The phrase “trade compliance” is often used in businesses involved in imports and exports. But what exactly do these words mean? A simply definition could be that it refers to things we are allowed to do relating to imports and exports. This could include ensuring that you are importing only products that are allowed by the authorities and not importing those that are forbidden, prohibited or restricted without a licence. One can easily understand that violating the rules, or not complying, will lead to penalties. These is a simplistic assumption about the meaning of trade compliance. Let’s dig into a few more details so that it is clear what constitutes trade compliance, and more importantly, what doesn’t.
Whenever two parties make a trade involving cross border movement of goods, they need to stick to certain rules and regulations while carrying out the trade. These rules and regulations are set not just by the two parties doing the trade but also by authorities in the exporting and importing countries who oversee trade activity. These rules may include, but are not restricted to, importing/exporting only allowed products, classifying products properly, determining risks associated with the specific shipment and paying all the taxes or duties that are due on the goods. When both the parties follow these rules, they are said to be compliant. And when they don’t, which can happen even due to unintended mistakes, they are deemed non-compliant and have hence committed a violation. An example of a violation could be as simple as labelling a product wrongly, and as extreme as importing prohibited products like explosives and drugs.
To sum it up, the concept of trade compliance refers to managing import and export activities in accordance with the rules and laws of import and export between all countries concerned.
The importance of Trade Compliance
The purpose of trade compliance is to ensure that global trade is done in an ethical and stable manner. This is intended to result in the general well being of the world economy. Even when trade agreements are signed by different parties, they always set out clear rules that they need to follow in order to ensure that trade facilitation brought about by the trade agreement complies with general ethical practices as well as the laws of the countries involved in the trading process. For instance, the United States prohibits some products to be exported to certain countries or to certain individuals or entities. Such prohibition intends to achieve world harmony and stability, resulting in an atmosphere that benefits the global economy, by preventing entities with harmful intent from gaining easy access to technology and products that may aid them in criminal activities, such as terrorism.
Hence, one of the driving factors behind having these regulations in countries is to prevent issues that directly harm the interests of the country or its people. For example, countries that do not allow public sale and consumption of alcohol will most probably also not allow the import of alcoholic drinks. Similarly, countries that have political issues with a neighbouring country will not allow weapons to be exported to that country. As already mentioned above, setting out these rules ensures the well being of the public, the country, and the global economy.
Trade compliance departments look at the following areas of work (among other things):
- Products are assigned correct HS classifications
- Customs values are correctly declared and right duties are paid
- Customs clearance lead time is acceptable
- Free Trade Agreement utilization is compliant
- Customs challenges are responded to in timely manner
- Products are assigned the correct ECCN number or equivalent
- Appropriate licences are applied for imports and exports
- Transfer pricing is correctly maintained
- Export control requirements are met
- Customs declarations are correctly filed
What happens if a company violates laws and regulations?
When a violation occurs, its consequences can be varying across different countries. One can roughly review the below mentioned factors that typically determine how harsh the penalties for violations may be.
- Nature of products, i.e. are they explosive?
- Origin of the products, i.e. are they from a sanctioned country?
- Destination of the products, i.e. were they going to a sanctioned country?
- Any illegal activity, such as bribery, that may have happened during the shipment process
It must be noted that the penalties for violating regulatory laws not related to export controls are mostly monetary but in some cases can also lead to incarceration, especially if offences relating to providing false information to authorities are involved.
Penalties are typically designed to erode all illicit gains and financially hurt entities that are involved in practices that are non-compliant. Such heavy fines help in discouraging illegal activity. Moreover, violations may also lead to a temporary ban on export or bad publicity, both of which end up harming the company way more than the monetary penalties.
How to ensure trade compliance in your business dealings?
Without a dedicated effort to maintain compliance, it is almost impossible to be compliant as not all cross border laws involve intuitive self explanatory concepts. For example the process of classifying your products requires familiarity with the rules of HS classification. It is generally a good idea to promote trade compliance education within your company so that the people working on the business deals already know what practices are in line with trade compliance and what practices may lead to a violation.
A great way to ensure compliance is to simply follow the guidelines already set out by Customs authorities.
The best thing any company can do is designate individuals whose sole responsibility is to establish written compliance standards that need to be followed by employees. In addition to that, having individuals within the company that are responsible for ensuring these compliance standards are followed every time a deal is made is also a great idea. Here are some additional tips that should benefit every trading company out there.
- Continuous risk assessment by appropriate trained individuals within the company
- Internal compliance management in written form needs to be available at all times to all employees
- Ongoing training related to compliance
- Continuous improvement projects related to compliance
- Pre- and post-trade compliance program or policy should exist and be available to all employees
- Record keeping should be done with a good standard
- Both internal and external compliance checks should take place regularly
- Employees should have access to a system that makes it easy to report any violations or potential risks of violations while remaining anonymous if required
A violation can have severe consequences and can even bankrupt a company, because Customs can levy penalties on several years of past imports. In order to avoid potential violations, companies often turn to third-party services and partners who are experts in trade compliance, while some companies hire trade compliances professionals.
Most companies would like to minimize risk to its business. Most of the time, it is trade compliance that is the biggest risk for any company looking to expand into foreign markets. Hiring consultants to help companies in such scenarios is often a great way to move forward and ensure your business stays successful and doesn’t crumble under the burden o trade compliance.
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