What is due diligence?

Due diligence in customs and import/export compliance is the process of assessing a company’s compliance with the relevant laws and regulatory bodies associated with importing and exporting goods and services.

It involves conducting a thorough investigation of a company’s import/export activities to identify any potential adverse impacts (risks) or violations in their operations, supply chain, or other business relationships, as recommended in the OECD Guidelines for Multinational Enterprises.

Why is it important?

Due diligence helps companies identify, prevent, or mitigate the adverse impacts associated with business operations, products, or services. 

The aim of import/export compliance due diligence is to minimise risks related to legal compliance, trade operations, reputation and business relationships, customs compliance and efficiency, national security, and financial considerations.

Thorough due diligence can help companies navigate the complexities of international trade and minimise the potential risks and liabilities associated with import/export activities.

Common pitfalls

Complex framework of legislation

Import/export compliance due diligence involves navigating a complex framework of legislation, including international, national, and local regulations. Examples of these include, but are not limited to:

• International Trade Agreements
• Customs Regulations
• Export Controls 
• Import/Export Licensing

This complex framework of legislation requires users to have a comprehensive understanding of the relevant laws and regulations. As UK law adjusts to Brexit and with political tensions rising across the globe, new rules and sanctions can be implemented at any time so knowledge must be up-to date to mitigate the risk of violation.

Misclassification of goods (HS codes & export control ratings)

Harmonised System (HS) codes are internationally recognised codes that are used to classify goods for customs purposes, whilst export control ratings determine the level of control or restriction on the export of specific goods or technologies. 

Misclassification of goods, relative to HS codes and export control ratings, is a significant risk to import/export compliance due diligence that can result in various compliance issues and consequences including:

• Customs Duties and Taxes: Misclassification may lead to underpayment or overpayment of customs duties and taxes that can result in penalties and fines, or financial losses for the company.
• Trade Compliance Violations: Misclassifying items with export controls may result in sensitive goods or technologies being exported to unauthorised parties or destinations; this can result in violations of export control laws with significant penalties and legal repercussions.
• Compliance with Trade Agreements:  Many trade agreements provide tariff concessions or benefits based on the correct classification of goods. Misclassification may lead to the loss of these benefits or non-compliance with specific rules of origin requirements.
• Supply Chain Disruptions: Misclassification can disrupt the smooth flow of goods within the supply chain. Incorrect classification may result in delays in customs clearance, additional inspections, or even seizure of goods, impacting the timely delivery of products and potentially damaging business relationships.

Poor record-keeping

Poor record keeping in import/export compliance due diligence can lead to significant challenges and potential compliance issues for companies. Effective record-keeping is crucial for demonstrating compliance, facilitating audits or inspections, and ensuring accurate reporting. Some key consequences of poor record-keeping include:

• Compliance Issues: Poor record-keeping makes it difficult to provide evidence of compliance with import/export regulations, such as customs documentation, permits, licenses, and shipping records. This can result in non-compliance, delays in customs clearance, penalties, fines, or even legal consequences.
• Audit Failures: Inadequate record-keeping can lead to failures during compliance audits or inspections. When records are missing, incomplete, or inaccurate, it raises concerns about the company’s ability to demonstrate compliance and may trigger further investigations.
• Operational Inefficiencies: Poor record-keeping can cause operational inefficiencies, as locating and retrieving relevant documentation becomes time-consuming. This can impact the speed and accuracy of customs clearance, supply chain management, and customer service.

Lack of planning

Planning is essential to ensure compliance with regulations, mitigate risks, and optimise import/export operations. Some consequences of inadequate planning include:

• Compliance Risks: Without proper planning, companies may overlook or underestimate the regulatory requirements and obligations associated with import/export activities. This can result in non-compliance with customs regulations, export controls, or trade agreements, leading to penalties, fines, or legal consequences.
• Operational Delays and Inefficiencies: Insufficient planning can cause operational disruptions and delays in customs clearance or supply chain processes. Lack of planning may lead to difficulties in obtaining necessary permits, licenses, or documentation, resulting in shipment delays, additional costs, and dissatisfied customers.
• Financial Implications: Lack of planning can result in unexpected financial impacts, such as higher customs duties or taxes due to missed opportunities for duty optimisation, failure to utilise preferential trade agreements, or unforeseen costs associated with non-compliance penalties.
• Reputation and Business Relationships: Inadequate planning can damage a company’s reputation and strain business relationships. Delays, compliance issues, or unreliable operations can lead to dissatisfied customers, loss of business opportunities, or reputational damage.

Conclusion

Import/export compliance due diligence is a critical aspect of international trade that requires a comprehensive understanding of legislation and regulations, and careful attention and planning. 

When filling out enterprise/government due diligence, companies must consider the common pitfalls identified to ensure they are adhering to regulations and maximising their operational efficiency

To address the risks associated with due diligence, it is recommended that companies seek the expertise of trade compliance specialists or legal professionals to ensure effective import/export compliance due diligence. 

About us

Naq Cyber and clearBorder work together to deliver automated due diligence procedures for compliant import and exports. Our team of experts are uniquely placed to simplify the complex and deliver scalable automated compliance solutions to your business. 

clearBorder

clearBorder provides independent advice on international trade, border systems, policies and processes. We deliver:

• online modular training suitable for individuals, teams or whole businesses to cut the risks and costs of trade across borders
• independent consultancy to ensure compliance, adapt businesses’ supply chains and maximise efficiency
• expert insight into policy and technology shaping the future trade borders, to enable clients to maintain their competitive advantage

We deploy our expertise and extensive partnerships across the freight forwarding, customs, policy-making and trading sectors to help our clients trade seamlessly across borders.

Naq Cyber

Naq automates data compliance for businesses importing into the UK market. Through a combination of an automated platform, and expert support, Naq eliminates the manual work and the complexity of achieving and maintaining compliance with UK industry frameworks such as UK-GDPR, MOD DART, JOSCAR, NHS DSPT, and more. 

By automating their data compliance, cybersecurity, and due diligence obligations, Naq has empowered numerous overseas businesses to unlock valuable opportunities with UK government departments such as the Ministry of Defence (MOD) and the National Health Service (NHS). 

Contact information

If you require further guidance regarding enterprise/government due diligence, you can contact us here.