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The
Changing Climate of Compliance
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Here we look at
some of the compliance issues to be
addressed and considers how 2004/ 2005 will
be a watershed for compliance on Customs and
export controls. |
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Many proposals
that have been "in the pipeline" for some
time are coming to fruition all at once. The
new UK Export Control Act will dramatically
change the compliance situation in the UK
and expose companies to severe penalties and
adverse publicity as never before. HM
Revenue & Customs have introduced new
computer systems and a new civil penalty
regime. Customs have reinforced their
compliance audit teams, designed computer
checks and now also include export controls
in their reviews. |
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Looking at
other regimes, the US and Japan have
extended their regulations and enforcement,
and emerging technology is bringing more
exports within the scope of the more
restrictive regimes. |
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The UK Export
Control Act 2001 |
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This new Act
sweeps up all types of export control and
sanctions legislation including UN, EU and
existing Customs legislation. In some ways,
it is like the US Export Administration
Regulations and The International Traffic in
Arms Regulations (ITAR). A number of orders
have been published, each with their own
appeals and penalty provisions. Essentially
this is an enabling Act which gives the
Secretary of State powers to present a
series of Statutory Orders two of which have
been issued namely those on Transfers of
Technology and Trade Controls. All companies
engaged in High Tech or Defence Sales at
home or abroad– however tangentially, need
to be aware of how one or other or both of
these regulations will affect them. |
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Although the
Trade Controls are a response to British
nationals at home or abroad who deal in arms
and related materiel , Military use is very
widely defined and the range of products
caught is extensive including Computer
Security. The extension of the Transfer
Controls on Technology are to inhibit
proliferation, not just to terrorists and
rogue nations but to many other
destinations. Under the "catch-all"
provisions, almost anything may be
controlled by reasons of military use,
embargoed destinations or use in
manufacture, research or deployment of
Weapons of Mass Destruction and Missiles.
The Act also imposes controls on "technical
assistance overseas" if it is related to
Weapons of Mass Destruction and any persons
engaged in arms brokering. |
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The physical
export of certain technical data, documents
and research is already subject to export
control. Export of these over the Internet
will now need a licence, as will certain
oral disclosures and e-mails of restricted
information. |
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Implications
for exporters |
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Not to have
taken compliance measures could be judged
legally as "reckless" and may leave members
of the Board of any public or private sector
institution open to prosecution, with
minimal legal grounds of defence, if goods
or technology gets into the wrong hands. The
onus will be firmly on the exporter not the
DTI. The Bill provides for maximum penalties
of up to 10 years’ imprisonment in the event
of a serious breach. |
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UK Customs
civil penalties |
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Customs have
now published a booklet detailing how and
when Civil Penalties will be levied. Some
observers believe that they will change the
whole nature of relations between traders,
forwarders and Customs. Their earlier
briefing paper referred to "misdemeanours" ,
a criminal law term, and it seems that
errors leading to duty, excise or VAT
"evasion" will be taken to mean dishonest
conduct. If so, an upsurge in appeals to the
VAT and Duty Tribunal can be expected. |
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A number of
types of error have been brought within the
penalty regime including: |
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unauthorised
use of deferment accounts, errors in or
failure to maintain adequate records |
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failure to
notify diversions, "end of transit",
itinerary changes and Customs warehouse
stock losses. |
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Examples of
misdemeanours under economic reliefs ( such
as IPR, OPR, End Use), Customs warehousing
and transit authorisations include:
-
any false
information
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failure to
abide by the conditions of the
authorisation
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late
returns
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failure to
declare home-use diversions
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poor
security of premises
-
exceeding
time limits.
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Errors
found in tariff classification, valuation
audits, CAP Imports and Exports, general
export procedures and duty Free Preferences
are especially likely to attract high
penalties because of their complexity, high
values and a decline in the expertise
necessary to ensure compliance. Detailed
company information must be provided;
companies cannot leave it all to the
forwarding agents. |
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Customs
systems and procedures |
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Major systems
will came into full stream in 2003 and now
impose disciplines for which traders and
agents need to be prepared if they are to
avoid penalties. Also, there is evidence
that many simplified procedures and economic
reliefs have not been taken up and that
obsolete methods have been perpetuated,
despite the fact that cost-effective systems
packages are now available. |
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For example,
with the reduction of tariff rates under
GATT and WTO over several years, many old
IPR systems will need slimming down and may
be uneconomic against the cost of
processing. Under Pareto’s Law, 80 per cent
of the savings will be found in 20 per cent
of the transactions. Conversely the
withdrawal of GSP General System of
Preference status from China and other
countries will expose many unprepared
companies not only to duty but to close
scrutiny of their classification and
valuation for the first time. |
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What is
different this year is that errors and
serious offenders will be "flushed out" by
new systems like CFSP and the New Export
System, and give rise to penalties on a
cumulative basis. Examples of such
misdemeanours include: |
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- late
declarations
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Assessing
penalties |
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A penalty of
up to £2500 for any contravention of a
Community Customs provision may be levied,
with the possibility of appeal to Customs
for review, and to the VAT and Duties
Tribunal. Customs propose to follow VAT
principles by issuing penalty letters,
progressively increasing penalties and
considering mitigation of penalties.
