International Trade Controls & Compliance…. It’s not only for the rich.


Canada is largely a trading economy; some estimates put one out of every three jobs as being dependent upon our exports. And, thanks to NAFTA and a variety of largely geo-political factors, within the exports sector we are disproportionately dependent upon our neighbours south of the 49th parallel.1 Whether this situation is good, or not so very palatable, depends upon individual points of view and is an existential sort of question that is beyond the scope of this article. This, however, is a reality that businesses-for-profit need to acknowledge ungrudgingly as well as strategize for.

One of the areas of relative complacency within the Canadian business landscape relates to international trade controls and compliance (more commonly referred to as “Export Controls”).  Somehow, there is a wide-spread impression out there that trade compliance is something that impacts a very small minority of business organizations and it should continue to be left to be the exclusive preserve of the very affluent, large, high-tech companies. Nothing could be farther from the truth.

Commonplace myths about trade compliance

Some of the most common—and dangerous—myths about export compliance go something like this :
- “We are not in the high-tech sector so we don’t have to bother with export controls.
- I only sell to companies within Canada and the U.S., and nowhere else, so why worry?
- My products do not have a military use, so where’s the beef?
- I only sell to select intermediaries and they, in turn, distribute my products widely; it is their problem.
- I do not deal with anyone in ‘black-listed’ countries, so I do not have to be concerned.
- My products are sold in the mass-market (or, retail) environment and such products are freely available in a lot of countries, so they could not be subject to any export controls.
- All my exports are routed thru’ a freight forwarder who does this for a living and is paid to worry about such things.
- Once my products leave Canada and/or the US, we are free from all such restrictions.
- I have no physical exports–my products are sold over the internet, so I don’t have this issue.
- So long as I avoid the bad countries, why should I worry about who/which company is buying my products?”

They sound like innocuous statements but are, unfortunately, highly loaded half-truths that can have potentially devastating consequences for a business entity, putting its very viability and existence at peril. For instance, export controls frequently apply even to customers located in allied or friendly NATO countries. Whom you specifically sell to is often as important as which country that customer is located in. Sharing of technical literature or specialized design blue-prints during a normal sales cycle could be construed as a violation in certain situations.  Depending upon the specific industry and/or circumstances, a visit to your production facilities by a foreign national could, by itself, constitute a violation. Not doing your due-diligence with a certain sales transaction could come back to bite you unexpectedly.

Why the US regulations are an important piece of the puzzle?

Generally speaking, any successful Canadian company worth its salt is deeply dependent upon the US market for its sustained growth.  It would not be far-fetched to state that a significant percentage would not even be viable without access to the vast US market, the segment that helps defray the costs of research and development over a much broader sales base.  This is especially true for those in the high-tech industries. And that’s where potentially the biggest rub is.

Canada and the USA have a strict bilateral understanding to watch out for each other’s interests in the area of international trade compliance and they take this responsibility seriously.  The two countries have a similar philosophy about export controls and compliance, but differ very drastically in their respective approaches at the operational levels.  The devil, as they say, is in the detail and this is ever so true in the area of compliance.

Canada has adopted a more nurturing, trusting approach vis-à-vis businesses.  The USA, on the other hand, has an approach that could only be called highly activist, hawk-eyed, and prosecutorial.  The combination of Canadian and US controls makes for a highly complex, veritable jungle of regulations that sometimes manages to confound even seasoned legal minds specializing in trade compliance.  In the changed international security and business environment since 9/11, this is even more so.

US government has been very ingenious as well as effective in reaching—over-reaching, if you will—beyond its national boundaries in discovering, investigating, and prosecuting apparent cases of export control violations, and has chosen to make examples of high-visibility US corporations (more than one from the Fortune 500 list !) as well as non-US based entities in the hope that they would serve as deterrents to the others.  In extreme cases, they have managed to put even some non-US (including Canadian) companies out of business.

For starters, while they may not directly be able to rope-in the Canadian parent, they can and will go after the US subsidiaries and / or partners, and work their way back upstream to unearth cases of suspected violations.They can also effectively shut Canadian businesses out from the US market, commercially as well as for sales to Government departments/entities. At the very least, a citation by the US Departments of Commerce or State can not be good news for any business, internationally, considering that such citations are widely distributed and publicized.

Whether the USA is being ‘extra-territorial’ and who gave them the moral authority to go about being the policeman of the world, etc., are philosophical questions that can be debated ad nauseam.  What it boils down to in practical terms is that the U.S. is a formidably large market, will continue to be so in the foreseeable future, and, as Canadians, we are inextricably intertwined with what happens in the US at the governmental as well as commercial levels.

The moral of the story so far? Export controls are an intricate part of our reality, a reality we need to deal with.  While it is virtually impossible to compress the vast and complex export regulations and deliver a summary in one paragraph or even a couple of pages, as a broad generality, irrespective of whether or not you are involved with cutting-edge technology, you need to be mindful of your exports at the country, entity, individual, and end-use level.

A healthy, practical approach

With some initiative, effort, and ingenuity, you can reduce this monster to a manageable level.  Some of the tips:

1. Know your product: this is not as innocuous at is sounds. As a business, you need to thoroughly understand your products and services not only from a technology stand-point, but also from the perspective of what possible uses they could be put to?  ‘Dual-use’ is a term used extensively in this area which, in over simplified terms, means that your products/services would normally be used for a simple commercial or civil purpose, but could also conceivably be used in a military application or in making weapons of mass destruction or for advancing the agenda of a terrorist outfit.

