This article was written by Paul Mayer, Executive Vice President & Melissa Bucukovski, Senior Consultant
Businesses and organizations can grow and expand via a variety of approaches and strategies.
One method for growing a business is to expand operations outside of the United States and offer goods and services internationally. International expansion is not a simple undertaking, but it can often yield advantageous and profitable results if management executes an appropriate globalization strategy. There are various factors management must consider when expanding outside of the U.S., such as supply chain and logistical matters, local market demand and conditions, local laws, culture, and political climate. A critical factor to consider in the regulatory space is Export Compliance. Countries all over the world have specific laws and regulations for exporting and importing goods, which are often complex and differ from one another. If these regulations are violated, not only can the violating entity face sizeable penalties and fines, but day to day business operations will be delayed and additional costs will be incurred. For example, if a U.S. company has a customer in Argentina, the U.S. company must be up to date on the requirements of Argentina’s port of entry. If the goods are not shipped in accordance with the specifications, they will not be accepted into the country. That will lead to delays in the Argentinian customer receiving the goods they ordered and additional costs if the goods need to be shipped back to the United States.
The premise of Export Compliance can be overwhelming if your company is looking to do business in another country and can even cause you to question if it’s worth it to go outside of your borders. The single most effective and comprehensive way to be confident your business can comply with and is complying with the complex Export Laws is to develop an Export Compliance Program (ECP). The U.S. Department of Commerce Bureau of Industry and Security (BIS) published Export Compliance Guidelines containing eight elements making up an effective Export Compliance Program. The elements are as follows:
- Element 1: Management Commitment
- Element 2: Risk Assessment
- Element 3: Export Authorization
- Element 4: Recordkeeping
- Element 5: Training
- Element 6: Audits
- Element 7: Handling Export Violations and Taking Corrective Actions
- Element 8: Building and Maintaining an Export Compliance Manual
While development of a comprehensive ECP is not a current regulatory requirement, the federal government expects all applicable organizations to address the key elements of an ECP. Further, the ECP is the most complete way to ensure compliance with individual regulatory requirements of the Export Administration Regulations (EAR), International Traffic in Arms Regulations (ITAR), and Office of Foreign Assets Control (OFAC), among other federal regulations. In addition, a documented and complete ECP is the most effective way to mitigate higher level scrutiny from governmental oversight entities.
The following section provides a description of each element along with some examples and best practices for what they may look like in an organization.
Element 1: Management Commitment
Senior Management commitment is the most important factor in the success of an ECP. With that support, the ECP is more likely to be fully embraced by the organization and integrated in the company’s daily operations. Every effective ECP is a top-down process with the organization’s senior management giving significance and legitimacy to the program by publicly supporting compliance policies and procedures, providing sufficient resources, and supporting export compliance training and training sessions.
A great way to demonstrate strong management support and commitment for export policies and procedures is to have the Chief Executive Officer, President, or another senior executive, personally sign the Management Commitment Statement. This formal statement communicates to all employees and staff the importance of export compliance and the commitment to adhere to the requirements of the EAR. This statement should be reviewed and disseminated annually for all employees to read and sign. It should also be included in the opening pages of your ECP manual.
Element 2: Risk Assessment
Risks in export compliance are threats that can negatively affect your organization’s reputation and export business, if ignored. The goal of this element is to identify preventable risks your company may face and then build safeguards to control for these risks.
Many companies fail to identify their risks early on and focus solely on getting orders out. This can create vulnerabilities in the compliance program and then require much more work later to correct. Start early and invest in a compliance program that assesses your organization’s risks.
Element 3: Export Authorization
If your exports include items on the Commerce Control List (CCL) other than EAR99 items, (typically low technology consumer items under less scrutiny for exports), then Element 3 may be the meat of your ECP. Even if you only export items classified as EAR99, the screening portion of this element is crucial for you. The goal is to build procedures, processes, process flows, and decision
tables to help guide employees to make consistent and correct export decisions. There are four parts to this element:
- License Determination
Element 4: Recordkeeping
Part 762 of the EAR describes how long to keep records, what type of records are required to be kept, how to reproduce documents if required, and which documents are exempted from retention.
There are some documents that may not be required by regulation, but it may be in your best interest to maintain these. For example: Internal documentation that describes the technical decision to classify one of your items in a specific Export Control Classification Number (ECCN) and who made these decisions, would be extremely critical to maintain in your export control records. Another example would be disputes of due diligence between you and your freight forwarder or screening that was conducted for your customers. These documents will help prove your due diligence.
Element 5: Training
A good training program is critical to having an effective compliance program. Employees are often consumed in their day-to-day tasks and have little time devoted to export compliance. Export compliance managers need to get their attention and cooperation. In designing the training program, look to tailor the message as specifically as possible to help various staff members understand their role and how they need to contribute.
Characteristics of a good training program:
- Provides job-specific knowledge based on need
- Communicates the export responsibilities for each employee
- Holds employees accountable for export training through assessments
Also, a training program should include periodic reviews and revisions to discuss the changes in an organization’s products and services, end-uses or end-users, and changes in the EAR. Organizations need to be on top of those changes and communicate the impacts of each to their employees.
Element 6: Audits
To keep a compliance program running smoothly, the system and its parts must be tested and recalibrated. Export compliance managers will need to keep the program dynamic – altering the program with changes in operations, products, and export control regulations. Audits assess the effectives of current processes and check for inconsistencies between these and day-to-day operations.
If resources allow, it is a good business practice to periodically utilize an outside auditor. External audits can provide an unbiased, third-party evaluation, and validation, of an organization’s overall export compliance program and practices.
Element 7: Handling Export Violations and Taking Corrective Actions
An essential part of an organization’s export compliance program are procedures which provide clear guidance to all employees concerning what actions to take in the event of suspected incidents of export related noncompliance. This is an area that is often not thought of or included in export compliance programs because management feels like they have a good system in place and the organization would never have an infraction of export control regulations. Early detection and fast responses to resolve the noncompliance issue is key to minimizing your organization’s exposure.
Element 8: ‘Build and Maintain Export Compliance Manual’
An Export Compliance Manual that incorporates each of the elements identified above is critical in developing, implementing and maintaining an effective ECP.
Key Steps to Consider
- Draft Management Commitment Statement.
- Develop, document, and implement a formal risk assessment process.
- Develop a process to periodically evaluate/screen for items that may be added to the CCL.
- Develop, document, and implement a recordkeeping policy/procedure.
- Review and update the current training program and assess and develop additional required training.
- Implement a formal auditing/monitoring process.
- Develop, document, and implement a process for reporting any potential export compliance violations and/or communicate the process for utilizing the anonymous hotline.
- Develop and implement (update as needed) the ECP manual and review your Export Compliance Program on an annual basis.
The Bonadio Group is a Top 50 CPA Firm in the country with a team solely devoted to Compliance Programs (development, implementation, assessment, and ongoing monitoring). Our team of experts work with organizations around the country to assure adequate and effective compliance programs are maintained.
If you have any questions or are interested in learning more about this topic, we’re here to help. Please do not hesitate to reach out to our trusted experts today.