trade compliance Archives

The ROI of Trade Compliance

Global Trade Management Solutions | By Steve Banker • 01/27/2020

What is the return on investment (ROI) associated with trade compliance? If compliance is understood as the chance that company might have to pay a hefty fine for noncompliance, then statistically, there is no ROI associated with compliance. You might think that would make it tough to sell this type of software. You’d be wrong.

Almost no one must pay penalties for noncompliance in trade. Let’s take the example of global trade compliance (GTC) solutions support communications with international government authorities regarding: Duties, tariffs, and preferential treatment requirements placed by governments on international trade and commerce; And, non-financial trade regulations issues, such as restricted parties, government licensing of export rights for controlled items, and other regulations.

Let’s use the example of US fines and penalties for noncompliance to export/import rules. Office of Foreign Asset Control (OFAC) penalties in 2019 totaled 13.4 million dollars. That does not seem like very much.

Now compare those fines to trade in goods. In 2018 global trade in goods between the US and the rest of the world was $4207 billion. Penalties, as a percentage of total trade in goods, is vanishingly small. A person has a better chance of getting hit by lightning than a company has of paying an OFAC fine.

Well you could argue, what about the damage to a company’s reputation? Well let’s look at the companies that were fined, they included GE, PACCAR, Haverly Systems, Stanley Black and Decker, ZAG IP, AppliChem (acquired by Illinois Tool, and e.l.f. Cosmetics. Do you remember reading about any of these firms getting fined for breaking export/import rules? I know I did not, and I’m a regular reader of financial news.

You could also argue that there would be ROI associated with emergency shipments, product delays, stock-outs, demurrage fees, additional warehousing costs due to containers being flagged and inspected at a point of entry. Beth Pride, President of BPE, begs to differ. BPE does consulting focused on trade compliance and Ms. Pride is an acknowledged expert in this area. She had previously worked with three software vendors producing global trade compliance software. When working for those software companies, she worked hard to build this business case. “That argument,” she said, “never flew.”

ROI Buckets from Trade Compliance Systems

But does GTC have a ROI associated with other benefit buckets? Certainly GTC software can help companies meet trade requirements with fewer people. The software, in combination with other solutions, can play a role in getting lower tariffs by helping companies make more intelligent sourcing and product assembly decisions. Further, by storing certain types of goods in bonded warehouses, companies can delay paying tariffs.

I’m kicking off ARC’s annual market study on the global trade compliance market. Last year my colleague Clint Reiser did the study. Because I viewed this as a compliance solution, I was surprised at how high Clint’s forecast for this market was. The ROI associated with global trade compliance software is something I want to dig into more deeply.

The Connection Between Trade Compliance and Logistics

Global Trade | By Reinhard Poelzl • 10/24/2019

Historically, governments have focused on the exporter of record when looking for sanction or embargo violations, including of the movement of sensitive dual-use products and technologies across borders. However, all parties to an export transaction, including freight forwarders and carriers, are subject to the same rules, and as such must be aware of what is required of them in the transaction. The scope of their due diligence must include destination controls, export licenses and restricted party screening. For freight forwarders, it is particularly challenging to comply with export license regulations since shipping companies tend not to gather the detailed information about the cargo they’re moving and partners involved in the transaction.

But this obstacle hasn’t slowed down the enforcement of any rulings. In addition to the potential for reputational damage, penalties for non-compliance can include substantial fines—millions of dollars in some instances— and criminal charges, including prison time.

Recently, logistics companies that have failed to comply with the regulations that govern exports have experienced more and significant penalties. For example, in 2018 US officials brought forward a landmark case of an export compliance violation resulting in a fine against one of the world’s leading freight forwarders. US agencies fined FedEx $500,000 for inadequate commodity screening that resulted from flawed software. The goods, which included aviation parts and electron microscope manufacturing items, are classified under a series of Export Control Classification Numbers (ECCNs) for anti-terrorism purposes. The delivery of such goods requires a license from the relevant authorities, which FedEx had not obtained.

