regardless of your company s business or industry.

Transcription

1

2 Compliance from page 1 regardless of your company s business or industry. A New Era of Aggressive Prosecution of Trade Fraud U.S. Immigration and Customs Enforcement (ICE) and the U.S. Department of Justice (DOJ) are beginning to aggressively fight international trade and customs fraud on both the supply (exporters/importers) and demand (purchasers) sides of imports. Specifically, taking a page from narcotics and organized crime investigations, undercover ICE agents have posed as procurement officers in real companies to uncover customs and trade fraud by not only importers and their executives, but also purchasers, processors and distributors. 1 DOJ is also getting more creative and aggressive, by using Sarbanes Oxley s criminal obstruction of justice statute 2 for customs and trade fraud. The Sarbanes Oxley obstruction provisions do not require the existence of a pending federal investigation or judicial proceeding and provide for up to 20 years in prison, compared to the traditional criminal statute 3 relied upon to pursue fraudulent customs import violations that limits incarceration to two years. 4 As part of deferred prosecution agreements in customs fraud cases, DOJ has also started requiring defendant companies to implement extensive supply chain compliance programs that include country-oforigin inquiries, risk assessments and audits of suppliers, and educating customers on corporate policies on raw material traceability. 5 Thus, the days of non-importers purchasers, processors and distributors claiming plausible deniability of their suppliers wrongdoing are coming to an end: every link in a company s supply chain is now a potential source of liability. Compliance continued on page 12 Practical Trade & Customs Strategies Thomson Reuters/WorldTrade Executive

3 Compliance from page 11 This trend, in combination with the proliferation of regulatory obligations throughout the supply chain (discussed below), is a stark warning for all foreign exporters, U.S. importers, consignees, and purchasers of all imported products to institute an effective supply chain compliance program. Targeting s with New Social and Safety Laws Congress has recently enacted several laws to address social welfare and safety concerns by imposing new regulations on supply chains. These laws can be cumbersome and difficult to administer, often with little guidance from regulators. They include (1) Dodd-Frank s Conflict Mineral Rules; (2) laws on forced labor and human trafficking; (3) the Lacey Act wildlife protection laws; and (4) new food safety laws. Dodd-Frank Conflict Mineral Rules A less-known provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is aimed at reducing ethnic violence in central Africa by shrinking the market for conflict minerals. 6 Congress mandated that manufacturers regulated by the U.S. Security and Exchange Commission (SEC) report whether their products contain metals derived from conflict minerals. 7 SEC rules require publicly traded companies to file in their annual report and disclose on their websites an independently audited Conflict Minerals Report describing the due diligence exercised in determining the chain of custody for any conflict minerals. Failure to comply may result in loss of Form S-3 eligibility, SEC enforcement proceedings, and/or shareholder litigation, as well as negative publicity from humanitarian groups. Initial industry-wide compliance costs are estimated to range from $9 billion to $16 billion. These figures do not include non-publicly traded suppliers especially in the electronics, automobile, and telecommunications sectors who will need to institute programs to trace finished products back to the originating mines, smelters, and refiners. The final rule is being challenged in U.S. district court, with oral arguments scheduled for July 1, If the lawsuit is unsuccessful, companies must submit their first conflict mineral disclosures in May In addition to the SEC s rule, several cities, U.S. states, and other countries have enacted, or are considering enacting, similar laws. Companies should be preparing now to comply with these rules. Forced Labor and Human Trafficking There is a growing body of laws that target supply chains to help prevent forced labor, child labor, and human trafficking. At the federal level, the U.S. Department of Labor (DOL) maintains two lists of goods from countries that DOL has reason to believe are produced using forced or indentured child labor. Government contractors that use products from countries on the first list 8 must certify that forced or indentured child labor was not used to make such products, while any company using products from countries on the second list 9 risk poor public relations and lost business. At the state level, the California Transparency in s Act (TSCA), which went into effect in January 2012, requires manufacturers and retailers to post on their websites detailed disclosure statements identifying steps taken to eradicate slavery and human trafficking from their supply chains, including audits of and certifications from suppliers, risk assessments, internal compliance programs and employee training. 10 Non-compliant companies risk civil actions by the California attorney general, possible collateral actions brought by private parties, and damage to their reputations. A federal law similar to TSCA, which was introduced in 2011 but was not enacted, 11 could impose such disclosure requirements nationwide. Wildlife Protection The Lacey Act was enacted to combat interstate trafficking of protected wildlife, fish, and plants and amended to apply to international commerce and logging. The 2008 Farm Bill amended the Lacey Act by further expanding its scope to a broader range of plants and plant products (including many wood products), making it unlawful to import, export, transport, sell, or purchase in interstate or foreign commerce any plant product taken, possessed, transported, or sold in violation of U.S. federal or state law, Indian Tribe law, or any foreign law that protects plants. 12 The Lacey Act amendments also make it unlawful to import certain plant products without an import declaration that includes the genus and species of each plant product. Violations can result in civil or criminal penalties, including prison and forfeiture of the imported product. The breadth of companies covered by the new Lacey Act provisions was made clear when the U.S. Fish and Wildlife Service (FWS) raided Gibson Guitars of Nashville, Tennessee in 2009 and FWS had received information that 12 Thomson Reuters/WorldTrade Executive June 15, 2013

