3 Epic Fails in Export Compliance

Have you ever heard the saying, “Love isn’t a big thing; it’s a million little things”? It’s a pretty popular quote that appears on many home decorations, cards and internet memes.

As an exporter, my take is a little different—I think the line should read, “Export compliance isn’t a big thing; it’s a million little things.” And while it might not make for a lovely greeting card, it’s true—your export compliance responsibility isn’t a simple task.

Export compliance is a nuanced, complex process that requires exporters to be aware of the scores of ever-evolving government regulations and requirements. In an effort to make understanding and obeying export compliance regulations a little easier, here are three epic fails in export compliance you should avoid at all costs.

1. Violating the Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act (FCPA) prohibits paying bribes to foreign government officials, specifically to buy products or clear customs faster. It was passed in 1977 in response to several U.S. bribery scandals involving the Mexican oil company PEMEX and the Tanaka government in Japan.

While criminal prosecutions under the FCPA were few and far between in the early years, that is changing. U.S. cases in the past few years have included Walmart Inc., Microsoft Corporation, Goodyear Tire & Rubber Company, Avon Products, Smith & Wesson, Hewlett-Packard, and Alcoa.

The FCPA covers two types of activities, which we detail in our article The Foreign Corrupt Practices Act:

1. It forbids U.S. companies, issuers or persons anywhere in the world, or foreign persons while within the U.S., from corruptly offering or paying anything of value, directly or indirectly, to a foreign government official, party or candidate in order to influence an official act or secure improper advantage to obtain or retain business.
   
   
2. It contains accounting provisions, enforced by the SEC, which require companies to: a) keep books and detailed records that accurately reflect transactions and the disposition of corporate assets, b) devise and maintain an adequate system of internal accounting controls, and c) conduct a periodic review of recorded and actual assets. In other words, disguised slush funds set up or maintained for illegal bribes are not allowed.

In the Walmart case, according to The FCPA Blog, "Walmart Inc. agreed Thursday to pay the DOJ and SEC $282 million to settle allegations that it violated the Foreign Corrupt Practices by paying an intermediary in Brazil for help obtaining construction permits and having weak anti-corruption internal controls in Brazil, China, India, and Mexico.

"From 2000 through 2011, Walmart’s subsidiaries in Brazil, China, India, and Mexico 'operated without a system of sufficient anti-corruption related internal accounting controls,' the SEC said."

In the Microsoft case, "Microsoft Corporation paid the DOJ and SEC $25.3 million Monday to settle FCPA offenses related to its operations in Hungary, Saudi Arabia, Thailand, and Turkey."

While Walmart and Microsoft are very large well-known corporations, there are plenty of examples of much smaller companies paying substantial penalties for FCPA violations.

Minimizing Your Risk of FCPA Violations

• Do a thorough investigation of all potential sales reps, agents and distributors.
• Include an FCPA clause in all contracts with agents, distributors and consultants (although this alone is not enough to forego an investigation).
• Ensure that your company policies include FCPA principles and educate staff, especially sales and accounting personnel, about FCPA red flags.

2. Shirking Your Responsibilities with Freight Forwarders

A painfully easy way to get stuck in an epic export compliance fail is to hand off your responsibilities to partners like your freight forwarders. This previous blog article neatly sums it up: If You’re Relying on Your Freight Forwarder for Export Compliance, You’ve Probably Already Violated the Law.

There are three things you need to remember and take into account in every transaction with a freight forwarder: You are the manager, you are the boss, and you are ultimately liable for your exports. You can take control of export compliance by choosing your freight forwarder wisely and maintaining control of and responsibility for your exports—and you can’t outsource liability.

The Risk of Outsourcing Compliance

According to the Bureau of Industry and Security (BIS), fines for export violations can reach up to $1 million per violation in criminal cases; in administrative cases, fines can result in a penalty amounting to the greater of $250,000 or twice the value of the transaction. In addition, criminal violators may be sentenced to prison for up to 20 years, and administrative penalties may include denial of export privileges. These penalties are almost always devastating for small and mid-sized companies.

These situations can be prevented. Our white paper, What You Need To Know About Export Compliance, will help you identify other common areas you must consider to remain on the right side of compliance.

3. Not Documenting Your Decisions

In every export, you should always make sure you substantiate your choices and your reasons for making them. In fact, the most important thing exporters can do post-shipment is to keep a thorough paper trail of all exports.

As we discuss in our article 10 Time Savings Tips for Creating and Organizing Your Export Documents, an industry-wide best practice is to maintain export documentation for at least five years after an export transaction is complete. For most companies, this means five-plus years of paper records. This includes:

• Printed copies of your export documents, including the invoice, packing list, bill of lading, country of origin certificate, accounts payable and receivable, and purchase orders and sales records. (You can download these and many other free export forms here.)
• All records of your export compliance screenings. These should be saved in case your company is audited.
• Comprehensive notes explaining why you (or your employees) made the decisions you made. For example, let's say you screened your export customer's name and address against the various restricted party lists, and you came back with partial matches. After reviewing those potential matches, you made the decision it was okay to proceed with the shipment. You should document and save the reasons why you decided it was okay to ship to this company. In some situations, demonstrating that you’re thinking proactively about compliance and legal regulations, keeping accurate records, and doing your due diligence throughout the process may be more important than being 100% correct in your outcome.
• Handwritten notes should also be filed with their corresponding shipments.
• An archive of emails of particular shipments. It is best to print these and file them, but if you can’t print every email, at least save them in multiple locations (on an external hard drive, in your email archives, etc.)

How to Document Your Decisions

As a rule, paper copies work better than electronic. All handwritten notations must be saved and stored with corresponding files. We recommend printing hard copies of every file, note and document associated with your shipments, but if you can’t, you must at least scan in your paperwork and keep an electronic file.

Shipping Solutions software makes it easy for you to not only complete your documentation, but to save and print every export form (including notes you may have on individual transactions). Sign up for a free online demo of the software.

More Help for Avoiding an Epic Fail

While this article addresses just a few epic fails in export compliance, we’ve written extensively on the topic. Here are a handful of general export compliance articles that may answer your questions:

• HS Codes, HTS Codes, and Schedule B Codes: What's the Difference?
• Export Codes: ECCN vs. HS and HTS Classifications
• EAR99 Isn't a Free Pass for Export Compliance
• No, You Probably Don't Need an Export License, But...
• Six Steps For Export Compliance

The Department of Commerce’s Bureau of Industry and Security (BIS) has published a book, Don't Let This Happen to You, which outlines exporters' compliance responsibilities and includes real-life examples of penalties they have recently issued against individuals and businesses. It’s a must-read, and you can get it for free by clicking below.

This post was originally published in October 2015 and has been updated to include current information, links and formatting.