Risk Management - November 1 2021
As global trade policy affects supply chains and importing and exporting, companies often have interests on both sides of global trade issues. They want lower costs and efficient labor sources and want to sell their goods and services with minimal restrictions. They also want quality imports and to engage in ethical business practices while maintaining national security. Attempting to balance these needs, the U.S. government continues to impose additional compliance requirements on businesses engaging in cross-border activities. As a result, business leaders need to know their supply chain and all the parties involved, including from where and whom the company sources imported goods and materials, the beneficial ownership of financial backers, the ultimate uses of products, and the identities of customers and product end-users. This information will not only minimize risk by ensuring compliance, but can also help identify strategic opportunities and areas for growth.
Biden Administration Activity
The Biden administration continues to review specific Trump administration decisions on trade policy, but generally is staying the course. For example, President Biden is maintaining Trump administration positions including: imposing additional duties on imported Chinese products; treating Hong Kong as part of China instead of an autonomous region with special trade status; banning importation of products made with forced labor; and minimizing U.S. reliance on Chinese imports of strategic goods, including rare earth metals and semiconductors. President Biden also continues to implement economic sanctions against individuals and entities as a way to support U.S. national security and foreign policy goals, and is instituting a proactive “Buy American” domestic policy in government contracts to boost U.S. manufacturing capacity.
At the same time, the administration has renewed cooperation with traditional U.S. economic allies and is making efforts to resolve long-standing disputes to address mutual interests in the global marketplace. These objectives mirror and support parallel Congressional recommendations to secure U.S. supply chains and foster closer cooperation on resources and investments with traditional U.S. allies as an alternative to reliance on adversaries such as Russia and China.
Moreover, the Biden administration has increased regulatory enforcement activity government-wide, from the Department of Justice and the Federal Trade Commission to the Treasury and Commerce Departments and the Securities and Exchange Commission (SEC). Numerous executive orders and administration policies focus on protecting U.S. technology, infrastructure and data. Companies that have not screened their business partners—including investors, suppliers and customers—could be caught off-guard and face significant financial and reputational penalties from these new and proposed requirements.
Responding to Increased International Trade Regulation
In the near term, expect an increase in government regulation on all cross-border transactions, as well as in customer requests for suppliers, service providers and third-party partners to provide data related to U.S. import, export, supply chain and foreign investment compliance. Everyone throughout the supply chain should be performing enhanced diligence to ensure they are not assuming unknown liabilities through the actions of third parties like importers, agents or distributors, suppliers of goods or services, and other business partners. For example, companies should expect that customers may require proof of non-China sourcing, and that U.S. Customs and Border Protection will expect certification that no product originates specifically from the Xinjiang region of China. Companies should also expect increased restrictions or prohibitions on products tied to forced labor, requiring importers to proactively review the labor practices of suppliers.
Additionally, companies should prepare for the SEC to require beneficial ownership information of shell companies, and for the Committee on Foreign Investment in the United States to actively seek information on beneficial ownership and corruption history of foreign investors and ultimate beneficial owners of U.S. businesses.
Other government actions may include the Treasury Department adding new entities to sanctions lists and the Department of Defense raising “Buy American” content requirements for government contracts. The Commerce Department may also require companies to develop proactive anti-boycott and export notification policies stipulating that they will not participate in unsanctioned foreign boycotts, and will report any requests to do so.
In practical terms, management of trade-related issues must change. Supply chain and logistics details can no longer be middle-management issues that rarely float up to the C-suite. Rather, they must be part of a company’s strategic planning. Companies that will perform best in this new environment are those with an open-minded C-suite that encourages creative thinking about trade-related issues. They will likely expect and encourage taking global geopolitical risk into account in supply chain planning, considering ESG issues up front by identifying how new or expected regulations will restrict or prohibit imports, and adjusting supply chain or product design choices accordingly.
If an entity in the supply chain or supply region becomes prohibited, the company should know how and when it can shift production and find alternative suppliers. Ensuring the use of the correct country of origin for goods and services will also be important. Country of origin affects the import duties, liability for penalties under customs regulations, or whether a company can take advantage of the benefits of current and future U.S. trade agreements. It also affects a company’s ability to provide the U.S. government with goods or services under the Buy American Act.
