The Compliance Gap

September 18, 2012
By Chuck Miller

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In recent years, more and more U.S. companies have entered the arena of international business, either through global sourcing or new export sales initiatives. Whether import or export-oriented, these global business initiatives typically require substantial preparation and planning to be successfully launched and sustained. Planning for new global sourcing programs requires development of total-cost sourcing models, identification and evaluation of potential foreign suppliers, updating of materials specifications, determination of supplier quality program requirements, new supplier and component qualification, detailed logistics planning, and various other steps. On the export side, new international sales programs require detailed foreign market research, product certification for overseas markets, identification and evaluation of channel partners, evaluation of international trade finance and contracting issues, development of overseas product support plans, and many other details.

Interestingly, one of the areas often overlooked by companies entering global markets is the requirement for an effective trade compliance program.

U.S. government regulations clearly define the obligations of importers and exporters to implement certain basic procedures and practices to ensure compliance with U.S. Customs & Border Protection (CBP) and other government agency requirements. The U.S. government views international trade as a privilege that can be suspended or revoked if companies fail to comply. Penalties for noncompliance can be significant, both in terms of heavy fines and even imprisonment of company officials, in some cases. Yet, recent industry surveys have revealed that a significant compliance gap exists—particularly in the case of small to medium size businesses.

This past summer, American Shipper reported on a recent study that found 82% of surveyed firms worried about the impact of customs delays and penalties and nearly a third found the regulations too complex and were ignoring them, simply hoping not to be caught in noncompliance.[1] 

In a separate survey conducted by the trade group Amber Road, 20% of mid-market companies responded that they ship products overseas but have no export compliance program in place.[2]

Violations can eat away at planned savings

This gap in compliance is all the more puzzling because of the severe negative impact that compliance violations can have on a business. For example, import filing violations deemed by U.S. Customs as grossly negligent (such as ignoring regulations) can bring fines of up to four times the declared value of the shipment, even for non-dutiable items! This kind of penalty could certainly negate any planned savings from a global sourcing program.

On the export side, similar negligence, such as failure to obtain an export license or screen for denied parties could bring penalties of up to $250,000 for individuals and $1 million or five times the shipment value (whichever is more) for organizations. Extreme violations can receive the ultimate penalty–debarment from exporting.

CBP, the Bureau of Industry and Security, and other government agencies are placing increased emphasis on auditing companies for import and export compliance. It is critical that companies of any size understand their trade compliance responsibilities and establish an effective compliance management program before doing business with overseas customers or suppliers.

Compliance enforcement by the U.S. government is not limited to large, multinational companies. Small and medium-size companies that may not have trade compliance expertise in-house should always consult with a trusted broker or advisory firm to verify which specific compliance program elements they require for their international business initiatives.

Chuck Miller is a Certified Professional in Supply Chain Management and Vice President of Mohawk Global Trade Advisors.

Mohawk Global Trade Advisors is the trade compliance and supply chain consulting division of Mohawk Global Logistics. It provides global trade compliance consulting, training, program development, and program auditing services to clients from a wide range of businesses.

[1] Eric Kulisch, “Head in the Sand,” American Shipper, July 2012: 16-20.
[2] Amber Road. Is the Mid-Market Ready to Increase Exports? [White Paper] 2012.