Trade Compliance

Trade Compliance - A Defence for the "C" Suite

Ned Blinick
January 27, 2021
min read
Trade Compliance - A Defence for the "C" SuiteTrade Compliance - A Defence for the "C" Suite

The risk from regulatory agencies governing international trade is increasing. The importer’s exposure to CBP and PGAs, such as FDA, USDA, and others, is rising. The penalties are not only directed at the company but to corporate executives as well.

This is not some far-off threat. The regulatory risk for the Importer and the"C" suite is the new reality brought about by the significant changes with CBP, Commerce, ICE, IRS, FDA, Fisheries and Wildlife, TTB, and every other agency that is linked to activity at the border. It is the consequence of ACE and its incredible capabilities to support massive data collection, predictive analytics, and artificial intelligence.

"The Department of Commerce just called - help!"

At a recent ICPA (International Compliance Professional Association) conference, I met a prospective trade compliance client who has been lobbying to improve her company's trade compliance capability. Over the years she has been getting push back from the executive team. Several weeks ago, one of the senior executives in the company got a call from the Department of Commerce. They were coming for a visit - in the next few days. And they wanted to see some very specific information related to its international transactions. The senior executive put out an urgent call for help to our prospective trade compliance client. She worked diligently and quickly to get the needed information to the executive so that he was prepared for the meeting.

This scenario is now playing out with more frequency because all the regulatory partners and CBP are sharing information. With this vast source of data these agencies more effectively profile and target suspected abusers.

The Changing Risk Profile for Importers

The entire compliance environment is being turned upside down. With the roll-out of CBP’s $4.5B ACE environment, the entire regime at the border has changed. As I already mentioned, ACE is now the clearing-house for all import related data - regardless of the regulatory agency. Whereas several years ago, import information was held in regulatory agency silos, ACE now provides cross-department gathering and centralized access to importers declaration at any border point. With this incredible data pool CBP, FDA, UDA, FSW, and other agencies are cross-referencing importer declarations and determining the accuracy and consistency of entries. With this data mining capability, these agencies are creating importer profiles and determining an importer’s risk level.

Another critical factor, affecting how importers are impacted, is the creation of the Centers of Excellence and Expertise (CEEs). The CEE centralizes within CBP all related regulatory expertise dealing with an area of responsibility. On the plus side, an importer has one access point within customs to go for information, clarification or a final ruling on a product or a protest. If there is a dispute with CBP or a PGA the importer has a much higher degree of confidence that it will be treated with consistency, which is the foundation for establishing proper trade practices. On the downside, the CEE has unprecedented access to an importer’s past history and current practices at the ports and beyond. This means that an importer has much less wiggle room when interacting with CBP and PGAs.

From Informed Compliance to Enforced Compliance

CBP has moved significantly from focusing on informed compliance (under the Mod Act) to enforced compliance (under TFTEA - Trade Facilitation Trade Enforcement Act).

This will evidence itself in three (3) fundamental ways:

  1. Detection - more exams, inspections, and reviews for those importers with suspect profiles. These actions are possible because of the centralization of expertise in the CEEs, the ability to mine the vast amounts of data and use predictive analytics, and the ability to leverage industry intelligence and industry collaboration.
  2. Deterrence - CBP and regulatory agencies are more aggressive in the use of penalties and fines to change importer behavior. They are increasing “bond” requirements as another lever to influence poor importer actions. And, they will be more aggressive in fine collections than they have been in the past. In some instances, they will use publicity (both corporate and personal) to deter future activity.
  3. Disruption - CBP is using the full range of enforcement tools to disrupt the import activity of poor actors to ensure compliance.

What this means for the Trade Compliance "C" Suite

With the new regime of TFTEA and ACE there is much greater emphasis placed on the importer and its management to ensure its own compliance. To ignore this fact places the organization and its management at potential risk.

An example of how things are changing: Historically an importer would/could depend on the customs broker to classify products with little fear of serious consequences of misclassification. Recent studies have shown that customs brokers “too often” misclassify products due to unfamiliarity with a product, lack of time, typing errors, etc. With the changes in the focus of CBP and PGAs, the practice of outsourcing product classification is much riskier because product misclassification is a serious red flag for an importer's Reasonable Care practices. This single problem can lead to serious problems with regulatory agencies.

Importers with suspect compliance profiles can expect their shipments to incur delays due to greater scrutiny. This will result in disruption at the time of entry. However, even after the shipments have cleared the border, suspect importers can expect to receive a greater number of CF28s and 29s, Single Issue Audits, and Focused Assessments. The involvement of CBP and PGA auditors in a company is very time consuming, invasive, and invariably leads to some penalties or fines. Or worse, audits can lead to negative publicity for the organization and/or its management,

On the positive, importers who have strong records of compliance will be given preferential treatment at the border and subsequently in the frequency of focused audits.

4 Takeaways to Reduce Trade Compliance Risk

  1. Ensure product master and account records are centralized, accurate, and up to date. Best practices strongly suggest that the importer take responsibility to classify its products to the 10 digit HS code and properly profile products for associated government agencies. Similarly, all relevant account details should be maintained and all registration codes controlled.
  2. Have well documented standard operating procedures (SOPs) in place. These SOPs must reflect internal practices and external relationships. Best practices require manuals governing import processes and record management, customs broker responsibilities and review mechanics, supplier facility management and review procedures, and carrier oversight procedures.
  3. Systematize processes to reflect SOPs.
  4. Have clear import processes to govern practices with suppliers, customs brokers, carriers, 3PLS, warehouses.
  5. Audit entries and ensure the accuracy of the information submitted to customs and PGAs.
  6. Have record and document management systems to support all import activity.
  7. Understand how dramatically the rules governing importing have changed. CBP and PGAs are now focusing more on enforcement and penalties.

Take Control of Your Compliance Practices

The risk to importers has risen with the completed implementation of ACE and the CEEs. ACE brings increased exposure of an importer's regulatory compliance practices to CBP through the CEEs and the relevant PGAs.

With increased visibility to importer data, regulators can now profile an importer and target its activity appropriately and proportionately. In the past, CBP was much more forgiving and instructive following the guidelines of ModAct. Today, CBP and the PGAs are much more aggressive in their approach to trade compliance practices under the TFTEA mandate. This increases the risks for both an organization and its management.

To reduce the risk to the organization and its management, an importer must take greater control of its compliance practices. Control means ensuring data accuracy, comprehensive record management, and enforceable SOPs. Failure to act appropriately exposes the importer to significantly greater organizational and personal risk.

As CBP frequently points out in virtually every discussion - “Importing is a privilege. Ignorance of the import rules is no excuse. The organization and its management is responsible for the declarations made to customs and the PGAs on its behalf.”

Maintaining a trade compliance status-quo is a very risky position for an importer. The consequences are very uncomfortable to contemplate.

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