Outsourcing Trade Compliance: No Passing the Buck

Dear John,

My boss just informed me that as a budget reduction effort, he is going to outsource all import and export trade compliance activities to a third-party logistics firm. That includes my job. When this is done, there will be nobody left at the company that knows anything about trade compliance!

After picking my chin up off of the floor I told him that the law doesn't allow companies to outsource compliance activities; the importer and exporter must have employees that are responsible for the import and export process. My boss asked me to prove it to him. I guess in my panic I was shooting from the hip because now I can't find the regulations that really back me up.

Please help!

Trade Compliance Desperado

Dear TC Desperado,

Cue 1973 Eagles soundtrack...

Wow, that is a jaw dropper. Sorry to hear what you are up against. I'm also sorry to inform you that the regulations are not so explicit for typical commercial importers and exporters like your company. Nowhere in the import regulations (CFR 19), nor in the export Foreign Trade or Export Administration Regulations (CFR 15), does it specifically mention that an employee of the corporation must perform the importing and exporting activities of the company, or that the company must employ professional trade compliance staff.

The exception to this is found within the International Traffic in Arms Regulations (ITAR, CFR 22). Within ITAR §120.25 we find the definition of an empowered official and the requirement that that individual be an employee of the exporter. Throughout the ITAR we find references to specific activities that must be performed by the empowered official. If your company deals with ITAR licensable products, then this is your answer.

If only the other trade regulations were as clear! Sadly, the other regulations merely imply the company will oversee trade compliance and to do so must have employees that can monitor the process. The implication, however, is not subtle. I'll do my best to lead you through this maze of regulations.

Import Reasonable Care

Within the U.S. import regulations we find that the importer is held to a heightened due diligence standard known as reasonable care. The import regulations allow for the delegation of specific customs business activities to a third party individual or company known as a customhouse broker. This delegation of authority is done under a power of attorney. The regulations do not, however, transfer the accountability for those activities. Responsibility remains with the importer even when specific activities have been delegated to the broker.

U.S. Customs and Border Protection (CBP) has published a range of documents clarifying what is intended by reasonable care. The oversight activities listed within CBP’s Reasonable Care Checklist could only be accomplished if the importer employs knowledgeable trade compliance staff.

In addition, if the third party logistics firm your company will be hiring to assist with the import process is not a customhouse broker licensed by CBP, they may be in violation of the regulations. Their violation, in turn, places your company's import program at risk.

Export Reporting Compliance

The Foreign Trade Regulations (FTR) are somewhat ambiguous when it comes to outsourcing. The FTR speak primarily to the export reporting activity. Within these regulations it is possible to transfer the reporting of the export to a third party agent, usually a freight forwarder, through a power of attorney. In a certain subset of exports, referred to as routed transactions, the export reporting is done by the agent of the buyer.

In most cases, the FTR hold your company responsible for providing specific data regarding the export to the agent. The FTR also include a record retention requirement for the exporter, even when responsibilities are delegated to an agent.

How will your company be able to comply with these regulations if there is no one left that will be able to provide accurate data, ensure it is submitted to the government properly, and ensure that history of the transaction is retained within corporate files?

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Export Controls

The Export Administration Regulations (EAR) acknowledge the delegation authority within the FTR and also permit delegation of authority to agents for export control purposes, such as applying for export licenses. The EAR, however, clearly state:

The exporter may hire forwarding or other agents to perform various tasks, but doing so does not necessarily relieve the exporter of compliance responsibilities. 15 CFR § 758.3

How will your company be able to meet its regulatory responsibilities if no one is left to monitor compliance?

The Role of Outsourcing

While I empathize with your plight, outsourcing plays a role within trade compliance. When done properly, use of third parties can allow a company to leverage its limited budget to take advantage of professional expertise and software applications it otherwise could not afford. By doing so a company may even enhance its trade compliance profile.

Under an outsourcing program you will see your job responsibilities change. Instead of performing the day-to-day trade compliance activities you will find yourself in a supervisory role monitoring the work done by the new service provider. Outsourcing of trade compliance, however, has its limitations.

Your boss appears to be taking the outsourcing model beyond these limits to an untenable extreme. In his efforts to reduce budget, he is placing your company at unreasonable risk of violating trade regulations. While it is possible to outsource trade compliance activities, it simply is not possible to outsource regulatory responsibility.

Consider this. When traveling for business I frequently outsource the driving to the airlines. This is fraught with pros and cons, but the airlines usually get me to my destination faster and often cheaper than I could do if I drove myself. In order to transact my business, however, I must take the trip.

I suppose, like your boss is proposing, I could send someone else on the trip for me. In order to control my business effectively, I will need to debrief that person when they return and hold them accountable for the results of the trip. After all, it is my company and the buck stops with me.

I hope the above can help you convince your boss that, while it may be reasonable to outsource trade compliance activities, it is not possible to pass the buck of trade compliance responsibility. Once you've convinced him of that I hope you will be successful in convincing him that you are the person to manage that responsibility for the company.

Good luck!

John D. Goodrich

P.S. Origin of the phrase “Passing the Buck.”

In order to avoid unfairness in the game of poker the deal changed hands during sessions. The person who was next in line to deal would be given a marker. This was often a knife, and knives often had handles made of buck's horn; hence the marker becoming known as a buck. When the dealer's turn was done he passed the buck. In other words, he passed on the responsibility for dealing fairly to the next person.

President Harry Truman was famous for the phrase, “The buck stops here,” meaning, of course, that he took full responsibility for his presidency.

Source: Wikipedia

This article was first published in November 2012 and has been updated to include current information, links and formatting.