Insufficient funds to pay or reliance on
another such as a forwarding agent will not
be accepted as reasonable excuses. Where
subsequent audits reveal further failures
then the withdrawal of approval for the
relief, authorisation or access to the
computer system will be considered. |
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Compliance
from an international perspective |
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The United
States - inside the beltway in Washington DC |
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Exporters,
importers and users of US products,
technology and software could be forgiven
for being confused about what is happening
to US Export Controls. In the wake of 11
September, there has been a furore in
Congress, with several Bills promising
penalties sufficient to put even blue chip
companies out of business. This would seem
to be an academic issue but for the fact
that the policy vacuum has been filled by
the military. The practical experience of
lawyers and consultants currently engaged in
compliance or in obtaining export licences
is of inordinate delays and licence
conditions, constraints on technology
transfer even to allies and restrictive
policies towards non-NATO countries. |
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Of particular
danger to the subsidiaries of US companies
and non-US companies with subsidiaries in
the United States (or US nationals as
employees) is the increased regulation to
counter the Arab League boycott of Israel.
Penalties for taking part in the boycott
have now increased to $11,000 per offence.
US Customs have also been active at home and
abroad in extending physical controls on
container traffic under threat of a ban on
entry to the United States. "Watch this
space" is the message from Washington. |
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Japanese,
US and British "catch-all" rules and audits |
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In 2001, Japan
introduced "catch-all" legislation like that
in Europe and the United States. A licence
is required where a company is informed by
the Japanese authorities that there is a
risk of diversion to nuclear, biological or
chemical weapons or missile development or
manufacture. Similarly, if "information is
available" or the exporter "has information"
about such use, authorisation must be
obtained. This is comparable to the British
rules about "grounds for suspicion" and the
US rule "know or have reason to know". In
all three cases, the company’s internal
checks by implication must embrace overseas
subsidiaries, agents and distributors, and
what is published in official documents or
on official websites. The range of goods and
technologies has been extended to encompass
practically everything. |
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Like the UK,
Japan does not like to think of its rules as
"extra-territorial". Effectively, however,
this legislation is extended de facto to all
subsidiaries of Japanese companies by
rolling audits of compliance programmes spun
out from Japan. In the light of increasingly
global threats and common responses to them
by the developed world,
"extra-territoriality", whether American,
British or Japanese, does not excite the
same adverse reactions that it did in the
past. |
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Moving
forward with compliance |
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Now that UK
and Japanese legislation also operates
extra-territorially in certain circumstances
(like US Legislation), most company
compliance programmes will need updating and
staff should be retrained. For many
companies, a synthesis between these
regulations must be achieved. Unfortunately,
in-house expertise in both Customs and
Export Control is fast disappearing. The
risks of detection, costs and penalties
where a company leaves matters to its
forwarder, which are properly the
responsibility of the company itself, have
been greatly increased. Compliance audits by
the DTI, Revenue & Customs or other
officials and for some companies by their
overseas parent companies should be seen as
inevitable. They should be planned for as
part of day-to-day operations. Proactive
measures such as system checks, staff
training, feasibility studies and audits,
which were much more commonly a feature of
earlier generations must be re-introduced. |
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Compliance
failures in these fields can be just as
disastrous as those seen in Financial
Services and Accounting Standards. In a
world still living with the fallout from 11
September, the odium may well be even
greater. Compliance programmes, training and
internal audits are comparatively cheap
forms of insurance. The "stick" is that
non-compliance may well put board members at
risk. The "carrot" is that duty and cost
savings can often be identified far in
excess of the cost of implementing both
types of compliance safeguards, if a
company’s entire international operations
are reviewed. |
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