2. Know the controls: you need to familiarize yourself with the basic parameters of the export controls of your home country, as well as export controls of any country whose technology/sub-assemblies might be incorporated into your finished product/service offering, and any import restrictions in your customers’ countries. When impacted by multiple jurisdictions, you may have to adopt a ‘lowest common denominator’ approach.

3. Compliance Team is not a single department: while typically a core group of individuals is assigned the formal responsibility for compliance, it is an obligation that needs to permeate the entire organization.  For a successful compliance program, it is imperative that the core team is charged with spearheading this activity in a cross-functional environment, based on complete and on-going collaboration with marketing, sales, operations, engineering, software development, IT, Product Management, and logistics, amongst others. The entire organization needs to view them as their ‘go-to-group” for any marketing, sales, product, and logistics initiatives and they, in turn, need to develop the soft skills so as to be able to influence without direct authority. Engage them early in the process so you are not confronted with unpleasant surprises, especially when it is least convenient to your plans!

4. Location, Location, Location: as important as the compliance activity itself is the consideration of where within the organization to best locate the compliance team in terms of its reporting line(s)? While there is no single correct answer, locating it within the sales function, for instance, would dilute its effectiveness very considerably.  It is best to align the compliance teams with departments known for fiduciary responsibility, such as Finance, Taxation, or Legal. It is an activity that should not be hampered by budgetary constraints but should be driven solely by considerations of accuracy, timeliness, and regulatory adherence.

5. Adopt a macro model: while export controls do tell you WHAT you need to do, they do not necessarily tell you HOW you need to achieve the control objectives, something that is left to individual companies’ devices. Since no two companies or business models are exactly alike, each entity needs to evolve the optimum export compliance model appropriate for its type, size, and geographical spread of sales operations.

6. Build some in-house expertise: if your products/services even remotely attract any kind of controls, you need to invest in some in-house personnel that will serve as your ‘expert resource’ in this area, be a knowledge base for the entire company, and ensure some continuity through the years. This is akin to having a General Counsel even though you might engage specialized outside counsel for specific legal cases. While such a compliance resource will spear-head all related work internally, it would need to be done in collaboration with Sales, Legal, Finance, Product Management, R&D, Technical Support, and any other stake holders, and an integrated, cross-functional approach is called for. Some training—initial and annual/biannual refreshers—is a worth while investment.

7. Identify a specialized external counsel: that you will tap for vetting any quasi-legal submissions or for their opinion on potentially tricky cases. These individuals do this for a living and can often help you pre-emptively avoid land-mines. It goes without saying that you might need more than one such resource, especially if impacted by multiple jurisdictions. Don’t hesitate to ask for references.

8. Do your due-diligence: especially with new customers.  Get to know their business, their target markets, and so on. You do not want to become an unwitting accomplice in someone else’s nefarious activities, or even be drawn into an innocent mistake committed by them. “Caveat venditor” is a good norm to follow, especially for those selling sophisticated products and/or technology.

9. Investigate ‘Red Flags’: While individual companies can not be expected to  function as FBI units, they should not ignore inconsistent information they discover in the normal course of the sales process.  For instance, is your customer located in a 110V country asking for 220V equipment? Does your customer insist on buying only the basic product, without installation and post-sales support even though that is the norm in your industry ?  Has the customer given a c/o ‘Ship To’ address belonging to a local freight-forwarder and is being cagey about its’ registered office and other such details or the intended final destination of the shipment? Does the customer indicate a preference for paying cash even for substantial invoice amounts?  If something does not strike you as being ‘right’, you do need to dig further.

10. Try to find common ground between export control needs and your internal controls /quality processes: while this does not seem obvious at first, there is a high degree of commonality amongst quality processes, process optimization, and export compliance as all of them strive to ensure integrity of internal systems and improved efficiency.  Do not view export controls as any different from corporate taxation, for instance: both create some extra work but are realities of doing business, make for good corporate citizens, and help ensure long-term viability of the businesses.  Subaru of America (SOA), for instance, has undertaken considerable up-front work in terms of overlapping their internal controls —developed under the Sarbanes-Oxley program (“SOX”)-with their cargo security and trade compliance programs.  As a result, they are now realizing very significant returns—across the organization—in terms of strong stability and predictability in logistics activities, streamlined, value-driven processes, significant internal support for customs compliance activity, improved risk management, and complete visibility.

11. There is only one constant—Change!: While the business climate, in general, has undergone a virtual paradigm shift over the past one/two decades and we have somewhat gotten used to working in a very fast paced environment, this is doubly true in the area of trade controls and compliance. Regulations are constantly evolving and, post 9/11, governments globally have become progressively sensitive to security concerns. Thus, businesses need ‘to constantly run to stay at the same spot’ (the ‘treadmill effect’) and the need to adapt their strategies and processes on an on-going basis has never been more pressing. This also begs the need for periodic refresher training across the organization.

While following the dictates of export controls might seem onerous at times, it makes for good business, especially in today’s international security environment. Businesses can either be dragged into it, kicking and screaming, or they can choose to address the critical issues head-on and derive competitive advantages out of their initiatives. With the right approach, not only can this tiger be tamed, it can become your ally.  

Provided by Sterling Agility.
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1 79% of the Canadian exports are US-bound (Source : Stats Canada)