Reviewing all import classification numbers and using the correct tariff codes is also vital to import compliance and to ensuring that regulations over other tariff codes do not accidentally affect the company’s imports.
Companies should also identify whether it shares any domestic technology with foreign individuals, even over the internet or with foreign persons in a company’s U.S. offices, as this may be prohibited or require an expert license. If applicable, consider whether certain mergers, acquisitions, foreign investments, joint ventures or other deals may attract U.S. regulatory scrutiny based on the nationalities of all parties involved, even indirectly.
To successfully incorporate these activities into a company’s strategic planning, compliance professionals and experts on these trade topics need a seat at the table to share their marketing savvy, supplier knowledge, and regulatory understanding. In-house counsel are critical partners as well, as they can often identify these issues before they become major problems and can provide advice on advantageous alternatives. For example, if your company is paying Section 301 import duties and you have not joined the pending class action lawsuit at the Court of International Trade for a refund, you should be asking your experts why not. Joining the lawsuit may provide a cost-effective opportunity to obtain refunds of List 3 and 4A Section 301 duties.
Now is a perfect time to review or institute robust compliance programs to ensure protection for the business and the key players at the top, who also carry personal liability under many trade regulations. Implement risk-based policies and procedures appropriate to the company’s size and activities and keep tabs on your entire organization through a top-down, organization-wide compliance program. If you have portfolio companies or subsidiaries, you are likely liable for their violations as well, and compliance efforts should be extended accordingly.
The company will also have to ask suppliers for certifications to support trade policies and conduct restricted party screenings on customers, partners and vendors. Because entities can be added to sanctions lists at any time, you should continuously and consistently re-screen those with whom the company has ongoing relationships, perhaps once a quarter. It is important to perform due diligence on all foreign suppliers, agents, distributors, customers, service providers and other third parties, which may include asking deeper questions regarding sourcing, ownership and other details. For example, under U.S. sanctions laws, any party a sanctioned entity owns 50% of is also considered sanctioned. Certain U.S. goods cannot be shipped to military end-users or for military end-uses in China, Russia, Myanmar or Venezuela. It is not enough to understand just the initial transaction—you need to understand who the transaction benefits, where the goods are coming from, where they are ultimately going, and the purpose.
To avoid unknowingly violating U.S. sanctions prohibitions, it can be helpful to implement IP address blocks to mitigate the risk that entities in embargoed locations such as Cuba, Iran, North Korea, Syria and the Crimea region of Ukraine engage with your business. Other similar techniques include taking sanctioned locations off drop-down menus and preventing processing of transactions with addresses in sanctioned locations.
Internally, companies should keep an anonymous whistleblower hotline and ensure employees know how to report red flags and potential or suspected violations. Additionally, one of the best ways to avoid compliance missteps is to train employees on why they are being asked to follow certain procedures or complete certain tasks, and ensure they understand the consequences of missteps. Deputizing individuals as part of the compliance team will make them more invested in ensuring the company maintains compliance. Regular compliance audits may also prove useful since a company finding a violation on its own is a better scenario than receiving a subpoena from the Treasury Department. Interview parties and partners, and scrutinize documents and practices for warning signs and lax compliance procedures.
The company should also seek specialized legal advice when needed. There is a lot to know about the political trade agenda and current trade compliance requirements, and penalties for non-compliance are high. Do not rely solely upon a customs broker who may be helpful as an agent or logistics consultant, but bears no liability if your classifications or country of origin are incorrect.
Stay current on U.S. trade policies so you can get a sense of what is coming and make any necessary preparations. The companies that will succeed best in the coming years will be those that raise the level of knowledge among their C-suites and board of directors, listen to their experts, embrace the incoming changes, and identify creative solutions to continue operations while remaining compliant.
Above all, remember that engaging in global business is complicated, and most companies have missteps from time to time. The measures discussed here can help ensure you have the strongest possible program in place now, but you should be prepared to revisit them regularly to meet changing compliance requirements or increased scrutiny.
Reprinted with permission from the November 1, 2021, issue of Risk Management. © 2021 Risk and Insurance Management Society, Inc. (RIMS). All Rights Reserved.