This case is just the tip of the iceberg– other logistics companies that have been fined recently as well include:

American Export Lines received a fine of $518,000 for transporting auto parts to Iran and Afghanistan
Pilot Air Freight distributed restricted goods to a denied Pakistani customer and received a subsequent fine of $175,000 (this was a case in which the screening software had major flaws)

These latest examples clearly demonstrate how important a robust and dedicated solution for export management is for freight forwarders, NVOCC and similar operators in the transportation space.

Don’t risk your company reputation, margins and import/export privileges; leverage technology and content solutions to stay out of hot water.

Reinhard is a senior solutions consultant for E2open in the European region. He served in this role with Amber Road before the acquisition this year. Reinhard is a subject matter expert in the trade compliance and logistics field, and has assisted hundreds of companies improve and transform their supply chains with technology solutions.

Mass Export Expo Captures National Trade Sentiments

Global Trade | By Clint Reiser • 12/10/2018

The Massachusetts Export Center hosted its ninth annual Mass Export Expo on Friday, December 7th. Although the conference was regional in nature, the topics of discussion are currently of great interest to businesses across the country and even across the globe. There were a number of sessions on topics ranging from US-China trade, US economic sanctions, the recently established USMCA, and much more. The panels included a number of corporate compliance officers and attorneys that discussed the intimate details of trade regulations, procedures, experiences, and opinions. Here are some of the points that I found most informative.

US-China Trade

The session on US-China trade relations was certainly timely and relevant to many. As such, there were a number of questions from the audience. Erin Ennis, SVP of the US-China Business Council moderated the session. When asked about the potential fallout from last week’s detainment of Huawei’s CFO, she stated that clearly, she could only speculate, but she has already seen evidence that some US technology execs are giving a second thought to traveling to China in concern of China retaliation. Audience members also expressed frustration with the many subtle differences between the US and China harmonized tariff schedules and the fact that there is no central repository of translations of China’s tariff schedule to English. With respect to technology development, Martin O’Neill, SVP of Cabot Corporation noted that China is a leader in the development of battery technology. I found this to be interesting due to the common view that China is typically a late-stage entrant in technology development.

I engaged in a separate discussion with Kristen Morneau of Mohawk Global Trade Advisors about the recently enacted tariffs on steel imports and their unintended consequences. Kristen noted that the US steel tariffs were intended to increase US jobs. But she has US clients that are experiencing difficulties from the tariffs. Specifically, companies that import steel as raw material are now subject to high tariffs. These companies transform the steel into final goods. However, their competitors that import the steel in final good form are not subject to the same tariffs. Therefore, the tariffs are threatening the intermediate goods processing jobs in the US, while providing cost advantages to competitors that import the goods from China in final form. Although the importers of steel in raw form can apply for duty drawback, the increased costs and time to reimbursement are substantial enough to threaten their ongoing operations.

The US-Mexico-Canada Agreement (USMCA)

The session on the recent USMCA included presentations and discussions about some of the significant changes from the exiting NAFTA framework. Suzanne Richer of Amber Road pointed out the agreement’s substantial focus on the automotive industry. In particular, the USMCA increases the North America content threshold requirement to 75 percent (at least 75 percent of an automobile must be made in North America to qualify for duty-free treatment). In addition, at least 40-45 percent must be made by workers earning at least $16 an hour. This will clearly reduce the wage advantages of Mexico and encourage manufacturers to reconsider the content inputs from the three countries. Also, the USMCA removes the standardized certificate of origin and transfers responsibility from the exporter to the importer. Although the new process will be more flexible, it is also less standardized and can increase the burden on importers. Finally, I found it interesting that the USMCA includes an automatic review process 6 years after initiation and an automatic termination of agreement in 16 years, unless the parties (US, Canada, Mexico) confirm their wish to continue.

US Economic Sanctions

Providers of sanctioned party screening software will be happy to hear that the panelists in the session on economic sanctions recommended to the audience that they use automated screening software. In fact, a couple panelists mentioned that their firms use multiple systems to assure a thorough process. However, they also stressed that human critical thinking must be paired with the screening software to achieve reliable results. A number of policies and directives (OFAC, etc.) were discussed throughout the session. But I found the difficulties faced by EU companies with respect to US-Iran sanctions to be most interesting. In particular, the updated EU blocking statute forbids EU persons from complying with the US extraterritorial sanctions on Iran. This places EU companies with a US business presence in a difficult situation – disregard US interests or disobey EU law.

