Build a Strong Framework for Trade Compliance
These five components of trade compliance can help companies operate effectively in today's international marketplace.
By Misty Rutter -- Supply Chain Management Review, 1/1/2007
Operating in the international marketplace has become a risky business. Heightened security measures and stepped-up governmental enforcement programs have made compliance with international-trade regulations more challenging.
The task of the corporate compliance officer is to navigate this treacherous terrain and build a sound compliance structure that also allows the company to effectively conduct business. U.S. Customs and Border Protection (CBP) has published “The Five Components of Effective Internal Controls,” a set of recommendations that provide the building blocks for this structure. Here's a look at how importers and exporters can use that framework to develop strong compliance programs.
1. Create a Culture of Compliance.
Management commitment is the cornerstone of any compliance program. Fortunately, it has become easier in recent years to get that commitment, now that executives are personally liable for noncompliance under the Sarbanes-Oxley Act.
The tone set by a company's executives carries throughout the organization. If a corporate culture of compliance exists, then internal controls are less likely to be viewed as a nuisance or something that needs to be circumnavigated. The first step toward creating this environment is to have a corporate policy issued by the chief executive. This policy should communicate: 1) management support for the compliance organization, 2) an insistence on the ethical and lawful transaction of business, and 3) intolerance for willful disregard of regulatory requirements.
Part of creating a culture of compliance is the visibility and stature of the company's compliance group. The compliance officer should have access to the executive level; he or she should also be empowered to interact with other departments within the company and to stop a transaction or activity that could lead to a violation. At many of the companies I've worked with, the compliance function reports to the legal organization. This structure can provide the necessary visibility to the executive level as well as elevate the stature of the compliance function. The key is to ensure that compliance does not report to an area where there could be a conflict of interest, such as sales or customer service.
2. Assess Your Risk.
Companies need to identify areas where they could potentially fall afoul of government regulations and to develop methods for managing those risks. Conducting an internal assessment of your current compliance program is a great way to start. Evaluate each area of compliance to determine if it is effective, documented, consistent, and—perhaps most importantly—current. Many companies that I have assisted have compliance manuals. However, some of those manuals had been created years earlier and had never been updated. That was a mistake: Neither the regulations nor the business environment is static, so a compliance program needs to evolve along with them. To make sure that happens, monitor the Federal Register for changes to the regulations. Update your procedures and communicate those changes to affected departments.
You should also be wary of factors that increase the risk of noncompliance. Developments such as staff turnover, rapid growth, and major business changes need to be managed. Successor liability is another area where many companies get into trouble. If you do not have a good due-diligence process for evaluating potential acquisitions before the deal is done, you could wind up inheriting a messy enforcement case. The acquisition of even a small business could throw you into a whole new regulatory arena. One of my clients, for example, had a good compliance program in place for its U.S. Department of Commerce export controls. But when the company acquired a new specialty-materials business, it suddenly found itself under International Traffic in Arms Regulations controls and had to revamp its compliance program.
3. Establish Control Activities.
Establishing internal controls is quite simply a matter of creating policies, procedures, and organizational structures that will minimize risk to your company. Procedures should be effective but not overly burdensome. You want to achieve compliance without bringing business to a screeching halt. Document what you do, and do what you document—but don't get unnecessarily tangled up in red tape. (ISO 9000 process standards lend themselves nicely to documenting trade-compliance programs.)
Compliance procedures can be either preventive (such as requiring supervisory approval for certain activities) or detective (such as periodic reviews of import entries or export declarations). All procedures should be kept up-to-date to reflect any regulatory or business-process changes. Take advantage of documented change-management procedures and formats that may already be in place in your company.
You should also develop control requirements for your suppliers and other supply chain partners. Work with your procurement department to require suppliers to provide information about their products' classification, country of origin, and eligibility for duty-preference programs. Develop scope-of-work documents for service providers such as freight forwarders and customs brokers. Work with your legal department on terms and conditions for distributor or partner agreements to ensure that trade-compliance requirements are spelled out.
Outsourcing compliance functions to outside service providers is a growing trend. But it is important to remember that it is ultimately the importer or exporter of record who is liable for any violations. Likewise, more and more companies are automating their trade-compliance function. I am a big fan of automation. Global traders cannot possibly manage compliance matters successfully with manual processes alone.
Nevertheless, it's important to remember that even the most sophisticated trade-compliance software does not eliminate the need for human intervention. That's because there are many nuances in the regulations that require analysis and interpretation. In other words, an automated solution should not be seen as a replacement for a talented and dedicated compliance group; it should be an effective tool for that group to use.
Record keeping is a key element of internal controls. Federal regulations require that certain documentation related to imports and exports be maintained and be accessible for a minimum period of time, typically five years. Make sure you have a documented record-retention schedule. And remember that these requirements may also apply to records from other departments, such as finance, procurement, order management, and shipping/receiving. Work with affected departments to ensure that they adhere to the same record-retention standards.
4. Keep Communicating.
In a nutshell: train, train, and then train some more. The higher the level of awareness within your organization, the more effectively you can maintain a compliant environment. Establish a training program with a recurrent training schedule. Some of my clients provide general awareness training on trade compliance to all new employees globally. At first glance this may seem to be overkill, but it is important to ensure that all employees who can affect trade compliance understand their responsibilities.
Keep training materials updated and send communications to affected departments when regulations are amended. Sending out a compliance newsletter or creating and maintaining an electronic bulletin board for compliance-related notices and updates has worked well for some of my clients.
I also recommend partnering with government agencies. Attend government-sponsored update sessions to stay current and to develop a dialogue with officials. Don't be afraid of being “on their radar screen”—they really are there to help.
5. Create a Monitoring Program.
An internal audit program is essential to any successful trade-compliance program. Once you have established internal controls, those controls need to be checked for effectiveness. Create an audit template and schedule. Develop a corrective-action plan that you can apply when discrepancies are found, and then check that the plan has been put into action. It's also a good idea to set up some kind of anonymous reporting mechanism, such as a hotline, so employees can escalate potential compliance problems. Let them be your eyes and ears.
These fundamental components provide the basic building materials of a solid, effective, trade-compliance program. With this strong foundation, your program will protect you—and your company—from the considerable risks associated with non-compliance.
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