Trade compliance is one of the most complex aspects of corporate compliance. In simple terms, trade compliance ensures that all import and export transactions conform with the laws and the countries involved, including in-country transfers of goods manufactured abroad. However, that definition barely scratches the surface. Companies that export/import across borders must comply with the regular framework of multiple governing bodies, often several within a single country, which can change rapidly and without warning. Regulations across trading nations may differ dramatically. In addition, trade compliance teams must hit budgetary shipping targets and fast delivery deadlines, while adhering to complex due diligence procedures. 

As nations continue to change their sanctions policies, so do national regulations that companies must follow. Companies that fail to do so may face severe consequences. In 2019, a subsidiary of The General Electric Company (GE) was fined $2.7 million for accepting payment from a company listed on the Specially Designated Nationals and Blocked Person List. It seems hefty, but OFAC was lenient in their case as they self-disclosed the error. They could have received a maximum penalty of nearly $19 million for their negligence. GE received a warning for being negligent in their restricted party screening. They did not collect the company’s full legal entity name or acronym, which appears on the SDN List. Thus, the sanctions screening software they used did not pick up the name.  

What Does Trade Compliance Involve?

Customer due diligence and sanctions screening are just one aspect of trade compliance. To be truly and fully compliant, all commodity-based import and export controls must be executed and managed in a compliant manner across the entire global supply chain, especially for dual-use goods or products destined for high-risk jurisdictions. 

Regulators have been increasingly focused on the maritime trade and shipping sectors, which also include banks that finance global trade and insurance companies that insure cargo. Following these steps, not only help companies avoid harsh penalties, but can prevent operational disruption, streamline custom audits, and avoid shipping delays, seizures and reputational damage. 

The key elements of trade compliance include:

  • Correct, Complete Information 

Goods must be correctly classified according to commodity and tariff codes. The correct duty rates, Intrastat, export control and origin of goods procedures must be followed. Any incorrect classification will raise a red flag and may trigger an investigation, which can lead to fines. Internal teams should accept responsibility and control over this information, and not delegate this responsibility to brokers or third parties. 

  • Following the Preferential Rules of Origin 

Preferential rules of origin apply in reciprocal trade preferences, usually customs unions or regional trade agreements, or in non-reciprocal trade preferences (usually in favour of developing nations). If goods that are being exported have a preferential origin, they will attract reduced or even zero duty rates when entering the importer’s country. The paperwork must be correctly processed and failure to comply may result in liability for unpaid duty for up to three years. Non-preferential origin is required on all international shipments, dictating the origin of the product that is being shipped. Again, errors may lead to fines.

  • Establishing and Applying Incoterms

Incoterms are globally recognized trade terms that provide a clear definition of the buyer and seller’s responsibilities during the shipment lifecycle, including detailing delivery, risk and liability. Incoterms must be established and applied by all involved to avoid confusion and payment errors. 

  • Licensing 

The onus is on the importer and exporter to determine whether or not they require a licence or permit. Failure to acquire the proper licence for controlled goods is a criminal offence which may lead to fines or confiscation of goods. Licence management controls must be strictly and diligently applied. 

  • Export Control 

Certain goods and even underlying technology are subject to export control legislation as they may have other harmful uses. All products must be properly classified against the appropriate legislation so that the correct license requirements can be established and applied. 

  • Screening 

Screening customers, vendors and transaction data lies at the heart of customer due diligence and trade compliance. It’s not enough to effectively screen against Sanctions Lists and other watchlists such as Politically Exposed Persons (PEP) or Crime lists. Data must be collected correctly through a robust Know Your Customer (KYC) process to avoid errors (like that of General Electric) slipping in. 

Bear in that all parties involved must be screened, but also other parties not directly named in sanctions programs. US and EU sanctions regulations extend to businesses that are majority-owned by a sanctioned party (in the EU) or 50% or more (in the US). 

Screening should be conducted at the beginning of the customer relationship and continue on a daily basis, especially when dealing with transactions that include parties outside of the organization. 

What Causes Screening Failures?

Screening is challenging. Rules imposed by various governments keep evolving and many global corporations have decentralized and inefficient systems that may lead to errors or require time-consuming manual checks. Manual screening is not only expensive but labour-intensive, which can lead to dangerous errors and failures. Teams may not have the capacity, knowledge or decision-making ability to conduct proper risk assessments. Similarly, if a system is outdated, it could lead to numerous false positives which require time-intensive research and checks to validate or reject. 

Is There a Solution? 

Automating the trade management screening process utilizing advanced screening tools is now considered a best practice. The best screening tools utilize advanced AI, NLP and algorithms to match results and come equipped with translation capabilities to screen names in their native language. 

Conclusion

Trade compliance is complex and growing even more so every day. However, the right tools of the trade can not only assist companies with mitigating the risk of compliance failures but can lead to streamlining and efficiencies throughout the entire supply chain.