The technology of international trade compliance
Legal and financial penalties threaten manufacturers that operate outside the law
By Malcolm Wheatley, senior contributing editor -- Manufacturing Business Technology, 10/1/2004 6:00:00 AM
The small convoy of vehicles arrived at the plant without warning. While the gate to the parking lot was being secured, officers emerged from the vehicles, each wearing a blue jacket with large yellow letters on the back. The letters—CBP in some cases, indicating a member of the Customs and Border Protection service; EE in others, indicating Export Enforcement; and ICE, for members of the Immigration and Customs Enforcement service—told the story. The plant was suspected of breaching one or more trade compliance regulations, and events were about to follow a timeworn path.
First, narrates Larry Christensen, a professor at Georgetown University's Law Center, employees are herded into the cafeteria and kept under guard. Randomly, they're then selected for interview. Given the suddenness and force of the raid, this is, he dryly notes, "a fairly coercive activity." Second, officers collect hard drives from all servers and desktops around the plant. One company that Christensen works with hasn't yet gotten them back—a full six months after the raid.
When pundits talk about the risks of globalization, they're usually talking about the threat of jobs moving overseas. The global trade compliance angle is rarely discussed—even though it poses a risk that affects every single American manufacturer that either imports or exports.
The risks are several. First, there's the risk of selling to, or buying from, any one of a number of prohibited individuals or organizations known as "denied parties." There are, says Christensen, some 7,064 of these named on lists maintained by the U.S. State, Treasury, and Commerce Departments—some 1,560 of which are deemed to be terrorists, or fronts for terrorist organizations. Others appear on the list for different reasons. The Indian Space Research Organisation is a perfectly respectable government agency, but trade with certain divisions is banned because of concerns over the proliferation of missile technology.
Money talks
More prosaically, there also are financial risks. Where imports attract tariffs or duties, items purchased from overseas may turn out to be more expensive if, for example, the wrong tariff code is applied. Importers pay more than need be if the paperwork omits mention of any one of dozens of "preferential programs" under which tariffs are cut, or waived altogether, thanks to free trade agreements. And, even more expensively, tariffs for some goods vary throughout the year, as low-tariff special quotas expire.
The result is that what seemed a bargain when the purchase order was placed could turn out to be an expensive mistake when goods enter Customs.
It would be wrong to imagine that these legal and financial risks are hypothetical bogeymen, rarely encountered in practice. A company doesn't have to be manufacturing munitions or high-tech equipment to fall foul of the denied-party restrictions.
Trade in anything at all with certain countries is prohibited. Just ask Tyson Foods, Springdale, Ark., which prior to the U.S. occupation was fined $150,000 for shipping chicken parts to Iraq through a broker in Jordan. And inadvertently dealing with denied parties even in non-embargoed countries is distressingly easy: take the case of American Home Products, Madison, N.J., which incurred a whopping $2.5-million fine when a minor subsidiary in Colombia was found to have dealt with blacklisted narcotics traders.
As for the financial costs of trade compliance, know that importers that subsequently reexport what they import can get 99 percent of duties paid refunded to them under the U.S. government's "duty drawback" scheme. Provided, that is, they can prove in excruciating detail that the widgets they are exporting are the same widgets they imported. When the widgets in question are fasteners, forgings, or castings built into a complex assembly—and perhaps routinely sourced from more than one supplier—that can be difficult.
Dr. John Coyle of Penn State University's Center for Supply Chain Research has estimated that in 2001, American importers and exporters left unclaimed as much as $10 billion in duty drawback. "Maybe they couldn't get all of it back, but a significant proportion could be reclaimed if companies kept better track of things," says Coyle.
What now?
So what's a manufacturer to do? Many rely on the shipper to handle the hassle for them. FedEx, for example, offers a range of compliance services. The airfreight giant recognizes that many customers simply wanted a way of ridding themselves of a burdensome chore, and in 2002 formed a specialized division, FedEx Trade Networks, to do just that. "We're already the largest customs brokerage in the U.S.," brags Ed Clark, its president and CEO.
Some of its compliance services are free, or more accurately, available from FedEx's Web site as part of the overall shipping service offered by FedEx. For other services, there's an explicit charge. All imports, for example, must specify a Harmonized Tariff Schedule identification code to Customs, found within the Harmonized Trade Schedule of the United States, a two-volume tome almost eight inches thick. Read it carefully: leather gloves attract one tariff, wool gloves another, and lined gloves still another.
