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Common Mistakes in
Global Trade
Compliance
Michelle Schulz, Partner
Elsa Manzanares, Partner
Gardere Wynne Sewell LLP
Brent Helms
Total Petrochemicals & Refining USA, Inc.
September 9, 2014
Agenda
Case Example: Clydezilla Corp.
Overview of Import and Export Compliance
Common Import and Export Compliance Pitfalls
Clydezilla
The early years
A Cautionary Tale
Clydezilla Corp. (not the real name) manufactures oil and
gas equipment and provides related support.
4
Clydezilla Corp.s Problems Begin
Clydezilla s newly acquired subsidiaries dont have
trade compliance programs
but they continue to import and export products like wildfire.
5
U.S. Customs Takes Notice
Clydezilla Corp. has no import compliance program in
place.
6
U.S. Dept. of Commerce Comes Calling
One month after receiving the Request for Information
from Customs, Clydezilla receives a call from a Special
Agent from the Department of Commerce
He asks questions about Noaske Notelle Inc., one of
Clydezillas U.S. customers.
The president of Noaske was recently indicted for
violations of the export control laws and the Special
Agent is seeking information about Clydezillas sales to
Noaske.
7
What is Next?
What will happen to Clydezilla?
8
Who Regulates Trade?
OTHER AGENCIES
OFAC, Census Bureau, EPA
DUAL USE DEFENSE ITEMS
ITEMS
Directorate of Defense
Bureau of Industry & Trade Controls
Security
International Traffic in
Export Administration Arms Regulations
Regulations
(ITAR)
(EAR)
22 CFR
15 CFR
U.S CUSTOMS AND
BORDER PROTECTION
Policemen to Enforce
Regulations
19 CFR
IMPORTS
What is an Import?
Shipment from foreign supplier to
US facility caused by purchase
order
Inter-company transfer from a
foreign facility to a US facility
Return of merchandise for repair
or replacement from a foreign
customer to a US facility
Foreign shipment to a third-party
US warehouse under US importer
of record number
Who is US Customs & Border Protection?
Founded in 1789
Formerly known as the US Customs Service under the Treasury
Dept.
Main purpose was revenue collection and enforcement of customs laws
As a result of September 11, 2001, Customs was reorganized under the
Dept. of Homeland Security
Valuation errors
Incorrect values declared (e.g., assists, royalties, commissions)
Changes in prices paid not reported to Import Department
Example: Assists
o Tools, dies, molds, foreign engineering
o Free or reduced cost
o Must be declared as part of dutiable value
Common Pitfalls (contd)
People outside Import Department dont
think they need to worry about import rules
or compliance
Too much reliance on the Customs broker
Common Pitfalls (contd)
No required documents or out-of-date documents to
support duty preference programs
No analysis performed to determine preference
eligibility
Example: North American Free Trade Agreement (NAFTA)
Common Pitfalls (contd)
Agreements to use fixed exchange rates
No documents to support deductions
Record retention policies too short
Not taking advantage of duty savings programs
US-Australia
US-Israel
US-EU coming soon?
Common Pitfalls (contd)
Country of origin determination
Chapter 9801 and 9802 used incorrectly
U.S. goods returned
Manufacturers Affidavit
Customs Brokers
What is their role?
Agent for the Importer of Record (IOR)
Enters information provided by IOR
The IOR is liable for mistakes by the broker!
EXPORTS
What is an Export?
Tangible Exports
Shipments through a US port via air, ocean, truck, rail,
mail, etc.
Intangible Exports
Electronic transfers (including email, fax and Internet
downloads)
Technical reports, drawings, data or source code
released to foreign nationals through visual or oral
disclosure
Also includes deemed exports
What is an Export? (contd)
Re-Exports
Shipments from one foreign country to another of
US-origin goods or foreign made goods
containing certain US-origin parts, components or
materials.
Transfers (in-country)
Shipment from a party in one country to another
party in the same country.
Who Controls U.S. Exports?
US Department of Commerce, Bureau of
Industry and Security (BIS)
Enforces the Export Administration Regulations (EAR)
Regulate the export of dual use items, or items
having both a commercial and military application.
35
Common Pitfalls Foreign Trade
Regulations (contd)
Exporters without trade compliance program rely
heavily on freight forwarders for classification and
export data reporting in AES.
38
Why Invest in Trade Compliance?
Where global expansion occurs over a short period
of time without corresponding increase in resources,
compliance risks multiply.
Exports
$100 million in fines highest the
Commerce Department ever issued in a
civil export case
Mandatory third-party export audit
Why Invest in Trade Compliance? (contd)
Successor liability in mergers and acquisitions
Companies acquire the violations of the target
company
Acquiring companies without a trade compliance
program are at greatest risk of inheriting
liabilities of target companies
Trade compliance issues easily overlooked when
parties are in a hurry to close the deal and
expand the business
Why Invest in Trade Compliance? (contd)
Whistleblowers
Company employees may notify authorities and
file action under False Claims Act
Recent example: Otterbox Settlement
o $4.3 million settlement with DOJ and CBP
o Underpayment of Customs duties by failing to include assists
in value of imports
o Employee in trade compliance department alleged she
warned company about undervaluing of imports and was
ignored
o Otterbox voluntary disclosed violations to CBP one year
before whistleblower suit filed
o Employee received payment of $830,000 from settlement
Best Practices for International
Expansion
Know your import valuation
method
Learn how to track assists for
Customs purposes
These are complex and time-
consuming. Inexperienced
importers with large import
volumes are frequently targeted
for audits in these two areas.
Best Practices for International
Expansion (contd)
Be aware of what affiliates are doing
Any engineering assists?
Any risk of transshipment?
Any shared technology that could be controlled?
o Have you properly classified your products and
technology?
o Do you have a technology control plan?
o Mark controlled drawings to flag them as restricted
information
Best Practices for International
Expansion (contd)
Solid trade management systems
Effective broker and forwarder oversight
Enough staffing for day-to-day compliance
Include import and export compliance language
in contracts and documents
Best Practices for International
Expansion (contd)
All departments play a role and communication is key:
Engineering
Finance
Human Resources
Sales & Marketing
IT
Operations
Supply Chain
Best Practices for International
Expansion (contd)
Investigate any potential violations immediately
and disclose if violation confirmed
Implement remedial measures
Conduct regular internal auditing
Ongoing training/education at all levels of
organization
Message to Industry
Your five-year plan for managing compliance risks is just as
important as your five-year plan for managing expansion of
products and services.
- Glenn Smith
Directorate of Defense Trade Controls
U.S. State Department
Clydezilla Corp. Board of Directors
Duty
Elsa Rates
Manzanares
emanzanares@gardere.com
Nuts and Bolts of Tariff Classification
Schedule B
Binding Rulings