Visibility Into Compliance

For at least one trade-related industry, these are boom times. The trade management software industry is prospering amid a wave of new and forthcoming regulatory compliance and security mandates and free trade agreements.

Importers and exporters are turning to a new generation of Web-based compliance platforms to help them navigate the complex world of global trade regulation as compliance matures into a core logistics function.
Much of the action in recent months has come as the Importer Security Filing, or 10+2, mandate went into effect. Under the U.S. Customs and Border Protection program, importers and carriers must file 12 data elements before a U.S.-bound container is loaded aboard a ship at a foreign port. Enforcement began on Jan. 26.

So far, about 75 percent of importers are filing, but the numbers are fluid and can change, according to Richard DiNucci, director of the Secure Freight Initiative.

At this point, Customs is not issuing fines against importers who have filed incorrect or missing data elements, or not filed at all. Instead the agency is issuing what DiNucci said are information notices stating that there may be issues with the filing. “The letters are not contemplating damage claims,” he said.

The ISF is part of Customs’ risk-based approach to trade regulation and is part of a broader push to automation to reduce the agency’s paperwork and free up time for targeted enforcement. “It allows us to do a much better job of determining which shipments should be looked at and how they should be looked at,” DiNucci said.

Almost lost amid the attention to 10+2 was that it was the first all-electronic trade program promulgated by Customs, with no paper option, pointing the way, perhaps, to the paperless future the trade community and Customs both want. That wasn’t the intent at the outset, DiNucci said, but importers who had not previously automated their trade compliance processes have readily adapted.

ISF is a reminder to shippers that they need to exert close control their own supply chains. For importers already complying with numerous trade mandates and under pressure to reduce costs, the silver lining of 10+2 is that it allows them to identify inefficiencies and eliminate redundancies, resulting in lower risk and fewer problems with Customs.

“If you clean that up, you can do us and yourself a favor,” DiNucci said.

Trade compliance has come a long way since the days when import managers toiled in a back office, flipping through the massive Harmonized Tariff Schedule, with the occasional quick nod over to the Federal Register.

ISF is only the tip of the iceberg. Programs modeled on the U.S. mandate are moving ahead in Canada, China, Mexico and the EU. New product safety standards, trade agreements and security mandates are being promulgated around the world.

As both the cost and complexity of trade compliance rise, along with the risks of noncompliance, there’s a growing trend among importers to integrate it more closely with core logistics processes, said Nathan Pieri, senior vice president for marketing and product management at Management Dynamics, an East Rutherford, N.J., trade technology provider. The result, he said, is compliance capability that works seamlessly through the supply chain in a way that improves the way shippers meet regulatory mandates and their own information needs.

“Companies want compliance, but also visibility,” he said. “We are seeing that shift and are starting to market and position solutions for that.”

Pieri calls it convergence, and said it is the latest step in a trade management industry that has evolved significantly over the past 25 years.

The field used to be focused solely on meeting export restrictions and collecting duties. The shift in focus that came with the North American Free Trade Agreement and other trade pacts lasted until security became the overriding issue after the Septem-
ber 11 terror attacks.

An “early majority” of companies are moving beyond addressing compliance on a tactical basis and placing it more in a strategic context, Pieri said. They are attracted by the new generation of software-as-a-service platforms, which they’re using as a first step in developing integrated and comprehensive compliance management programs.

“The evolution of markets starts with large companies and trickles down to the masses,” Pieri said. “We think the large mid-market will roll through the solutions map and build these capabilities as they go.”

Management Dynamics is surveying its customers to see how their internal procurement organizations overlap with trade compliance and other supply chain management functions. Even as companies begin to develop integrated compliance programs, many still don’t consider compliance-related costs when making sourcing decisions. They often fail to claim preferential duty treatment because they don’t understand rules of origin or documentary requirements.

Importers and providers agree compliance is closely tied to supply chain visibility. From a trade compliance standpoint, visibility is needed not just to watch transactions occur, but to be able to gather and report all the relevant data elements.

“Visibility is not just about watching stuff happen,” said Melissa Irmen, vice president of products and strategy for Integration Point, a Charlotte, N.C.-based provider of global trade and compliance solutions. “Things are changing so fast, and to have connectivity to all partners is just critical.”

South Korea is a case in point. The United States’ seventh-largest trading partner, the country has at least 14 free trade agreements signed or in process and is looking to expand FTAs to 60 different countries.

