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Finding out that the government wants to do an end-use check on your export is a lot like finding out that you’re being audited by the IRS. Anxiety begins to take over. You may ask yourself, what did I do wrong?

The reality of the situation is that you may have been selected at random, so don’t panic. Through the U.S. Bureau of Industry and Security—the agency that performs these checks—the government is attempting to verify that your exported goods are not being used by the wrong people or for the wrong reasons. Ultimately, end use checks are a proactive way to protect national security. They help the government inhibit the proliferation of weapons of mass destruction, limit support of terrorism, and identify unauthorized end users.

Behind the Scenes

Although the government performs two types of end-use checks, one pre-license and one post-shipment, the majority of checks are post-shipment.

Fifty percent [1] of post-shipment end-use checks are conducted by Export Control Officers in U.S. embassies and consulates in Moscow, Beijing, Hong Kong, New Delhi, Singapore, and Abu Dhabi. The other fifty percent of checks are conducted by U.S. investigative officials.

During each check, the exporter will be asked for all documentation related to a particular shipment. The Export Control Officer will then take steps to verify that the item is being used as intended by the end-user, at the stated location, as noted in the shipment’s documents.

This may involve physically visiting the foreign consignee’s operations to verify location and correct use.

If the officer discovers that the item is not in the location stated on the documents or is being used improperly, the check’s results will be considered “unfavorable” and the exporter’s future shipping activities will be monitored more closely by government officials or in some instances, completely prohibited.

Avoiding Unfavorable Results

Loss of export privileges is a death sentence for U.S. companies that sell their products overseas. So how do you avoid “unfavorable” end-use check results? The answer lies in how well you complete your screening, know your customer, keep your records, and review your documentation.

Complete your screening

This one is simple. Don’t attempt to ship your exports without knowing your screening requirements and completing them in full. If you export EAR99 goods, you are not exempt from these requirements.

Know your customer

Let’s assume you’ve completed all of your screening requirements. Your foreign consignee didn’t appear on any of the prohibited end-user lists. However, this doesn’t mean that you truly know your customer and your customer’s operations. The best way to do this is to actually visit your customer. So, plan a visit to the customer’s facility. See with your own eyes what kind of operation your foreign customer is running.

Keep your records

Federal regulations require exporters to keep all transaction records for five years [2]. Some of the documents that may be requested during a government end-use check include:

• commercial invoice
• purchase order
• airway bill or international bill of lading
• copy of the electronic export information filing
• screening documentation, if available
• supporting documentation (i.e. shipper’s letter of instruction)
• technical specifications

Review your documentation

It is important to review any export documentation prepared by you and on your behalf. Your freight forwarder can help you with this process but make sure that you take time to carefully inspect the documents yourself.

• Look for incomplete or inaccurate information.
• If documents share the same data, check to make sure that the data matches on each one.
• Does the commercial invoice identify all parties to the transaction (the ship to and sold to parties, price payable to, etc.)?
• Does the invoice include a commodity description sufficient enough to correspond to the schedule B number used?
• Are the serial numbers correct on the commercial invoice and other shipping documents?
• If your goods require a destination control statement [3], does the statement appear on all of your documents?
• If a freight forwarder files your electronic export information (EEI), did you use a Shipper’s Letter of Instruction to help prevent AES filing errors?
• Did you independently review the EEI for accuracy?
• If you didn’t receive a copy of the EEI from your forwarder, did you request a copy? Does your compliance program include a procedure that requires a copy of every EEI from your forwarder?

The Bureau of Industry and Security expects every exporter to know their compliance responsibilities and to abide by them. It is up to you, the exporter, to determine exactly how. Protect your company from an “unfavorable” end-use check by completing your screening, knowing your customer, keeping your records, and reviewing your documentation.

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I get a phone call from a frantic export client who is desperate to meet with me. He’s just been informed by the Bureau of Industry and Security (BIS) that he’s being penalized $250,000 for failing to do proper export screening. He tells me the BIS have made a huge mistake. His goods are harmless commodities with no specific ECCN so they are classified as EAR99. “My goods don’t need an export license, so I don’t have to do any screening, right?” Not exactly, I tell him.

Many U.S. exporters make the mistake of assuming that there are no additional license checks once goods are determined to be classifiable as EAR99 (meaning the goods are under the jurisdiction of the U.S. Department of Commerce and are not listed on the Commerce Control List). However, EAR99 goods may require a license from the Bureau of Industry and Security under certain circumstances, including, if being shipped to an embargoed country, to certain end users, or in support of a prohibited end-use. To rule out these possibilities, by law [1], exporters must complete additional license checks or screening after goods are classified as EAR99 and before shipping.

Additional Screening

It is in an exporter’s best interest to document the process for each of the following screens as well as keep the records for each completed screen for five years.

Denied Party Screening
This screen involves checking a number of lists to ensure that an export or reexport is not being shipped to a prohibited end-user. Exporters can invest in software to perform this screen or use the “Lists to Check” page on the Bureau of Industry and Security’s website at  www.bis.doc.gov/complianceandenforcement/liststocheck.htm.

The first part of the screen involves checking the Denied Persons List and Debarred List. It is illegal for an exporter to conduct a sale with any individual or entity on these two lists, regardless of whether the end-user is located in the U.S or overseas.

Next, exporters should check all parties against the Unverified List, Entity List, Specially Designated Nationals List, and Nonproliferation Sanctions List. Export transactions involving certain parties on these lists may be completely prohibited or only allowed with a license.

Red Flags Check
Check for any abnormal circumstances in an export transaction that cause a reasonable suspicion of a potential violation of the Export Administration Regulations. The Bureau of Industry and Security refers to such circumstances as “red flags.”

