Regulators are increasingly turning their focus to the shipping sector - including the banks that finance trade and insurers that insure cargo. Goods, agreements, buyers, sellers, ports and even shipping vessels find themselves under greater scrutiny than ever before.
Trade compliance can vary from country to country and even between types of goods. Many businesses that perform cross-border trade struggle to adhere to these increasingly complex regulations.
The Importance (and Challenges) of Trade Compliance
Trade compliance is seen as an essential part of keeping global trade practices stable by ensuring that businesses and the goods they deal in adhere to set economic, ethical, and quality standards and requirements. Failure to adhere to trade agreements across countries and product sectors can lead to delays, financial losses and even penalties.
However, international trade compliance is highly complex. There are usually several regulatory frameworks that need to be followed, imposed by multiple governing bodies within a single territory. Regulations are rarely harmonized across trading nations. Added to that, there is often internal pressure. Moreover, these regulations may change very quickly and with very little warning. Companies need to keep shipping costs low and deliveries fast while trying to adhere to the heightened due diligence required.
As international transactions require multiple parties, geographies and even languages, conducting this due diligence isn't easy. These transactions are often heavily document-based, and the risk of document fraud is considerable, increasing the risk of money laundering, terrorist financing or even sanctions evasion. Digitizing and vetting disparate data sources can be a challenge - and impossible to do manually. Yet failure to adhere to trade compliance requirements may affect a business's ability to trade globally.
Trade Compliance Operating Practices and Requirements
Trade compliance consists of several requirements. These requirements may vary between countries and include:
The United Nations' Statistics Division manages a system of classification of goods imported and exported by a given country known as the Standard International Trade Classification (SITC). This makes it easier for countries and entities to compile and compare international trade statistics on various types of merchandise across multiple countries. All goods must be classified correctly.
Countries that have fulfilled certain criteria may claim preferential rates of duty. Where goods are traded between countries with preferential origin agreements, they may enter the country at reduced or even zero rates of duty.
International Commercial Terms
International Commercial Terms (sometimes called incoterms) are conditions or rules by which goods are shipped and determine who is responsible for taxes, duties, delivery and trade compliance. This helps companies navigate complex and varying legal interpretations between nations by providing a single, globally recognized set of rules.
This practice ensures that any and all trade compliance regulations are met to ensure the smooth processing of goods upon entry.
Goods must be valued correctly and imported/exported at a fair rate to ensure that countries receive the taxes and duties they are due when goods enter their country.
Documents must be submitted for the application of the import of goods according to the correct operational and administrative processes. Import licenses and conditions may vary between countries.
Export controls refer to the procedures that must be followed to meet the legal obligations for the export of goods.
Customers and suppliers must be vetted using sanctions lists or restricted/denied parties lists to ensure that goods are not destined for a sanctioned person, company or country. These lists are published by country-specific regulatory bodies, in the US for example the Office of Foreign Assets Control (OFAC) and updated regularly. Screening must be factored into the overall due diligence process and include ownership evaluations.
Some businesses have entire teams that continually assess trade compliance regulations in order to keep abreast of regulatory changes, sanctions and high-risk countries in order to avoid penalties, shipment delays and reputational risk. Thankfully, technology and a few additional steps can mitigate the risks companies, and financial entities face from regulators by:
- Identifying risks upfront
- Maintaining and creating audit trails to satisfy regulatory checks
- Staying current with ever-changing regulations
Data is collected and checked at every stage of the trade, and software is updated to keep ahead of the best practices required by entities like OFAC and FATF as well as governments around the globe. If you want to know how you can improve your Sanctions compliance process, please feel free to reach out to our sanctions.io team.