The touchstone of any international trade compliance program is the development of a strong and accurate database of the company’s products, services and technology. The ability to gather this information is central to determining classification for export and import purposes, export control requirements, origin and customs valuation.

All too often, companies that thought they were complying with international trade laws are publicly flogged with penalties imposed by the relevant legal agencies, or find that they pay the not so public price of legal and investigation costs to avoid or mitigate such penalties.

In this article, we use the six basic “question words” to outline the process of gathering the information necessary to understand a product for purposes of international trade compliance. This same methodology may also be used to evaluate supply chain, pricing, and customer and supplier issues.

What?

What is the product? Obviously, companies know a great deal about their products, but often, the relevant documents do not clearly describe the product or provide sufficient information to assure compliance with international trade law.

• What is the product commonly called?
• Is there an industry-specific reference term for the product (i.e., chemicals are commonly referenced by their CAS number and certain alloys may be referenced by their ASTM standard)?
• What is the product made of?
• Is there relevant technical information, schematics and/or marketing literature that will help explain the nature of the product?

For products being imported, the answers to these questions will help determine the admissibility of a product and its Harmonized Tariff Schedule of the United States (HTSUS) classification, which dictates the duty rates a company must pay upon entry.

For export purposes, the answers to these questions with respect to both the product and its components will help determine jurisdiction. Products on the U.S. Munitions List (USML) (i.e., defense articles, technical data or defense services) are controlled for export by the International Traffic in Arms Regulations (ITAR). “Dual use” products are listed on the Commerce Control List (CCL) and controlled pursuant to the Export Administration Regulations (EAR). Other regulations may be applicable to exported products in addition to, or instead of, those listed above.

Companies – regardless of whether they are importing, exporting or both – should develop a matrix – a “master” product database that includes, at a minimum, all of the company’s goods, technology and/or services; their HTSUS classifications; export classifications (USML Category or ECCN); Schedule B Numbers; and origins. Where applicable, the matrix should also include additional classifications or identifications relevant to the industry, such as CAS numbers, ASTM standards and FDA codes. The matrix should be accessible to any company personnel who may be involved in imports, exports or foreign sales of the company’s products or technology.

Who?

Who is the supplier, the producer, the customer? The presence of relationships between any of the parties involved in the transaction may raise questions about the value of the imported merchandise.

Import and export issues may also arise when products are specifically produced for a customer. Did that customer provide anything of value used in the production of the imported article? Perhaps the customer anticipated a satellite or military application for the product. If so, the item is likely to be controlled for export.

Is the customer a distributor, OEM or service provider in a foreign country that is permitted under local law to do business in sanctioned countries? If so, have controls been implemented that are reasonably calculated to prevent the products or services from being re-exported in violation of U.S. export or sanctions laws? Who is marketing the product? If the product is ITAR controlled, are the sales agents registered as brokers as required by the ITAR?

Under the U.S. laws, a company has a responsibility to know their customers and suppliers. The U.S. prohibits transactions – both import and export – with certain individuals and entities. To avoid violating these prohibitions, all companies should establish a system to screen customers and suppliers against the relevant U.S. Government sanctions lists. Additionally, the Customs Trade Partnership Against Terrorism arguably imposes a “know your suppliers” obligation, and U.S. export control laws explicitly require exporters to “know their customer.

Finally, perhaps most importantly, the “who” question directs the compliance department to the persons who may have the information necessary to fully understand the product. Within any company these are likely to include research, product development, procurement, manufacturing, contracting and accounts payable individuals.

Where?

Where is the product made? For many companies, the world is their assembly line – a fact that complicates a company’s ability to determine certain aspects about the nature of a product, including its origin and whether export controls are applicable. Understanding the manufacturing operation and where each step is performed is central to determining the origin of the product for duty and marking purposes. Equally important is knowing the source of raw materials or the location where components are being manufactured.

Where is the product being sold or used? The ultimate destination of a company’s product is critical because the U.S. exercises export control over U.S. origin goods and technology wherever they are located, and the applicable export controls may be destination-dependent. The EAR and OFAC regulations combine to generally prohibit most exports or re-exports of U.S. origin goods to embargoed and sanctioned countries (e.g., Cuba, Iran, North Korea, North Sudan and Syria, and, with regard to financial services, Burma), even if done indirectly (e.g., transshipped through a third country). The ITAR requires an authorization for all exports of USML items and prohibits exports to a longer list of countries.

Look for Part II of this article, which will explore the last three questions companies should answer about their products, Wednesday.

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About the Authors

Robert Shapiro is vice chair of Thompson Coburn LLP‘s Transportation and International Commerce practice group. His practice focuses on issues concerning the international trade and shipment of goods. He regularly represents clients before Customs and Border Protection, the U.S. Department of Commerce, the U.S. International Trade Commission, the U.S. Department of State, the Federal Maritime Commission, the Office of the U.S. Trade Representative and United States Congress.

Teresa Polino is a partner in Thompson Coburn’s Transportation and International Commerce group. Her practice focuses on import compliance, the various import preference programs, valuation issues, country of origin marking and labeling issues, and supply chain security requirements. She works with clients ranging from small producers to large multinationals regarding the import requirements of both the United States and other countries.

James Slear is a partner in Thompson Coburn‘s International Trade practice. Jim advises domestic, foreign and multinational clients in a wide array of industries, including aerospace, biomedicine, defense, financial services, insurance, Internet services, manufacturing, semiconductor and telecommunications. He focuses his practice on international trade compliance and enforcement, including the economic and trade sanctions administered by the Office of Foreign Assets Control (OFAC), the International Traffic in Arms Regulations (ITAR), the Export Administration Regulations (EAR) and the Foreign Corrupt Practices Act (FCPA). He also advises clients regarding matters before the Committee on Foreign Investment in the United States (CFIUS).

Sean McGowan practices in Thompson Coburn‘s Transportation and International Commerce group. He counsels clients on compliance matters involving U.S. federal regulations that affect the aviation, maritime, trucking, rail and hazardous materials transportation industries. In addition, he counsels clients on U.S. federal regulatory compliance issues associated with the international movement of goods and the international transfer of services and technology. He advises on matters involving the Export Administration Regulations (EAR), International Traffic in Arms Regulations (ITAR), and sanctions programs under the Office of Foreign Assets Control (OFAC).

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