Examples of red flags include the customer insisting on paying with cash for an expensive item when normally the terms of sale would call for financing OR the products don’t fit the buyer’s line of business (e.g. an order of sophisticated computers for a small bakery).

For a list of common red flags, visit:

www.mohawkglobal.com/downloads/export-red-flag-checklist.pdf

Sanctioned or Embargoed Countries Check
Exporters must verify that the destination is not a sanctioned country. The U.S. restricts shipping to Sudan, Syria, Cuba, North Korea, and Iran. Exporters should carefully review embargo provisions for license requirements.

End-Use Check
For goods subject to “Control Policy: End-User and End-Use Based.” Code of Federal Regulations Title 15 Part 744, exporters must check for prohibited end-uses, such as chemical, biological, and nuclear applications; as well as those used to transport them (e.g. a vessel, aircraft, or rocket system).

If any of the above screens results in a prohibition, the exporter must request a license from the Bureau of Industry and Security or ensure the export is eligible for a license exception.

The real cost of noncompliance

It’s important that U.S. exporters understand and comply with all screening requirements to avoid losing export privileges and hundreds of thousands of dollars in penalties [2]. In 2010, the Bureau of Industry and Security completed 708 end-use checks, resulting in over $12.2 million in criminal fines and $25.4 million [3] in civil penalties.

• Export Compliance Consulting

More rules, steeper penalties require focus on customs and trade compliance

Companies engaged in international commerce need to take customs and trade compliance more seriously in this post-9/11 era of increasing regulations, stepped-up enforcement and steeper penalties, cautions one industry expert.

Recent trade regulation developments are sending a couple of clear signals, says Robert Stein, director of customs and trade compliance for Mohawk Global Trade Advisors, a full-service international and domestic logistics provider. “One is that companies are expected to know their supply chains,’” Stein says. “The other is that companies should focus less on the cost of compliance and more on the cost of noncompliance.”

Below are some recent regulatory developments that illustrate the importance of these messages.

Importer Security Filing program

The Importer Security Filing (ISF) program, also known as “10 + 2,” is designed to help U.S. Customs and Border Protection (“Customs”) capture detailed information about shipments before they are loaded on vessels bound for the United States. The program has been in place since January 26, 2009, but enforcement won’t begin until January 26, 2010.

Under the ISF program, at least 24 hours prior to vessel loading, U.S. importers must transmit detailed information to Customs about any shipment bound for them.

Filings must be timely. Beginning next January 26, Customs won’t allow ships to load unless the ISF filing beats the 24-hour deadline.

In addition, information in the filing — such as the goods’ Customs classification, country of origin, manufacturer, etc. — must be accurate. Inaccurate filings will subject importers to a $5,000 penalty per violation. “However, Customs has said it will base penalties on how hard it perceives an importer has worked to be compliant,” Stein notes. “Having a good track record might mitigate the penalty.”

Customs has been issuing progress reports to importers that have initiated 10 + 2 filings. “These reports can help importers work with their export partners to improve filing timeliness and accuracy, as well as provide a record to show Customs they have been making a good faith compliance effort,” Stein says.

As a result, importers are wise to begin ISF filings as soon as possible this year, he says.

Lacey Act amendments

With the enactment of the 2008 Farm Bill, the Lacey Act was amended to require an import declaration for certain plants and plant products. Importers of these products must file a declaration that contains information such as the plant’s scientific name, the value of the importation, its quantity and the name of the country from which the plant was taken.

The declaration requirements are being phased in. The current second phase, which runs through September 30, 2009, adds certain wood products (e.g., sheets for veneering, tools and tool handles) to the list of products that importers must declare.

Phase 3 beginning in October 2009 will require declarations for certain wood pulp products, and phase 4 beginning in April 2010 will require declarations for various paper products and furniture.

Importers must research the required information, complete a paper declaration form they can access at the Animal and Plant Health Inspection Service (APHIS) Web site, and then submit the form to their customs broker, who files the declaration electronically.

Amendment violators are subject to commercial civil penalties of $10,000 per violation and individual civil fines of $250. Criminal penalties are much more severe, with misdemeanors triggering penalties for individuals of $100,000 and up to a year in prison, and $200,000 for organizations. Meanwhile, felony convictions incur penalties for individuals of $250,000 and up to five years in prison, and $500,000 for organizations.

Increased penalties for export violations

Exporters too must focus on compliance. One reason is that recent federal legislation has increased penalties for violations of U.S. sanctions and dual-use export control regulations. The latter were designed to control the export of goods that can be used for secondary purposes such as weapons production.

In October 2008, civil penalties rose to $250,000 per violation (or twice the value of the transaction) from $50,000. Criminal penalties increased to $1 million per transaction and up to 20 years in prison for a “knowing and willing violation.”

Improve your compliance efforts

Not only are regulations multiplying and penalties escalating, but the government is using technology as a tool to enforce the rules more aggressively, Stein says.

So how should companies that source and/or sell products overseas respond? Stein, a licensed customs broker and certified customs specialist, offers this advice:

Don’t procrastinate. For example, take advantage of grace periods such as the one Customs is offering for ISF filing and prepare early for Lacey Act amendment declaration requirements.

Engage experts to conduct spot compliance audits. There are consultants, customs brokers and attorneys that can help companies gauge their level of compliance. Often, companies fall short in such routine matters as record-keeping, valuations, NAFTA violations, misclassification of goods and improper declaration of country of origin.

Invest in in-house programs and expertise. Now that all import and export filings must be done electronically, the federal government’s ability to mine and monitor data has improved dramatically.

Utilize online resources. The Bureau of Industry and Security (BIS) offers an Export Management & Compliance Program Self-Assessment Tool

[pdf]

Link to original <www.fpsc.com/RBS/GlobalTradeAdvisor/Summer2009.htm#story2>

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