Avoiding

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.

Clydezilla was historically a domestic supplier.

But Clydezilla began rapidly acquiring subsidiaries in the

last two years to expand its business internationally.

The company dramatically increased its level of imports

and exports in the last two years.

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 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.

As it grows, Clydezilla begins implementing a limited

export compliance program focused solely on product
classification to determine licensing requirements.

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 U.S. Customs Takes Notice
Clydezilla Corp. has no import compliance program in
place.

Clydezilla receives a Request for Information from U.S.

Customs and Border Protection (CBP, or Customs) regarding
claims for duty-free treatment on certain import entries.

In responding, Clydezilla discovers that its limited trade

compliance program is wholly inadequate.

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 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.

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 What is Next?
What will happen to Clydezilla?

What is Clydezillas liability?

How could Clydezilla have prevented this situation?

What can we learn from Clydezillas mistakes?

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

Responsible to enforce regulations for more than 40 agencies

 What Does Customs Expect?
Reasonable Care
Established under the Customs Modernization Act
in 1993
Informed compliance. See www.cbp.gov.
Partnering with Customs in good faith
o Example: classification ruling requests
 What Are Common Pitfalls?
Import:
Tariff classifications (high percentage)
Duty underpayment
Valuation
Free-Trade Agreements
Record keeping
Also country of origin, related-party
indicators, etc.
 Common Pitfalls
Lack of communication among departments

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.

US Department of State, Directorate of

Defense Trade Controls (DDTC)
Enforces the International Traffic in Arms Regulations
(ITAR)
Regulates the export of defense articles, or items
listed on the United States Munitions List (USML)
Who Controls U.S. Exports? (contd)
Homeland Security, U.S. Customs and Border
Protection
Police the borders
Enforce exports at all U.S. borders

Department of Commerce, Census Bureau

Collects and reports trade statistics

Department of Treasury, Office of Foreign

Assets Controls
Enforces U.S. mandated embargoes and sanctions
 What Are Common Pitfalls?
Export:
Incorrect product and technology classification
(high percentage)
Failure to identify exports of technology (high
percentage)
Insufficient due diligence on end-use and end-
users
Lack of familiarity with Foreign Trade
Regulations and export data reporting
Recordkeeping
 Common Pitfalls Export
Classification
Lack of knowledge of regulations
reliance on other parties

export classification errors

Leads to incorrect licensing determination and reporting

violations for your products
Also leads to incorrect classification of controlled
technology
 Common Pitfalls Export
Classification (contd)
First step: determine which regulations control your
product.
Assistance is available:
Commodity Jurisdiction (CJ) determinations.
Commodity Classification Automated Tracking System
(CCATS) determinations
o binding product classifications

Do not ship product unless you know your export

classification!
 Common Pitfalls Technology
Controls
Technical information or technology relating to a
controlled products is also controlled under the export
regulations
Drawings
Manuals
Blueprints
Photographs
Instructions
 Common Pitfalls Technology
Controls (contd)
Sharing of technical information with foreign nationals
(in the U.S. or abroad) is considered an export and
should be reviewed for licensing requirements.
 Common Pitfalls Technology
Controls (contd)
What technical data/technology do you have in your
possession?
Where is it located?
Who has access (even potential access)?
Do you need a license to share with foreign nationals
in U.S. or abroad?
Common Pitfalls Unauthorized End Uses
or End Users
Lack of procedures for conducting due diligence to ensure
export is not destined for prohibited end-use, end-user, or
destination.
You cannot proceed with a transaction with knowledge that a
violation of the export regulations is occurring or is about to
occur.
Knowledge does not always mean you knew
It also means you should have known
Cannot self blind
Common Pitfalls Unauthorized End Uses
or End Users (contd)
What if you are not the exporter?
You STILL have an obligation to conduct due
diligence on domestic sales if you know that
product is destined for export.
Common Pitfalls Unauthorized End Uses
or End Users (contd)
Conduct denied party screening

Implement procedures requiring employees to

conduct due diligence and identify potential red
flag transactions.

Obtain end user certificate from customer prior to

export.
 Common Pitfalls Foreign Trade
Regulations
Most tangible exports from the U.S. require
Electronic Export Information (EEI) to be filed in
Automated Export System (AES)

EEI consists of mandatory and conditional data

elements

Exports can self-file in AES, or delegate that

authority to a freight forwarder

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 Common Pitfalls Foreign Trade
Regulations (contd)
Exporters without trade compliance program rely
heavily on freight forwarders for classification and
export data reporting in AES.

Under export regulations, the exporter is primarily

liable for data incorrectly reported by the freight
forwarder.
 Common Pitfalls Foreign Trade
Regulations (contd)
U.S. Customs and Border Protection (CBP)
enforce FTR
CBP is currently heavy handed in FTR
enforcement
 Common Pitfalls - Recordkeeping

Must maintain records for a minimum of five years

from the date of the transaction.
For example
Exports under a license, compliance with the terms of the
license, and documenting use of license exemptions

Air waybills, bills of lading, purchase orders, invoices, and

other documentation

Companies often rely on freight forwarders to maintain

records.

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 Why Invest in Trade Compliance?
Where global expansion occurs over a short period
of time without corresponding increase in resources,
compliance risks multiply.

Significant increase in import and export volumes

raises risk profile from perspective of enforcement
agencies
Higher likelihood of audits and reviews
 Why Invest in Trade Compliance? (contd)
Enforcement continues to rise
Customs uses Focused Assessments, inspections,
seizures, requests for information
Export agencies use investigations, seizures,
directed disclosures
Competitors are sources of information for import
and export agencies
 Why Invest in Trade Compliance? (contd)
Enforcement continues to rise
Agencies monitor import and export data
Project Shield America
Large Oil Company example:
Penalties over $252 million in 2013
Foreign Corrupt Practices Act (FCPA)
o Includes $87.2 criminal penalty
o Compliance monitor on-site
 Why Invest in Trade Compliance? (contd)

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

Chairman of the Board

Questions?
So youve tackled the tariff code!
Michelle Schulz
Key Concepts tariff classification
mschulz@gardere.com

Duty
Elsa Rates
Manzanares
emanzanares@gardere.com
Nuts and Bolts of Tariff Classification
Schedule B
Binding Rulings