We have seen some high-profile news on the Huawei CFO being held in Canada and prior to that the arrest of a Volkswagen executive after the automaker’s emissions scandal. It gives pause to any company doing international business, and the need to be in compliance with all the rules and regulations. 

If you believe this is something that will not touch you because you are only doing business with Canada or Mexico or your company is small and will not attract the attention of the authorities, you are seriously misguided. Your team needs logistics experts who are completely familiar with the demands of Customs authorities in the U.S. and around the world. 

If you’re ready to export or import goods, you’ll first need to appoint a customs broker and freight forwarder to do your moves. Obviously, it is their responsibility to see that all the correct information, process and movement of goods takes place and you bear no real responsibility as they are the experts, right? 

Wrong! Your company will supply the data from which these service organizations will derive information and fulfill their work. Any mistake in the data is solely your responsibility. You have a contract with these companies, and you have even had to sign a power of attorney (POA) to allow them to sign documents on your behalf. It is time you had a clear and careful look at these contracts. There will be a clause that says they are only responsible if negligent. There may even be an insurance clause, but this does not cover your incorrect data. 

Secondly, you signed a POA, and unless there are clauses that say they may only sign a document on your behalf after having verified accuracy and compliance — after which the service company is unlikely to sign it — you have given them authority to sign on your behalf. Many companies just have the legal department issue a standard POA with no restrictions, which leaves the service provider with a simple escape of “you gave me authority”. In fact, I have seen companies where they do not have a record centrally of all POAs issued, so multiple parties issue them to the same service provider with different wording. Concerned at this point? Well, you should be, and we are not clear yet on the liability. 

Denied Parties

A Customs Declaration (called a Commercial Invoice or CI) is a legal document which, if it contains errors, could constitute fraud. We all realize that we need a license for special equipment that is highly toxic or military in nature, but general goods are much simpler to move! Well not so simple, unless you understand what is required. 

The CI comprises 12 major items that must be correct. At the header level you must have the seller, the buyer and the ultimate destination. The buyer cannot be on any list that the U.S. government prohibits trade with. There are lists with companies and individuals which reflect these “denied parties”, which you must check every time you place an order. 

The denied parties list will have an address of a U.S. correctional facility, which tells you how seriously this is taken by the U.S. government. The ultimate destination is vitally important. It is the end destination for the goods. It is not where the buyer tells you to send them, it is where they will end up. 

If it is obvious that the goods will be moved to another destination, then you must question if this will be to denied parties or countries subject to sanctions. For example, if you were to send goods to a country with a reasonable knowledge that the type of goods will never be used in that country, and they were then sent to a sanctioned country, this could warrant a visit from the authorities for sanctions violations. 

This is the classic case of “sanctions busting”, which is not romantic when the authorities knock on your door. For each line of goods that are moved under the CI, there are at least three things you must get right and that will need some careful thought. These are the Customs Classification number or Harmonized Tariff Schedule (HTS or HS in some countries) number, the price and the country of origin. The price is obvious. You must not use a different price from what you would normally sell an item for in order to minimize customs duties in the importing country. The HS number is the classification of your goods in terms of Customs rules (global rules by the World Customs Organization) so you pay your correct duties. 

Companies that choose the classification to minimize duties also get a lot of scrutiny from Customs authorities. And then there is the Country of Origin (COO), which many organizations do not understand. Imagine if you are sending a pair of pliers from your warehouse in the U.S. to your operation in Mexico. 

The country of origin is not necessarily the U.S. but where it was made. Now, if this happened to be Vietnam, then that must be declared to Customs. However, what happens when you buy pliers from a U.S. supplier who may source them from China, Vietnam and Jordan? They are the same product, just made in different countries. 

You must check the country of origin before you load them into the box from your warehouse or keep them in different slots in the warehouse so the correct COO is utilized and recorded on the CI. Not simple, but lack of this understanding is going to cause problems with the customs authorities in the receiving country, as well as potentially with U.S. Customs. 