FedEx makes the information available electronically, says Clark, and offers the services of its consultants—trained in dealing with such ambiguities—to categorize a manufacturer's entire inventory.
FedEx isn't alone in offering compliance services as part of a bigger package. Sea freight company APL does so, as well as global logistics software specialist G-Log.
"In the trade compliance space, there's an important distinction between content-specific vendors and process-specific vendors," says Lora Cecere, a director with AMR Research, Boston. FedEx and G-Log are examples of process-centric vendors, while content-specific vendors—which compile, maintain, and sell access to the data on tariffs, embargoes, and denied parties—include Vastera, NextLinx, and Open Harbor.
Some vendors straddle both aspects of compliance. FedEx, for example, acquired content provider WorldTariff, which covers the tariffs, taxes, duties, and preferential trade programs of 118 countries.
ERP players also are in on the act, thanks to tie-ins and partnerships with content providers. PeopleSoft, for example, has offered an in-built trade compliance capability since 1995, says Bob Dicello, senior product manager. "Any time an order moves through the system, or changes its status, there's a compliance check," he says. In this way, a manufacturing company can't accept a legitimate order, and then find through a subsequent change of customer name, address, carrier, or country of destination that it is inadvertently in breach of the law.
Schaumburg, Ill.-based electronics giant Motorolareckons it is big enough to handle its own logistics affairs, yet sources trade compliance content from FedEx's WorldTariff subsidiary. Access is through an online database, explains Eric Larsen, Motorola's senior trade compliance specialist.
"There's a FedEx solution that's more integrated with SAP, but we're an Oracle shop," he says. FedEx recently announced a conversion utility, but Larsen doesn't anticipate switching. "We haven't been able to sell the bosses on the benefits of making the investment," he says. "We can't go to the business and say, 'We need to be compliant,' because we already are compliant." That said, he acknowledges that businesses without Motorola's deep bench of compliance expertise—it has 85 trade specialists scattered around the world—might find making the switch worthwhile.
Although Motorola uses WorldTariff to make better sourcing decisions by calculating the actual landed cost of a potential purchase—cost of goods plus applicable taxes and tariffs—it finds that the benefits of compliance are difficult to estimate. "The ROI of compliance is a tough sell. It's hard to put a price on the fines you didn't pay," says Larsen.
Looking at ROI
Vastera has parlayed its expertise in the content aspects of compliance into soup-to-nuts international trade software offerings—TradeSphere Importer and TradeSphere Exporter, as well as a managed services capability—handling trade compliance for companies such as Ford, Black & Decker, Nortel, GE, and Lucent.
It also has a deep bench of experts. Georgetown University Law Center's Larry Christensen, for example, is a former senior official at the U.S. government's Bureau of Export Administration, and acts as Vastera's VP for international trade content. George Weise, Vastera's VP of global trade compliance, is a former commissioner of the U.S. Customs Service. To Weise, the hard cash ROI of improved compliance comes in two forms.
The first ROI is duty drawback. Claiming it—and claiming it correctly—is a complex business, and many manufacturers, as noted earlier, find it easier to leave the money on the table. The second ROI is supply chains that work better: "Getting the right information in the right hands at the right time to effect a smoothly running supply chain," as Weise puts it. With improved assurance that goods will show up on time, inventory buffers can be trimmed. Short term, money is saved. Longer term, both activities are self-financing.
It was a promise with obvious appeal for chemical manufacturer Schenectady International, Schenectady, N.Y., which operates 25 production sites across 14 countries. The company first selected Vastera as part of a J.D. Edwards rollout in 1998, explains Schenectady's manager of global enterprise solutions, Ken Rau. Last year the company revisited the decision when it implemented enterprise software from Ross Systems in its international operations—a decision subsequently extended to the U.S.
Once again, Vastera was the name that emerged from the short list. Vastera, explains Rau, is operational at sites in Mexico, Germany, China, and the U.K., and is presently being implemented in Switzerland and the U.S. It is planned to be operational next year in India, South Africa, Brazil, Korea, and Australia.
Routinely, says Rau, the Vastera system identifies orders that are in breach of compliance rules. Most times, it's because of a minor flaw in the documentation that might hold up a shipment at a port or border—bad news, certainly, but not catastrophic. Occasionally, though, it's because a denied party is involved. "Quite simply, the product performs exactly as we'd expect it to," says Rau. For any company keen to avoid a visit from people wearing blue jackets with yellow letters, that has to be good news.
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