restrictions on the US trade with Cuba? Some may not be aware, and some may be aware but may not understand the implications of those restrictions for the off-shore subsidiaries or divisions. Cuba’s exports include a wide variety of goods including tobacco products, fish and agricultural products. Their imports include manufactured goods, automobiles and other transportation machinery and equipment, food products, chemicals and many more. If your company has subsidiaries or divisions operating independently in other countries, this may be an area to explore. It may possibly be a good reason to recommend centralization of your customs and regulatory compliance responsibilities.

Critical and Complex

The Compliance Manager for the small to medium size importer has a different set of challenges, if that role even exists. In our era of relentless cost cutting, compliance is sometimes considered an overhead position that can be done without. Often, the senior management of those smaller companies does not realize or understand the critical and complex role of customs and regulatory compliance. Others may not have the organizational structure or budget to support the staffing needed to ensure compliance. An important message for those senior managers: Importing is a right, not a privilege and your right to import can be terminated for cause at any time. It would, of course, take serious infractions to get to that point, but it emphasizes the importance of compliance.

The role and functions of the Compliance Manager must be highly integrated into the organization, in much the same way as the Sales or Marketing Manager, Finance Manager, Distribution and/or Operations Manager. The organizational support for this function must also be carefully developed to ensure that the number of support staff as well as their expertise can support the size and complexity of the import program. The compliance manager must have the support of senior executives within the company. It needs to be made clear to other operational managers that the compliance manager is responsible for the company’s compliance with the many arcane provisions that exist in the tariff schedules and within international trade agreements. There are very complex regulations applicable to various commodities which are enforced by US Customs and Border Protection and which include other government agencies’ regulations such as the Food and Drug Administration, the Federal Trade Commission, Fish and Wildlife and the Department of Agriculture.

The Compliance Manager must be aware of the requirements and regulations of each of the regulatory agencies and how or if those regulations may apply to the imports of their company. For example, an apparel importer may import cotton sweaters. This may seem relatively easy and straight forward, but if the sweaters have buttons made from shells, there are Fish and Wildlife implications. This can impact the selection of ports of entry because the importer will want to select a port which has F&W inspectors on sight in order to clear the goods for delivery in an expeditious manner. In addition, certain certificates may be required or customs entry will be denied. If the Traffic Manager or other logistics or purchasing staff responsible for overseeing the compliance functions is not aware of the issues or does not know the right questions to ask, there could be significant delays and related costs incurred. Compliance, therefore, does not lend itself to being a collateral duty of an employee who does not have the expertise to know the four corners of the regulatory processes. In today’s business environment, these additional costs and delays will result in significant competitive disadvantages for the uninformed importer.

In the post 9/11 environment, the Compliance Manager must also stay abreast of the requirements and details of many pieces of security related legislation and cognizant of how new legislation might impact the company’s imports or their selection of supply chain partners. Legislation such as The Bioterrorism Act of 2002 can have far-reaching implications that may not on its face appear relevant to some importers. The BTA assigns the Food & Drug Administration with the responsibility of protecting the food and beverage supply that comes into or passes through the United States against potential acts of terrorism. Under the BTA, certain third party logistics providers are required to register with the FDA, and failure to comply with this could cause an importers’ shipments to be detained and possibly denied entry into the United States. Other pieces of legislation which have been passed and could impact certain decisions made by the Compliance Manager include The International Ship and Port Security Code, The Known Shipper Rule and The Sarbanes-Oxley Act. Canada, the European Union and the Asian Pacific Economic Council are developing similar security regulations and a corporate Compliance Manager for multinational companies must remain up to date on those regulations as well. The World Customs Organization has adopted the Framework to Secure and Facilitate Global Trade. While the WCO cannot require its members to comply, it is widely thought that this will become the international standard for cargo security in global trade.

A Catalyst in the Company

The Compliance Manager should also be the catalyst in the company to determine to what degree the company will participate in voluntary programs administered by US Customs and Border Protection. The Customs-Trade Partnership Against Terrorism and the Importer Self Assessment are two such voluntary programs. However, a significant investment of time is required in the preparation phase for participation in these programs. The Compliance Manager will need to ensure that proper procedures are in place within the company as well as with all supply chain partners, including standard operating procedures and internal controls for all parties to the transactions.

In March of 2005, CBP announced mandatory requirements for all C-TPAT importers and their supply chain partners, effective in September. C-TPAT members can expect increased scrutiny over the compliance with those requirements as CBP ramps up the validation process by increasing the number of supply chain specialists on board. Furthermore, Commissioner Robert Bonner has indicated that, in the event of an “incident” which causes partial or total port closures, validated C-TPAT participants shipping through ports that participate in the CBP’s Container Security Initiative will receive priority over companies who are not C-TPAT participants when deciding whose shipments will move first. This will have tremendous value to the importers who are able to continue operations in the face of such an incident.

The role of today’s compliance manager is diverse, complex and must be integrated into the operations of the company, regardless of how large or small the company may be. The actions and decisions of the Compliance Manager impact many departments and functions within the company; from finance to purchasing, procurement, research, design and development, from sales to operations and logistics, legal and security. The Compliance Manager’s responsibilities include determination of product classification, duty rates and fees, recommendations on the design of products in order to obtain the lowest duty rate possible, ensuring that the clearance process is seamless and timely and validating that the various logistics partners are compliant with Customs and OGA requirements.

The compliance manager needs to remain up to date on new and changing laws and regulations because ignorance is not an acceptable excuse for non-compliance. Because of the diversity of their role, the Compliance Manager must work diligently to break down the silos which exist in companies of all sizes, and must institute cross-functional processes to ensure compliance to all customs, regulatory and legislative requirements.

This is not a job for the meek of heart. It should not be underestimated by the senior management of companies involved in international trade today. This is a job for an ethical, strong, flexible, influential, intelligent, committed individual who can build consensus among departments with the goal of ensuring that the hard work and effort of all the various departments within the company is not jeopardized or compromised by an incident of non-compliance.

Joan Padduck and Phil Spayd are directors at Global Trade Systems, Inc. They can be reached at (508) 954-9108.