If this is not enough, there is the Foreign Corrupt Practices Act (FCPA). This prohibits a U.S. citizen, or an employee of a registered entity in the U.S., to pay a “facilitation fee” to anyone associated with a foreign government. Please note this holds for companies registered in the U.S., and their employees worldwide. That means even if the person’s country of residence accepts these facilitation fees, these personnel working for you cannot make this type of payment. Equally, your agents have to comply, as they represent your company. 

So, what constitutes a “facilitation fee”? It is essentially any payment to get preferential treatment. It holds for anyone associated with a government. So, the wife or relation of a government official or their employee, whom you pay $500 to, for example, or buy an airline ticket for or give them a value of … well, you get the idea. 

The fines are around $2m for a small offense, but companies have paid fines in hundreds of millions of dollars for more egregious offenses. The pinnacle of the issue was a European company that utilized bribery extensively and, on its exposure, was required to pay $800m to the U.S. government and $800m to their government with over 400 people being implicated and removed from their jobs. 

Many companies rely on legal teams to help with this. They are a valuable resource, but their focus is to deal with legal issues after they happen, and then those take time and are a significant cost. You must embed this into the day-to-day operations to prevent this, not deal with it after the issue rears its head, unless you like paying large legal fees. 

There Is No Defense

What happens when a company “misbehaves” with official documentation and, in particular, the customs documentation? 

The first thing to realize is the customs authorities have their own powers, which are very similar to the powers of the IRS. That is more than the normal law enforcement powers. They have their own court, which means that you go to the customs or trade court, not a commercial court. 

If you deal with sanctioned countries or companies or people, you are in violation of U.S. law, and other government parties such as the DOJ will be knocking on your door. Finally, there is no such thing as sympathy when you say to an enforcement official: “I was unaware or did not know”. That is not a defense. 

Just to emphasize the issue: in the U.S. we have a slightly different definition in the Customs Regulations with the designation of the United States Principal Party of Interest (USPPI), which is the exporter of the goods. 

By definition, this shows U.S. Customs is looking for the party which is the registered entity in the U.S. that exports the goods. This party may own them or not, and it will hold that party responsible and accountable for the export. If there are errors in the CI from classification, price, COO or ultimate destination, then the USPPI will be the entity charged. 

If you think this is not fair, then firstly you do not understand the Customs regulations; secondly, you need to understand what can be done by a customs authority. 

In Australia, a small company had a Chinese supplier deliver goods to their doorstep on a regular basis. Unbeknownst to the buyer, the Chinese company got their customs brokers to reduce the price declared in the importation declaration to the Australian customs. Australian Customs took the Australian registered company to court and fined them to the point where the company was essentially unable to continue to operate. 

While this is probably extreme, it shows the focus of any customs authority — they are charged with gaining revenue for the country only, and they are measured on that and not on sympathy. 

If you’re starting to worry, it may be time to add some experts to your organization. 

These are not necessarily customs brokers licensed in the U.S. only, these should be people who understand the broader environment in which you work and understand the customs process in multiple countries as well as FCPA. They need to be able to work with finance (price), procurement (denied parties) and warehouse (COO) in order to ensure you have robust methods, documented processes and controls in place. 

And above all, everyone needs to be trained as to what is required by Customs and how not to be involved in FCPA violations. 

Some companies have an annual training course which everyone is required to pass. That is a minimum and not really effective in the complexities of the world trade. My recommendation is to introduce a control process each month that requires supervisory staff involved with these processes to do a carefully designed audit. 

This builds a robust method of supervisors at different levels and different locations reviewing the details and keeping track of the processes their staff are actually following. The first cry is that this costs time for the supervisors, which is not a value-add. Ensuring compliance is part of supervision, but it reduces the questions from internal audits or annual audits. These questions take inordinate amounts of time to answer events which happened up to a year previously and, if it prevents an issue rising to legal level, then the cost of legal fees makes this a small cost. This is far better than an annual training program alone which, once passed, may be subsumed by current events and pressures until it is redone at the end of a year. 

It is your responsibility to ensure all this is in place. While logistics practitioners who understand this can help you, the drive and control to ensure the compliance rests solely with you as the leader to make your logistics world-class. 

John Vogt is a visiting assistant professor at the University of Houston-Downtown.