4 Gibson had violated the Lacey Act by importing ebony and rosewood fingerboard blanks from India and Madagascar, where laws restrict the thickness of wood products that may be exported. FWS agents seized wood, guitars, computers, and electronic files. Gibson ultimately settled with DOJ in the form of a criminal enforcement agreement (CEA) to pay $350,000, withdraw its claims to Madagascar ebony seized by investigators valued at $261,844, and invest in a comprehensive upgrade to its trade compliance program. In return, DOJ agreed not to pursue a criminal prosecution of Gibson. The CEA further requires Gibson to disclose information about its activities and those of its current and former directors, officers, employees, and others concerning the import or purchase of wood products for use in manufacturing guitars. Food Safety The Food Safety Modernization Act of 2010 (FSMA) is the most comprehensive food safety law enacted in over 50 years and imposes substantial new requirements for food products imported, produced, manufactured and/or marketed in the United States. FSMA also bolsters the U.S. Food and Drug Administration s (FDA) enforcement capabilities. Proposed (and soon-to-be-proposed) rules under FSMA include: (a) new safety standards for foreign and domestic farms engaged in growing, harvesting, packing and holding fresh produce; (b) hazard-analysis and risk-based preventive controls for human food; (c) new current good manufacturing practices; and (d) a risk-based foreign supplier verification program, requiring importers to ensure that imported food is produced in compliance with U.S. law. Those subject to the new rules should be particularly vigilant FSMA provides for 4,000 new FDA inspectors to review conditions at foreign and domestic facilities. Meanwhile, the DOJ and FDA appear to be targeting middle management, 13 not just executives, 14 for violations of food safety laws. Reforms and Increased Enforcement of Export Controls and Customs Laws The basis of any good supply chain compliance program is still rooted in customs compliance, which includes the following high-risk areas that can cause significant revenue loss, hurt the economy, or threaten public health and safety: (a) valuation and classification of merchandise; (b) free trade agreements (FTA) and preference programs; (c) intellectual property rights; (d) antidumping/countervailing duties; and (e) recordkeeping. These issues drive CBP s prioritization of its enforcement and facilitation efforts, including the selection of audit candidates, special enforcement operations, policy issuance, and legislative and regulatory initiatives. As such, these should form the core of companies risk management approach to customs compliance. CBP has increased its oversight of claims of FTA and preferential programs by importers through increased verification. CBP is also expanding and combining its trusted trader programs (C-TPAT and ISA) and creating new Centers of Excellence and Expertise (CEEs) that will provide centralized processing for trusted partners, enhancing consistency and predictability for importers, which should both lower compliance costs and enhance CBP enforcement efforts. Export controls and sanctions also affect your supply chain. Export controls enforced by the State, Treasury, and Commerce Departments are complicated and change frequently. Regulations governing commercial and military goods are undergoing the biggest reform in decades as part of the President s Export Control Reform Initiative, creating a web of new administrative and analytical hurdles for companies affected by the changes. U.S. sanctions rules are also steadily being enhanced and applied more vigorously overseas, including to subsidiaries of U.S. companies. To comply with these laws, exporters (and particularly re-exporters) should track U.S. origin goods and those items export control classification as they move through their international supply chains. Designing your compliance system to account for export controls can avoid substantial headaches and penalties later. Recent enforcement cases for violations of U.S. sanctions and export control laws have included nine-figure monetary penalties, external monitoring and auditing requirements, denials of export privileges, and revocations of government contracting rights. Any activity regarding U.S. sanctioned countries or China will be subject to enhanced enforcement scrutiny. For example, United Technologies Corporation was subject to a $75 million penalty, an external monitor, and debarment of its Canadian subsidiary, among other penalties, for the re-export of controlled defense software to China from Canada. Banks have been subject to substantial penalties for violations of U.S. sanctions rules, including a $375 million fine levied against HSBC last year for its role in scrubbing evidence of Iranian involvement in certain transactions. Compliance, continued on page 14 Practical Trade & Customs Strategies Thomson Reuters/WorldTrade Executive

