Don’t Let Poor Trade Compliance Break Your Supply Chain
In many companies, trade compliance is viewed as a necessary evil, a collection of mind-numbingly tedious tasks that add a lot of cost but little (if any) value. Besides that, it’s as boring as watching paint dry. Ok, that last part is partially true. Proper trade compliance involves pages of arcane requirements, sometimes conflicting government regulations, and an alphabet soup of codes, acronyms, and sub-section headers.
Well, if you’re craving excitement, go ahead and ignore trade compliance. Life at your company certainly wouldn’t be boring. Worst case, it might be a living hell.
To understand why, let’s look at the difference between a company with a solid compliance program and one without — and consider how that difference in priorities affects each company’s brand, customer relationships, and the all-important bottom line.
A Tale of Two Companies
Consider the “boring” fate of Company A, with its crackerjack compliance department:
- Cost savings: Company A plans ahead, understands the rules and leverages free trade agreements, duty-reduction programs, and free trade zones to reduce the total cost of ownership (TCO).
- Efficient movement of goods: The paperwork is always correct, so there is little delay or confusion in customs at international borders. Shipments arrive at their destinations with little or no interruption.
- Limited regulatory oversight: Company A has a stellar reputation for excellent compliance, so shipments and paperwork draw less official scrutiny and encounter fewer delays.
- Competitive advantage: Efficient operations mean less risk and better service for customers. They don’t have to worry about a shipment being held up or even seized at the border.
Then there’s Company F, where things are hopping! The company was recently caught violating export laws. Now the PR department is fielding calls from the media, the sales team is trying to placate the angry customer whose goods were confiscated, and there’s a government auditor on-site sifting through thousands of documents.
It’s not the compliance manager’s fault. He understands his job but doesn’t have the staff or budget he needs. Before this crisis, he got little or no support from upper management. As a result, the company received a significant penalty — a $15 million fine — for an export violation. The manager was able to mitigate the penalty; it was lowered to $1 million. However, the violation became public and made headlines.
P.T. Barnum reportedly said, “There’s no such thing as bad publicity.” Company F begs to differ. They now have:
- A devalued brand: Export fines and penalties are part of the public record and Company F received extensive media coverage.
- A competitive disadvantage: The company has an unhappy customer and took a hit to its reputation.
- Increased scrutiny: Company F is now on regulators’ radar as a possible serial violator. Future shipments could face added delays as they’re subject to closer scrutiny. Regulators can choose to review transactions from the past 5-7 years looking for more violations. Yikes!
- Financial penalties: Company F had to pay a penalty. Furthermore, it also has to make a significant investment to bring the company back into compliance. If it had spent that money upfront, there would have been no penalty or bad publicity.
Don’t be like Company F. Make sure your compliance staff is up to speed on all requirements. Or better yet, find a trade compliance partner to help you successfully navigate your way through import/export laws and regulations.
Trade Compliance is a Moving Target
Often, cost and complacency are the two biggest reasons for poor trade compliance. Complacent company executives argue cost: “We’ve had the same staff doing the same work for years, and everything is fine. Why should we spend more?” Well, everything is fine until it’s not. Chances are if the trade compliance staff hasn’t changed their strategy in years, then everything is not fine.
In the global marketplace, things change quickly and unexpectedly. For example, who saw Brexit coming or predicted that the issue would still be unresolved more than three years later? U.S. officials are negotiating (or renegotiating) several multi-lateral trade agreements, and there’s uncertainty about U.S./China tariffs and trade talks.
Just keeping track of that is a full-time job.
Once trade negotiators reach agreements, the work really begins for compliance professionals. For example, the Philippines Strategic Trade Management Act (STMA) was finalized in 2018, with implementation set for midyear 2020. It’s designed to manage the trade of strategic goods and help prevent the proliferation of weapons of mass destruction. The act defines specific types of goods and categorizes that are meant for military use only, dual use, or are nationally controlled goods. Each category has specific paperwork and licensing requirements. The act also requires company registration and specifies the documentation that must be included in import/export paperwork. Penalties for violations include fines and imprisonment.
Our Flash Global team has spent months studying the STMA’s requirements, conducting internal training for our staff and making sure everyone is up to date so we can educate our customers. This is how we react to regulatory changes that affect our partners. We continually monitor regulatory and legal changes in every country where we maintain operations.
Our job is to support the promises you make to your customers, and trade compliance is part of every link in your supply chain. Success depends on having the education and knowledge to do the job right.
Be Proactive, not Reactive
Many companies tend to underestimate the time commitment and complexity of trade compliance when they enter new international markets. They’re confident that they can handle all the details in-house — without a significant investment in extra staffing and training. Unfortunately, there’s no such thing as a minor paperwork error. Even a typo can put a shipment in limbo.
One of our past clients learned this the hard way when the company decided to expand into Brazil without a deep understanding of the country’s often-challenging business environment. The company’s attitude was “We’ve got this, and we can do all the paperwork ourselves.” Unfortunately, they quickly ran into problems when they used the wrong product classification codes and valuations.
The result was a worst-case scenario for any exporter. After Brazilian customs seized the shipment, the company was fined and banned from doing business in Brazil. Poor planning and preparation sank an important expansion project before it really got going — a huge waste of time and money.
There’s a Lot to Learn. Are You Up to Speed?
Consider how familiar you are with these terms and how they relate to trade compliance:
- HTS and ECCN codes – What are they and how do you use them?
- IOR and EOR – Who is ultimately responsible for determining product classification?
- Product valuation – How do product returns/repairs/refresh/configuration affect product value?
Trade compliance can be chaotic and confusing, especially for companies just beginning international expansion. Our 5-part series of trade compliance webinars can help you fit all the pieces into place, and you can learn how to use your trade compliance program to polish your brand, control costs, and strengthen your customer relationships.
Then, we can start a conversation, exploring your specific needs and goals, and how we can help you achieve your biggest dreams. With on-the-ground support in more than 130 countries and the ability to enter new markets efficiently, we handle the details so you can focus on what you do best.