Sneak Peak: Global Trade Management (GTM) Market Update

Global Trade | By Clint Reiser • 07/19/2017

ARC Advisory Group conducts an annual in-depth analysis of the worldwide global trade management (GTM) software market. The research process includes the analysis of large amounts of information and interviews with executives from numerous GTM companies. The process concludes with the publication of ARC’s Global Trade Management Market Research Study. I am nearing the end of the study update process and thought I would take this opportunity to discuss some of the GTM market’s current characteristics.

ARC’s Definition of the GTM Software Market

ARC has a broad definition of the GTM software market and we segment it into two high-level solution categories: Trade Compliance and International Trade Visibility & Execution. Trade compliance functionality helps companies manage trade compliance costs and processes like duties, tariffs and required filings; and regulations such as restricted party screening that are overhead costs and pose risks for regulatory fines by government entities. International trade visibility & execution functionality provides geographically dispersed trading partners with the ability to collaborate, monitor, and manage the steps within the procurement, production, and delivery processes of the extended supply chain. Some GTM providers, such as MIC Customs Solutions, focus solely on trade compliance. Others such as GT Nexus provide visibility and collaboration functionality for global trading partners. And finally, there are several GTM software providers that offer both trade compliance and international trade visibility and execution functionality. These providers include Descartes, BluJay Solutions, and Amber Road. Even within each of the GTM categories there is great variation in the capabilities offered by suppliers. For example, there are niche compliance solution providers that only manage domestic customs regulations. In addition, international trade solutions may vary by mode. For example, INTTRA provides electronic ocean cargo booking, whereas Champ Cargosystems is dedicated to the air cargo industry. Because of the functional and regional diversity, there is also a diverse range of factors affecting different vendors’ businesses in different ways. In short, the GTM market is very heterogeneous.

GTM Market Characteristics

Many GTM software vendors sell their solutions through the SaaS model. In fact, roughly half of the GTM market’s revenues come in the form of SaaS – with the remainder being perpetual software, implementation, and maintenance services. SaaS makes user adoption an easier decision that can be made through an operating budget rather than a capital budgeting process. This has encouraged the adoption of these solutions by shippers. The systems can be implemented more quickly and usage can be expanded incrementally with lower upfront expenses. But many of the applications have historically been adopted as point solutions. More recently, GTM vendors have expanded their solution footprints, allowing them to sell their solutions as a GTM platform. This allows users to purchase a system that is more standardized, offers greater continuity across the enterprise (i.e. compliance for multiple business units across countries on one platform), and provides integration benefits (for example, visibility into both supplier inventory status and compliance status across the supply chain). This maturation of solutions into larger global deals, with solutions sold as platforms, has contributed to the growth in adoption in GTM solutions. In addition, the incentives for adopting GTM is transitioning from what used to be heavily focused on regulatory compliance, toward the management of regulatory programs to the benefit of the organization. In particular, companies are using GTM solutions for item classification and other process steps to take full advantage of the preferential treatment made available through FTAs. They’re also leveraging duty deferral programs like free/foreign trade zones and bonded warehouses to reduce inventory holding costs. At the same time, secular trends such as outsourcing and increasingly complex international supply chains is supporting the value proposition for supply chain visibility solutions. All of these factors are stimulating the GTM market to grow faster than the more broadly defined supply chain software market. In general, GTM solutions are of greatest interest to companies in industries that have complex supply chains and are subject to high tariff costs or high compliance risks. Some of these industries include automotive, telecom, pharmaceuticals, and household goods (see GTM Merchandise Trade Analysis). However, companies across numerous industries invest in GTM solutions. Of course, logistics service providers are the most prevalent, but other industries such as banking also use GTM solutions to manage compliance risk. GTM software is of interest to a wide range of businesses, and it is supporting the ongoing secular trend of international trade. And despite some of the recent rhetoric, I don’t see this growth trend abating any time soon.

