What does “trade compliance” mean? To understand, we first need to look at importing and exporting as a whole. In the United States, trade compliance hinges on the fact that we need to protect the physical safety of our country and citizens, as well as our economic security.
There are important reasons we don’t want certain goods exported from, or imported to, the United States. Geopolitical concerns, intellectual property concerns, human rights issues and infringements, and terrorism and security are some of the issues related to exports. Protection of United States industries—including agriculture, food and drug, and cosmetics—are considerations related imports. For this reason, trade compliance exists and is an essential component of all importing and exporting activities.
What is Trade Compliance?
International trade compliance includes the rules, regulations and best practices of importing and exporting between two or more countries. Its important that every part of your organization—from sales and accounting to shipping and purchasing to legal—is aware of their trade compliance responsibilities and perform their tasks in a way that is consistent with regulations and your company's compliance procedures.
For exporters, ensuring trade compliance includes (but is not limited to):
- Determining which government agency has jurisdiction over your products.
- Identifying if there are restrictions on exporting those goods to certain countries, such as embargoes, sanctions or license requirements.
- Checking lists of denied parties to prevent exports to individuals and organizations with whom the government says you shouldn’t do business.
- Classifying your products properly according to the Schedule B or Harmonized Tariff Schedule of the United States.
- Correctly preparing the appropriate export documents.
For importers, ensuring trade compliance includes:
- Determining if there are any restrictions or limitations on importing certain goods into the country, including required permits or licenses.
- Identifying the correct Harmonized Tariff Schedule classification for the goods.
- Identifying and reporting the appropriate duty rates and taxes for entering the goods into the country.
Why Trade Compliance Matters
For importers and exporters, there are consequences for not understanding and abiding by trade compliance regulations.
For importers, trade compliance includes proper classification and reporting; if done incorrectly, you may face financial consequences such as high interest rates, financial penalties, fines and more. Additionally, your imports could be held in customs without a timeline for release, thus delaying your payment for the goods. The same consequences apply if you don’t have the necessary import licenses or appropriate agency documentation.
According to the Bureau of Industry and Security (BIS), fines for export violations can reach up to $1 million per violation in criminal cases, while administrative cases 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.
Penalties of this size and nature can be especially devastating to small- and medium-sized businesses, which represent 97% of the 300,000 U.S. companies that export, according to the U.S. Census Bureau. Small- and medium-sized businesses may think they lack the time or money to train personnel in export regulations and compliance screening. Even if they do have the necessary experience and do proper training, export personnel may not have the support of senior management, who are often totally unaware of U.S. export regulations.
How to Set Up an International Trade Compliance Program for Import and Export
Below, we’ve outlined the basic steps every importer and exporter should follow to create and implement a successful trade compliance plan. Note that this isn’t a comprehensive plan—it’s important to look at your own import and export operations to know exactly how to proceed for your company; however, this list will help you get started.
- Get management buy-in for your trade compliance program. You won’t get far unless your entire team, from the top down, is on board with the steps to ensure compliance. However, buy-in requires detailed information from many departments and can slow the process. While this is a crucial step, it is sometimes ignored by companies that are anxious to start importing and exporting.
- Audit your current import and export processes. Assess the effectiveness of your existing compliance program if you have one. Record each step in the program, and capture your current export or import processes in a comprehensive, detailed manner. You should also define and address your organization’s vulnerabilities.
- Find reliable partners. Whether you’re an importer or an exporter, it’s important to select customs brokers, freight forwarders and other logistics partners who can help you stay compliant. For example, most importers don’t do their own import clearance—so you need strong relationships and communication channels to create reliable import partners. This article can help you identify the characteristics to look for in potential business partners.
- Set up and adhere to a formal training program. The world of international trade is constantly changing. As regulations, best practices, technology and tools evolve, so too do the needs and requirements of exporters. Participate regularly in training and development to make sure you and your team (including all departments within your business) are fully aware of any important changes to import and export compliance.
One excellent way to make sure all departments are involved with compliance and aware of their responsibilities is to make sure their roles and responsibilities are clearly defined in your team’s trade compliance manual or trade compliance program. For exporters, this is formally called an Export Compliance Program (ECP).
As they are the basis of your compliance training program, your import or export compliance manual and audit plan should include pertinent policies and step-by-step procedures. By making sure your sales team is fully up to speed, you'll prepare them for the unknown and feel confident in your process should you ever be audited.
