Global Trade Compliance: A Cost Center or Cost Saver?

When it comes to the supply chain and moving goods from point A to point B, some companies view compliance as more of a headache and a cost center, while others see it as a cost saver by creating more efficiency and money savings. Since it is not bringing money into a company, per se, many organizations think about compliance only when issues arise. However, the cost of poor compliance management or inactivity—when it comes to not actively managing one’s supply chain—can be high, from upfront expenses like duties and fines to goods being held, and more. A company’s reputation, time-to-market and lost business opportunities are also on the line.

While expense may be the main factor behind why many companies put off compliance, delaying this important component in the global supply chain is just like cutting the budget or putting off preventative maintenance on necessary equipment or a vehicle. If not proactively attended to, it could lead to more costly downtimes and maintenance during a time when it is needed most and is least expected.

In terms of international trade compliance, just because a company has not been through an exam or audited does not mean it will not be in the near future. As with being audited by the IRS, it may not happen or it may be a random occurrence when least expected. But when it does happen it can gravely impact a company’s bottom line and disrupt business overall, and companies are often then most forced to take actions to prevent it from happening again.

Two concepts that emerge from the Mod Act are “informed compliance” and “shared responsibility,” which are premised on the idea that in order to maximize voluntary compliance with the laws and regulations of U.S. Customs and Border Protection (CBP), the trade community needs to be clearly and completely informed of its legal obligation.

As mentioned earlier, penalties associated with non-compliance include sanctions, fines or the loss of import or export privileges (such as restrictions placed on a company preventing it from exporting to new customers in the future, even if the transaction is legal), and possibly even imprisonment.

Many non-compliance penalties arise due to improper determination of the classification, valuation, country of origin of goods or for goods that are not invoiced or declared. Some import restrictions limit the entry of certain products into the United States, and are based primarily on country of origin and product type. For example, the United States limits the entry of various fibers and textiles by subjecting such goods to numerical quotas. Goods which exceed import restrictions are generally refused entry at the U.S. border and must be trans-shipped elsewhere.

As just one example, a large camera maker agreed to pay a $20 million customs penalty on $60 million of imports due to incorrect country of origin labeling on some camera equipment (which was even duty-free). The label showed “Made in Hong Kong”, but the equipment was actually made in China. In another incident, a U.S. subsidiary of a subway train manufacturer had to pay $1.5 million in penalties and $96,000 in additional duties for reporting incorrect dollar amounts on entry documents and for failing to report escalation payments. Those dollar amounts came from the shipping invoices of the parent company. (Keep in mind that importers are required to keep a copy of all correspondence related to their import transactions for five years.)

In addition to fines and penalties from customs, consider the stress to employees, the distraction of the audit on your business practices, lost time and opportunities, lost time to market. For many of these things, it’s difficult to put a hard dollar amount on the financial implications, but if companies begin to think about them most managers realize the effects can be significant. The best policy, therefore, is to understand the regulations and have access to the correct data to back the company up.

When one considers all of the repercussions with what CAN go wrong, the cost of a smooth compliance process and supply chain just may be, as the famous credit card commercial suggests “priceless.”

Here are some steps that can help companies in moving from inertia to immersion in global trade management and compliance:

  • Determine who should be involved in the process—this may vary from organization to organization and often includes individuals from supply chain management, to operations to the finance department, and even partners.
  • Create a compliance manual that includes the following:
  • Information about the company
  • Import/entry processes and policies used to classify and appraise merchandise
  • Recordkeeping – where, how and who’s in charge
  • Procedures and controls for valuation of merchandise
  • Procedures and controls for antidumping
  • Strict documentation and procedural requirements for U.S. goods returned
  • Employee training
  • Post-entry process guidelines
  • Semi-annual review to ensure manual is being followed and updated when needed
  • Realize that ultimately it comes down to your organization’s responsibility. Even when you use a broker, your company needs to have full control on information relating to where and from whom products are coming from, what is going into each product, cost information, regulatory requirements (including any antidumping laws, if there are additional duties required, etc.), and regularly auditing what one’s broker is presenting to customs to ensure that it is not in variance with what the company provided them. Laws and products are constantly changing, and companies need access to this type information quickly.
  • Look for tools that meet your needs to best maintain and manage all of that info. According to AberdeenGroup, 62 percent of businesses manage their customs compliance manually by using spreadsheets and entering data by hand to keep track of vital shipment and product information. This can cause a lot of challenges when importing and exporting, and can lead to unwanted results, including delays in the supply chain, and non-compliance penalties and fines. And, companies that constantly change their products and partners/suppliers (which is increasingly the case in today’s global, cost-conscious marketplace) especially need automated compliance procedures to ensure all requirements are met, such as additional duties that need to be paid.
  • The best solution to ‘manual madness’ is to have software that can help maintain and manage all trade related content effectively. Companies should look for technology and tools that meet their needs in managing information and offering a central location where they can input and retrieve data quickly. Robust compliance software includes validations and alerts to make sure all data elements are covered, track and provide audit trails of what was changed by whom and when.These tools include customs updates (including HTS updates) and provide a collaborative platform to allow partners to input their information (commercial invoice information based on your purchase orders, for instance) to help maintain supply chain data, and help manage archived data.
  • Be a champion. Look for ways to convince management that they need a strong compliance strategy before issues arise. The decision is easy once a company is faced with an audit, but don’t let that be the driver for your organization. Make sure everyone involved is on the same page – from supply chain managers, to operations to the finance department, and even partners.
  • Other ways to stay on top of compliance issues is to attend conferences, and to meet with peers to gather information on how they keep up to date on issues such as classifications, determining country of origin, as well as the latest customs information. The International Trade Compliance Institute is also a good resource.

 

It’s never too late to create or revamp compliance strategies. The initial investment is a lot less expensive and time consuming than paying hefty fines and penalties. And, in today’s highly competitive global market, the companies that have efficient, strategic business practices most often come out on top.

 

Sri Ramadas, Director, Projects & Services for Netwin Solutions, has more than 20 years of IT experience in business development, account management, project management and product implementation management. His company is online at www.gtkonnect.com.

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