5 Compliance from page 13 What Every Compliance Program Should Include While each industry faces unique risks under various supply chain laws and regulations, every company should maintain a supply chain compliance program (SCCP) that includes the following: Management Commitment: Senior management should establish trade compliance standards for the organization, actively communicate the company s commitment to compliance, and foster a compliance-oriented culture. An important tool in demonstrating management commitment is a policy statement that clearly lays out leadership s expectations and identifies the individuals responsible for meeting those expectations. Formal Written Compliance Program Manual: It is imperative to develop a formal written compliance program that provides a map of compliance. The manual should include: (a) the substantive U.S. laws and regulations that apply to the company; (b) compliance policies, procedures and templates required by the SCCP; and (c) relevant points of contact. Due Diligence and Risk Assessment: The SCCP should include policies and procedures for routine due diligence and continuous risk assessment. This may include: (a) country-of-origin and traceability inquiries; (b) customs classification, valuation, marking/documentation determinations; (c) risk assessments; and (d) screening of employees, suppliers, contractors, customers, products, destinations and transactions. In some cases, this may be required throughout the import/export lifecycle from product development (R&D, mining) to post-sale service and warranty claims. Templates for Contracts/Agreements: An effective SCCP should include internal rules on (industry-specific) supply chain regulation-related provisions for all purchase and sales contracts and agreements. Training: Employees that have the conscience and confidence to step forward when actions are suspect are one of the best ways to identify and resolve risks of noncompliance. All employees, particularly those involved in import, export, and procurement activities, should be made aware of the SCCP, and all relevant SCCP policies and procedures. Educate Your Suppliers: All suppliers, contractors, and vendors should be made aware of your SCCP s policies, procedures and requirements to ensure compliance. Audit Module: Every SCCP should be subject to continuous auditing, review, updating, and improvement. This should include both periodic internal and third party audits of the SCCP, in many cases audits or verification of suppliers and/or purchasers. Corrective Actions: The SCCP should include policies and procedures for handling and reporting trade compliance problems and violations, including completing corrective actions in response to potential violations (internal investigations) and dealing with government investigations. Recordkeeping: Adherence to regulatory recordkeeping requirements is essential. The SCCP should include adequate document retention and destruction policies and procedures. o 1 This tactic was used in the record-breaking Honeygate investigations. For a full discussion of Honeygate, see Michael J. Coursey and Benjamin Blase Caryl, Massive Honey Smuggling Sting Signals Continued Crack-down on International Trade Fraud, in the Mar. 31, 2013 edition of Practical Trade & Customs Strategies, U.S.C U.S.C See e.g., United States v. Chavez, et al., No. 12MJ2756 (S.D. CA, June 23, 2012). 5 See supra at note 1. 6 Conflict minerals include columbite-tantalite, cassiterite, gold, and wolframite. 7 See 15 U.S.C. 78m(p). Conflict minerals metal derivatives include tungsten, tin and titanium. 8 See Executive Order (June 12, 1999). The current list covers 30 products from 24 countries. 48 C.F.R This list currently covers 134 products from 74 countries. 22 U.S.C et seq. 10 California Civil Code Business Transparency on Trafficking and Slavery Act, H.R (112 th ). 12 See 16 U.S.C United States v. Parnell, No. 1:13-CR-12-WLS (Feb. 15, 2013). 14 United States v. Park, 421 U.S. 658 (1975). Benjamin Blase Caryl (bcaryl@kelleydrye.com) and Robert Slack (rslack@kelleydrye.com) are attorneys in the International Trade & Customs Law Group at Kelley Drye & Warren in Washington, DC. Mr. Caryl focuses on obtaining trade relief for U.S. manufacturers, farmers and workers from unfairly traded imports. Mr. Slack focuses on U.S. export controls and sanctions compliance. 14 Thomson Reuters/WorldTrade Executive June 15, 2013