- Stay educated. International trade is as complicated now as it's ever been. Exporters and importers shouldn’t rely on the way they’ve always been doing things to predict the future. Even if you put forth the effort to create a trade compliance plan, it has a short shelf life if you don’t review and update it.
- Implement a process for monitoring trade regulations and making necessary changes. It’s imperative to be aware of changing regulations and review and update your program accordingly; this process should be detailed in your trade compliance program. For example, both importers and exporters should monitor changes to both country-specific HS codes and worldwide codes and adjust documentation based on the changes. However, to consistently and correctly make these changes requires a detailed process.
- Screen customers and vendors. Export compliance requires you to follow the rules and regulations established by the U.S. government that restrict doing business with entities the government deems a danger to U.S. interests.
To identify these entities, your team should do restricted party screenings (or denied party screenings) to check potential customers or business partners against one or more of the restricted party lists to ensure they are not doing business with a restricted party. Learn more about this process in our article, Export Compliance: Understanding Restricted Party Screening.
- Determine which licenses you need to import and export. A small percentage of total imports and exports require a license. As the importer or exporter, you must determine if your items require an export license based upon the goods’ technical characteristics, the destination, the end user and the end use. Failure to obtain a required export license can result in significant fines, restrictions on future exports and—in the most egregious cases—jail time.
- Understand import and export controls. Import and export controls are used to control which products and technologies can move freely around the world. Learn more about import controls here; learn about export controls here.
- Use free trade agreements when applicable. Free trade agreements provide an advantage in reduced or eliminated tariffs, and there are real benefits to qualifying for them. Purchasing and manufacturing can be modified based on your qualification for FTAs.
- Maintain thorough records. Companies need to maintain all paperwork associated with exports and imports for the designated period of time (generally five years for both imports and exports). In the case of an audit, you need to be able to provide paperwork that justifies your decisions to demonstrate your due diligence. Note that this paperwork needs to be easily accessible—it shouldn’t be stored in an offsite facility—and detailed. In addition to the formal documents you’ve created, it should include all of your notes on each step of the process and explain any judgment calls you made.
- Properly value goods. When selling a product from an exporter to an importer, the value of the goods is clear. But when you transfer goods from divisions or related companies, there may be less clarity. Check out, Everything Has a Value—to U.S. Customs.
- Prepare your documents for import and export. Throughout your import or export journey, you will be preparing and creating dozens of export or import documents and forms. It’s important to keep track of these documents and accurately complete them—any errors could delay your shipments or, in the worst-case scenario, land you in hot water with regulatory agencies. You can choose to manually complete all of this paperwork or you can choose software to assist you. (Keep reading to learn the benefits of software vs. manually preparing documentation.)
Streamline All of Your Trade Compliance Efforts with Shipping Solutions
Whether you’re an importer or exporter, Shipping Solutions software will help you eliminate redundancy in your processes, ensure compliance and help you more quickly and accurately complete each transaction. Here’s how Shipping Solutions can help you put it all together:
Document Creation and Preparation
Avoid the headaches of manually completing your documentation by choosing Shipping Solutions export software specifically designed for exporters. Shipping Solutions helps you quickly create accurate export forms, file your electronic export information (EEI) through AESDirect, generate certificates of origin and more.
Import and Export Compliance
Shipping Solutions has an export compliance module that makes it easy to screen restricted and denied parties and export license determination that indicates which documents are required for your shipment. Check out our article, Make Shipping Solutions a Part of Your Export Compliance Program, for all of the specifics.
Shipping Solutions Trade Wizards consists of five tools optimized for importers and exporters; they make it affordable for you to meet your trade compliance responsibilities quickly and professionally.
- Product Classification Wizard helps you find correct HS codes, HTS codes and export control classification numbers (ECCN) for your products. This wizard also determines duty rates, both default and available preferential, for different countries.
- Restricted Party Screening Wizard helps exporters check every party in export transactions and assists importers in researching vendors.
- Export Controls Wizard helps determine if you need a license to export your products.
- Import Controls Wizard tells you which import controls may exist for your product, including the required licenses, permits, and certifications.
- Landed Cost Calculator puts it all together and helps you calculate the full, final landed cost. For importers, this tool allows you to compare sourcing options from up to five different countries. For exporters, it can help you competitively price your products.
Let us show you how Shipping Solutions can save time, save money and cut out tedious frustration in your efforts for trade compliance. Just fill out this form to access your free Shipping Solutions software demo.
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