Global Trade Management Software –Execution, Visibility, Compliance …and that Darn Tax Wedge

Global Trade | By Clint Reiser • 03/29/2017

Global trade and free trade agreements – they’re hot topics today and they are responsible for tectonic shifts in various industries and the economic welfare of many. But they’re also topics that require ongoing management by today’s multinational companies and their trading, logistics, and finance partners. Luckily, there is a software application for that.

A quick primer as I embark on the update to ARC’s Global Trade Management Market Research Study

Trade Compliance

That darn tax wedge. I consider trade tariffs to be a form of taxes, and in this context they can have the same detrimental economic effects on the supply and demand of internationally traded goods. Namely, they increase costs that discourage supply (exports to a given country) and demand (imports by a given country). Not only are tariffs an additional cost imposed on internationally traded goods, but staying compliant with the regulations, duties, and tariffs burdens importers and exporters with additional overhead costs. Global trade management (GTM) software solutions help companies manage trade compliance costs like duties and tariffs, and regulations such as restricted party screening that are overhead costs and pose risks for regulatory fines by government entities. The management of these processes, requirements, and transactions is the role of what ARC categorizes as the Trade Compliance functionality of GTM solutions. Typically, large companies engaged in substantial volumes of international trade will make investments in a GTM solution for trade compliance issues. The tariff and clerical burdens, along with non-compliance risks, are substantial enough to deliver a meaningful ROI from the implementation and use of GTM software. Meanwhile, smaller companies will either adopt a SaaS subscription to the GTM functionality they require, or often they will outsource much of the compliance responsibility to customs brokers or other 3PLs that are set-up to handle import/export processes for clients. And establishing a robust GTM system is a significant part of what the customs brokers do to set-up their trade compliance capabilities. This is a reason why ARC estimates that logistics service providers are such a large market segment for GTM sales (see ARC’s Global Trade Management Market Study).

Trade regulation complexity and tariff and duty burdens are an important contributor to GTM software sales. But there are several additional factors, including trade volume, that contribute to GTM software adoption. An increase in volume leads to an increase in clerical burdens and trade tariffs, all else equal. Increased trade volumes also contribute to demand for GTM solutions that provide what ARC categorizes as International Trade Visibility and Trade Execution functionality.

International Trade Visibility and Execution

International trade is complex and involves multiple parties. The lead times and large number of parties involved from purchase to delivery make these trade flows difficult to monitor and manage. Trade visibility solutions provide geographically dispersed trading partners with the ability to collaborate, monitor, and manage the steps within the procurement, production, and delivery processes and to make timely adjustments that are required to meet their business plans. The software functionality is typically (always?) delivered through a SaaS model and these solutions are often referred to as supply chain networks or global trade platforms. Adoption of these solutions is driven not only by trade volumes, but also by supply chain and product complexity, heterogeneity of materials and parts, and the degree of outsourcing within the supply chain. Event management capabilities that alert interested parties of key events in the supply chain is central to the value offered. These events include production volumes or lot completions, stages of production, delivery status, product location, and payment and billing status. For example, automotive supply chains are heavy users of these solutions due to the heterogeneity and cost of the parts and the complexity of the supply chains. Trade visibility solutions are among the best enterprise software applications for the cloud, as the connectivity delivered and network effect from increasing numbers of users is a primary determinant of the solution’s ability to deliver value. Although most enterprise software markets are experiencing consolidation, I believe that trade visibility solutions are especially well-suited for consolidation because the value of the solution increases with the number of users and degree of standardization.

Standardization is also a desired characteristic of International Trade Execution solutions. INTTRA, backed by a consortium of the largest ocean carriers, is a prime example of a trade execution solution for ocean freight shipping. Similarly, Champ Cargosystems provides an execution platform for the air cargo community. I believe that trade volumes are a primary contributing factor in the changing demand for International Trade Execution systems. These systems are closely linked to transaction volumes and the facilitation of those transactions.

