How to Ensure Trade Compliance
Trade compliance refers to the broad set of regulations, certifications, transparency requirements and laws by which international trade is conducted. Companies, businesses and even countries strive to stay abreast of trade compliance and perform due diligence in matters of global trade. Why? Because failure to do so can lead to penalties, sanctions or imprisonment.
Though an essential component of international trade, trade compliance can be a difficult thing to keep up with – especially when your priorities lie with things like your business operations, provision of services or keeping your supply chain going. This is where clearBorder can help. We offer bespoke consultancy and specialist training modules to upskill your trading team, and trade compliance is one of our key areas of speciality.
This blog will examine trade compliance in closer detail, walking you through the information you need to know and helping to ensure your organisation always meets the necessary standards.
What is Trade Compliance?
Trade compliance refers to compliance with regulatory measures by which the import and export of products, services and technology are governed. In the words of UK Customs: a trade compliance check “allows us to check that all matters relating to customs and international trade are correct, including that you’re paying the right amount of tax” (HM Revenue and Customs).
Depending on your industry, your products or services, and the country or countries you import to or export from, there may be a huge number of laws, both national and international, that your business is required to comply with.
Trade compliance applies to all matters of import and export, not only those industries with tighter security controls, such as military technology, finance or aerospace.
Whatever the nature of your business, you’ll likely find that there are specific certifications, regulations and associated best practices you are required to meet in global trade. This is the essence of trade compliance.
Why is Trade Compliance Important?
First and foremost, trade compliance is a matter of law. And the risks associated with non-compliance can be severe.
Organisations such as HMRC (HM Revenue and Customs) or the US DDTC (The Directorate of Defense Trade Controls) will at times audit your import and/or export operations, so it’s vital to perform due diligence to avoid the risks of sanctions, penalties or imprisonment.
A quick look at the OFAC (Office of Foreign Asset Control) website illustrates just how many businesses fall short of trade compliance. It’s surprising to note the high profile of many of the companies listed there, as well as the often-extensive penalties they’ve incurred.
Trade Compliance Procedures
This all begs the question: what trade compliance procedures should you follow? How can you ensure that your organisation remains compliant?
Well, the exact procedures you’ll need to follow will depend on a number of factors: import and export countries, goods, products or services, ESG (environmental, social and governance) data, and supply chain sustainability, to name a few.
For specialist trade compliance consultancy tailored to your organisation and industry, contact the clearBorder team today. You’ll have access to unparalleled knowledge and practical advice to help maintain smooth trading.
With that said, there are a number of best practices and more general solutions you should maintain, in order to give your organisation the best chance of remaining trade compliant.
- Keep up-to-date, accurate records
- Maintain transparency of records, data and certifications
- Make these documents easy to access and available upon request
- Hire a compliance manager, or consult with trading specialists regularly
- Ensure your employees have access to training
- Ensure company resources are tracked and can be accounted for
- Remain cognizant of trade compliance updates in your country of operation
- Perform quality assurance controls on your products or services
- Check for controls or restrictions on items you procure
- Establish an ongoing trade compliance program
Risks of Violating Trade Compliance
The risks associated with non-compliance can be significant. Penalties can be relatively minor but they can be unexpected and costly to meet. They can also grow significantly for certain breaches.
Here, we’ve compiled a number of penalties that may stem from non-compliance.
- Monetary fines
- Shipping delays or supply chain stoppages
- Criminal sanctions and/or court proceedings
- Imprisonment
- Bans on import or export
What Does Trade Compliance Consist Of?
Trade compliance is best understood as broken down into eight distinct elements. Following them in sequence and ensuring each function according to design will all-but guarantee ongoing trade compliance. Below, we’ll walk through each element in turn.
Customs tariff classification
Commodity and tariff codes are used to classify goods. Classification certifications contain data such as duty rates, origin of goods, Intrastat and export control, and it’s important to get this classification right.
Using incorrect classification will alert Customs and raise suspicions about your internal operations, which can often lead to an audit and investigation. Mismanaged classification codes might also be grounds for penalties and/or fines.
Preferential origin
Preferential origin is where two or more countries have a special trade agreement in place. If your organisation deals with products or goods of preferential origin, you may not need to pay any duty at all when goods cross the border.
Non-preferential origin
This is essentially a statement concerning the origin of goods within a shipment. Non-preferential origin data is mandatory, and the rules surrounding it vary depending on the local laws of import and export countries.
Incoterms®
Incoterms® are internationally-recognised statements regarding the terms of a trading relationship. They outline the responsibilities and obligations of both the buyer and seller of products or services. Incoterms® pertain to the entire shipping lifecycle and supply chain, and represent a core component of global trade.
Therefore, it’s important that you determine, read, understand and apply Incoterms® in import and export. This will greatly reduce the likelihood of mishandlings, confusion, disputes or misunderstandings throughout the shipping lifecycle.
Licences & permits
Import and export of some products, such as military goods, chemicals, historical artefacts or POAO require extra certification. It’s your responsibility to establish whether you need a licence or permit to facilitate your cross-border operations.
If you hold such an authorisation, make sure that you adhere to the terms and conditions to avoid any violations.
Lack of an appropriate licence or permit is considered a criminal offence, and may see your goods confiscated, as well as charges being brought against you.
Trade controls
Some goods, software and technologies are subject to more stringent laws. This is because they are judged to present a higher-than-usual risk to consumers or countries.
Depending on the origin or nature of your goods and business, there may be various security controls which apply – US regulations like ITAR or UK export controlled goods, for instance – and you’ll need to meet these requirements in order to ensure trade compliance.
In some cases, an authorisation might be required even where an activity takes place wholly within or wholly outside of the UK.
A trade licence is required for trafficking and brokering export controlled items when this involves a company or person from within the UK (whether or not they are a UK person) or by any UK person operating overseas.
Brokering services can include activities such as drop shipping, arranging supply from overseas, and arranging inter-company transfers of listed goods. A licence might be needed to even negotiate to purchase, supply or arrange transit from one third country to another.
This applies even if the items are not exported from the UK or do not pass through the UK.
Customs management
It’s almost inevitable that, at some point, your import or export shipments will be subject to a customs audit. Whilst this isn’t necessarily something to be worried about, it’s important to have an action plan for how you will manage a customs check if and when you should face one.
Screening
As a matter of due diligence, you should be performing regular screening checks on your buyers, sellers and data to ensure you haven’t inadvertently entered a trading relationship with dangerous, sanctioned or otherwise ‘risky’ persons or entities.
To conduct screening checks, you should cross-reference all trading data against data contained in external and internationally-recognised databases: examples would include The UK Sanctions List or the US Statutory Debarment List. There may be several lists from different regulators and jurisdiction which you are required to check.
Valuation
In order to determine VAT and duty charges, HMRC will need to establish the value of goods and services imported to the UK. This means that every shipment must have a reasonable and justifiable valuation associated with it, and this valuation should comply with one of the six methods approved by the World Trade Organisation.
clearBorder: Transparency in Trade Compliance
Evidently, there’s a fair amount of time and effort needed to ensure trade compliance, but it’s important to do. The global trade in products, software or services presents opportunities but also a series of challenging security controls and regulations. You need to make sure your organisation is equipped to navigate these to maximise your opportunities.
With independent and expert trade compliance consultancy from clearBorder, you will be positioned to perform operations smoothly and efficiently, paving the way for smoother, safer, faster processes and improved returns. Contact our team now to find out more about trading across borders.