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Written by Trevor Morton
September 2011

Managing export compliance is mandatory, and governance failures can have far reaching consequences. Trevor Morton explains the key considerations in export compliance

The ease with which it is now possible to move goods across national boarders creates welcome opportunities for all firms large and small. Goods, technology, information and services can move freely in stark contrast to the past. Then, firms would be faced with a deluge of multipart documents or carnets, and almost ritualistic customs procedures, if only to move goods across the English Channel. Failure to have the right form in the right place at the right time resulted in tedious delays. More serious omissions and errors might have resulted in goods being impounded until the paperwork was in order.

The growth of the EU and other free-trade areas has for many created a perception of the universal and easy passage of goods of any type, anytime, and anywhere. Courier and freight services, now international by default, further compound the myth that, if its ready for collection, consider it delivered. As one of many packages that they will ship that day, it is bound to reach its destination, its contents and destination being of little interest to the authorities. Not so. Export transactions have the potential to create a web of complexity intended to conceal money laundering, bribery and breaches of export controls that range from illicit trade in rare species to the supply of weapons and materials to make them. Volumes of shipments may be increasing but, rest assured, customs and border authorities are getting smarter. International trade now is such that checking all documentation and every consignment could never happen. But analysis of data on shipments to destinations of concern, specific consignees and types of goods has, in the case of the UK-identified a number of breaches of export controls.

At a time when international trade is being trumpeted as crucial to re-starting our stagnating economies, the interdiction of breaches of export controls is an increasingly high priority for governments worldwide. For any organisation directly or indirectly involved in the export supply chain, rigorous controls and effective compliance management are essential if they – and their employees – are to avoid pitfalls ranging from customs seizures, punitive fines and imprisonment of directors. For the worst offences, even more draconian powers exist. Management should be under no illusion, failures of governance and compliance now have far reaching consequences.

So where do effective management controls begin when the kudos of winning an attractive export orders kick in? Firstly, do you know what you are exporting? Does the product, services or information you are being asked to supply breach export controls of your locality? And does it contain technology from nations with explicit controls on items that your organisation may deem as innocent sub-components? From microchips to high-pressure valves, and many seemingly benign raw materials are controlled items requiring export licences. Next, do the items contravene import controls to the country of destination? Due diligence is essential whether it is a one-off deal or a strategic exports deal. For organisations where exports are the norm, the appointment of export compliance managers in on the increase.

The role of export compliance management is to serve as a company’s local and, de facto, international expert to ensure both exports and import are in accordance with an array of regulations. The role requires the creation of robust control processes to monitor, track and record the import and export of all goods, both within the company, with suppliers and to customers. Goods, we should remind ourselves, includes materials, components and sub-components, software and data. Effective compliance requires training and awareness across an organisation, from R&D to legal, purchasing, ICT and sales.

Trade is an attractive medium by which to either disguise money laundering activities or conceal the ultimate destination of controlled or strategic goods. Complex chains of parties and intermediaries can be used to conceal the sources of funds for the transaction or the ultimate recipient of the shipment. An onerous aspect of compliance management, when exporting further afield, is ensuring all parties involved are who they say they are. Banks will not be party to transactions where they are not able to address anti-money laundering regulation. And, at the first hint of a suspect party to a transaction, banks are duty bound to inform their respective financial authorities. Any party to a transaction must report suspect transactions. Informing suspect parties to a transaction, or ‘tipping off’, is a very serious offence. Ignorance is no defence. Due diligence begins in the sales office. Appropriate awareness and education from export compliance leads should create a culture that ensures suspicious transactions are spotted at the outset of a sale, then reported and investigated.

There is a general awareness that export controls exist for benign goods such as works of art, endangered species and the like. At the other end of the spectrum, products such as firearms or narcotics are equally well categorised and controlled. But in between is a plethora of products which, whilst appearing benign, are subject to export controls. Many controlled exports fall into a category of ‘dual-use’. One such example is a Dosimeter, a simple device worn by hospital staff everywhere to measure exposure to X-rays. For a state intent on developing radioactive substances for non-peaceful purposes, the innocent Dosimeter becomes an essential tool of the trade. Exporting Dosimeters and countless other dual-use items requires the appropriate licence.

For exporters, there are countless other items which individually appear benign. But in the wrong hands, they have the potential to become the components of ammunition, weapons and, tools of suppression and torture. According to London-based solicitor Christopher David of law firm Kingsley Napley, “dual use items can be a difficult area for exporters. Care should be taken to obtain a licence if required and, that the licence accurately reflects the items that are concerned. UK’s Customs & Excise authorities scrutinise exports of controlled items carefully and not having the correct licence is a criminal offence. Since April 2009 Her Majesty’s Revenue & Customs (HMRC – consisting of the Inland Revenue and Customs and Excise), can obtain fines starting from £1,000 (€1,200) for failing to obtain a licence, through to two years imprisonment for a misleading licence application and finally up to 10 years imprisonment for intentionally evading the licencing provisions.”

Prosecutions and penalties

Awareness of prosecutions and penalties imposed is seen as part of the approach to stressing the needs for compliance with export controls and licensing. The UK’s Export Control Organisation (ECO) Prosecution Notices outline cases such as the attempted export of vehicles to Sierra Leone. Consigned to an ‘alluvial diamond mining and exploration company’, three military Land Rovers and two Unimogs vehicles were impounded. The prosecution resulted in 30 month jail sentences for two company directors. Freely available information would have told them the goods were controlled items. Breaches of export controls in the US are well documented and publicised. One landmark prosecution saw the ITT Corporation fined US$100m. Such events raise concerns as to how compliance by major corporations could be so lax.

According to Michel Dennery, a board member of FERMA, indications are that export compliance is high on the agenda for participants to this years FERMA conference. “Export compliance has traditionally resided within the legal department. The growth in international trade and increasingly complex global markets now requires a breadth of expertise and awareness. Export compliance management, a relatively new function, is a sought after skill. While harmonisation of export controls within the EU has been underway for some time, there remain ‘technical differences’ at a country level. Business risks such as penalties for minor breaches have far reaching consequences for companies and their directors. Reputational damage may result in companies being black-listed within export markets and by importing countries”.

By their very nature, export control regulations are complex and more especially in the context of dual-use. Compliance is mandatory, whether you are the original manufacturer or a mere pawn in the supply chain. Crossing over into the realms of strategic goods and breaching the export legislation of the numerous governments that are party to control agreements has the potential to unleash the wrath of numerous enforcement agencies, foreign and domestic. Their powers and those of the respective judiciaries have the potential to scar corporations and individuals for life. Clearly, manufacturing or trading in surface-to-air missiles and the likes is not the threshold for putting export compliance on your management agenda. Being a mere party to an inappropriately licensed transaction bears unwelcome risks to business continuity.

For significant breaches the penalties create strategic risks to a business. The mere suspicion of a breach of export controls can result in passports being confiscated. For a key director in a company this can be debilitating. In the event of prosecution, such directors become excluded from entry into an increasing number of countries, most notably the US. The worst-case scenario for failure to manage compliance across the supply chain for the exporter concerned could be the revocation of export licences and the barring of a company from exporting.

For organisations in export markets or those looking to revitalise their order books by venturing in to export, advice and guidance is essential. It is available from many sources including the consulates of exporting and consignee countries, risk specialists, insurers, and law firms. Information, freely available on the internet should be taken at face value give the frequent and often unannounced changes in legislation by some countries.


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