Next on my GTM research to-do list:

Conduct a review and analysis of the WTO trade trends and forecasts and other publicly available information on global trade volumes
Review growth rates of publicly traded GTM software providers
Speak with public and privately-held GTM software providers
Learn about how GTM end-users perceive the relative value of the numerous features and functions offered by GTM solutions and the reasons for their recent buying decisions.

**If your company recently purchased or subscribed to global trade management software, please let me know (creiser@arcweb.com) about the factors that motivated your investment decision. Your input will be used only as context for our analysis of the market.

Can You Rely on Freight Forwarders for Trade Compliance?

Global Trade | By Steve Banker • 09/09/2013

Can you rely on freight forwarders for trade compliance?

To answer that question ARC interviewed trade professionals from 12 shipping companies. All of them agreed that you cannot put your fate into the hands of freight forwarders when it comes to compliance. If goods are misclassified, or if shipments go to restricted parties, the shipper is considered the Importer of Record, not the freight forwarder. And it is the Importer of Record that pays the fines and penalties imposed by a governmental authority. The exception is some Latin American countries where there is joint liability between the shipper and the forwarder. For egregious offenders, those penalties can run into the millions of dollars, as was the case for one of the companies we interviewed.

A director of trade compliance at a High Tech company provided the best explanation of why companies need to retain control. He believed that compliance is not high on the list of what forwarders care about, even though they say it is. The forwarders his company works with care about what percent of goods get delivered in a particular time window, because their pay is linked to that metric. He has seen many shipment declarations that he knew contained multiple products with different classifications, but the forwarder declared just one.

How do shippers that work with freight forwarders retain control? In a posting last month, I wrote about how Leggett & Platt’s GTM solution completely automates the information flowing between suppliers, freight forwarders, customs authorities and various internal departments. All the data elements necessary for an Importer Security Filings (ISFs) automatically propagate into the document without the need for rekeying. The solution is so automated that the company has all the information it needs to do self-filings if it wants. Leggett & Platt, however, still prefers to have freight forwarders as a layer between itself and customs. The forwarders provide a second set of eyes for compliance, and if there is a mistake, they provide local representation with foreign customs agencies. John Wainwright, the Vice President of Customs Compliance at Leggett & Platt, thinks the ability for freight forwarders to provide these services makes them worth the money.

But how do shippers without a GTM system control the process? Hu Huang, Director of International Logistics & Customs Compliance at Kichler Lighting, told me she sends their freight forwarder a CD that lists all their items and HTS codes on a quarterly basis. Therefore, any mistakes made at filing are likely due to Kichler, not its partner. Kichler also sends purchase orders to its forwarder via EDI and those POs have unit prices on them. The forwarder verifies the code, quantity, and shipping windows. Thus, Kichler’s partner serves as an important check in the process.

Another company used a process similar to Kichler’s, except it used a portal. Internal folks classify the products and brokers can access this data by entering SKU data into the compliance database on a portal. The system provides the trade classification for the broker. If a product has not been classified, the brokers can contact the company’s trade people and get a classification. Every few months, the company pulls data out of the broker system and checks trade classification and country of origin data. It puts this data in a pivot table and audits the work. The analysis shows that the partner’s work is 99.7 percent accurate. If there are any problems, the company contacts customs and submits a revision. (Customs compliance ownership belongs to the shipper — i.e., the Importer of the Record. This is a responsibility issue, not an automation or system issue. In any event, Customs only looks for the Importer of Record, not the freight forwarder.)

Some of the shippers interviewed believed they could use freight forwarders to help classify goods and still retain a large degree of control. One shipper retained an internal trade staff, yet used two forwarders to augment their staff. They worked with only the largest and most reputable of brokers; they audited a sample of their broker’s classifications, depending on the product category, either every two weeks or monthly; they engaged in extensive co-training exercises when the forwarders were hired; and they continue to bring the two trade staffs together to examine processes and issues on an annual basis. They described this as a two way street where the company and the forwarders learn from each other. In certain areas, the shipper has become better at compliance by interacting with its partners.

In short, the answer to “Can you rely on freight forwarders for trade compliance?” is no, but the methods used by shippers to retain control are very different.

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