To help clients comply, Integration Point recently announced a strategic relationship with Samjong KPMG Advisory, a consulting firm and business unit of KPMG Sejong Customs Corp. “More and more companies are looking for assistance in understanding all the compliance rules of FTAs as well as how to benefit,” said Young Hyo Kim, managing director of Samjong KPMG Advisory.

Efforts by Integration Point and its customers to increase supply chain visibility brought a mostly smooth transition to 10+2 compliance.

“When it comes to classification and the content of filings, people are feeling pretty comfortable,” Irmen said. “They were feeling that way before 10+2.”

Euromarket Designs, the houseware retailer that does business as Crate & Barrel, had been using Integration Point’s Foreign Trade Zone Management software for more than three years when it asked the company to handle its ISF needs, which include regular updates and enhancements.

“We knew them to be extremely flexible and responsive in meeting our company’s specific needs,” said Virginia Thompson, Euromarket Design’s manager of import/export operations and international trade compliance. “With a regulation as new and unknown as ISF, we knew that would be critical.”

Product safety compliance is always challenging for importers of a wide range of regulated goods, including toys, food, drugs, tobacco, medical device and motor vehicles. One key challenge is a lack of standard classification codes among global traders and regulators.

New product safety rules are rarely easy to follow.

The Lacey Act, a wildlife protection statute originally enacted in 1900, was significantly expanded in 2008, making it unlawful to import a broad range of plant and plant products without an import declaration. For imported paper and paperboard with recycled content, the declaration must show the average percentage of recycled content, regardless of wood species or country of harvest.

Importers of toy, food and other goods are all facing new safety mandates. The Consumer Product Safety Improvement Act was enacted in 2008 to reduce lead levels in products intended for children, and the Food Safety Enhancement Act of 2009 would give the U.S. Food and Drug Administration increased regulatory powers over food providers.

Importers have had their plates full implementing the 10+2 rules and Lacey Act compliance in a single year, especially during a recession, said Jim Percival, vice president of corporate compliance for Damco, a global provider of freight forwarding and supply chain management services. The company is a part of the A.P. Moller-Maersk Group.

To comply with the Lacey Act, importers and their brokers should maintain product databases that flag applicable HTS numbers so they can proactively secure the necessary forms from vendors.

Importers have overwhelmingly met the deadline for complying with 10+2, in large part because the requirements are aligned with shippers’ own needs to receive and transmit data earlier in the shipping process, said Monica Laufenberg, Damco’s chief informational officer

About 97 percent of the total entries Damco processes have a valid ISF attached, Percival said. A small number of importers are still either unaware of the regulations or choose not to comply because fines are not being issued.

The ISF requirements have led some clients to extend their relationships with Damco. The Children’s Place, a North American children’s clothing retailer, recently asked the company to be its customs broker and handle its 10+2 filings. The collaboration includes managing purchase orders from global origins to delivery at the four distribution centers in the United States and Canada.

Importers and exporters rely on their providers to ensure that data from areas further upstream in the supply chain, including vendors and factories abroad, is received in a timely fashion. Increasingly, they’re putting mandates of their own in supplier vendor manuals and making compliance a part of doing business, Laufenberg said.

Even if no one is currently being fined or penalized for 10+2 violations, fines and withheld shipments are common for compliance mistakes or omissions for a wide variety of regulated goods. Importers often pay penalties for shipments that are released by customers but later found to contain errors in documentation or to have run afoul of other rules.

“Those are daily occurrences,” Laufenberg said. “Importers and 3PLs alike have to take consistent efforts to minimize those kinds of impacts.”

As trade compliance grows in complexity and importance, Damco is increasingly being asked to develop and fine-tune vendor management programs and supplier scorecards to benchmark the accuracy and timeliness of trade, transportation and security-related data.

And many companies expect the need for expanded data to grow.

IES, a transportation software company based in Midland Park, N.J., has about 1,400 trucking customers engaged in U.S.-Canada border trade. They’re still in the process of fine-tuning 10+2 and will soon have to comply with Advance Commercial Information, a Canada Border Services Agency program affecting Canadian imports.

Now in its third phase, the ACI program is rolling out eManifest, which requires the electronic transmission of advance cargo data for all highway and rail shipments.

“We’re working with our carrier customers to develop and deliver a new product to handle Canada,” said Kevin Gavin, vice president of supply chain management for IES.

David Biederman can be contacted at inexdb@comcast.net.