The Sarbanes-Oxley Act provides the U.S. government with sweeping access to corporate operations and processes in order to detect misconduct which does not necessarily require " criminal intent." Important to this discussion is language that refers not only to criminal activity but also to violations of government regulations. For logistics and supply chain managers, that includes import/export compliance.
All of this shows up in the sentencing guide for the Sarbanes-Oxley Act and includes descriptions of "substantial authority personnel" that fit nearly every management position within logistics, transportation or distribution, and explicit instructions on implementing an ethics and compliance program.
"The ethics and compliance program is for the whole company and for all the regulations and laws that impact on its business," says Larry Christensen, vice president of export controls for JP Morgan Chase Vastera, a global trade management company.
Christensen describes an example of an acquisition where the company being acquired was investigated for a violation of the Foreign Corrupt Practices Act for paying a bribe to a foreign official. The acquiring company learned of the violation and pulled out of the deal. Shareholder value in the target company dropped $50 million in one day, which brought it to the attention of the Securities and Exchange Commission (SEC). The SEC said the company had made a material misstatement or had failed to disclose material information to stockholders.
The big news isn't the $28 million fine the SEC levied against the company, says Christensen; it's the fact the SEC said the next company that engages in this kind of conduct — failing to do its due diligence or making a boilerplate representation that glosses over or omits material facts — will be subject to criminal action and stockholder derivative suits (class actions).
There are related developments in the U.S. Departments of Commerce and State indicating they will impose liability on the acquiring firms for violations committed by the firm to be acquired, Christensen continues. The so-called successor liability will extend to the acquisition-of assets, not only to the acquisition of the on-going corporate entity.
Taken together, these developments indicate that non-criminal violations of government regulations (such as Customs regulations on imports or Export Administration rules governing exports) are of material interest to shareholders, they have the potential to have a financial impact and the Compliance and Ethics Program mandated by Sarbanes Oxley must monitor for such violations and address them. And, under the sentencing guide for Sarbanes-Oxley, "substantial authority personnel" are those who exercise a substantial measure of discretion in acting on behalf of an organization when acting within the scope of their authority — which includes things like negotiating/setting price levels or negotiating/approving significant contracts.
On the subject of import/export, LogisticsToday.com recently asked users how they managed compliance (see chart on p. 1). Just over 50% say they handle import and export compliance internally. Another 29% say they outsource all import and export compliance. Only 15% outsource export compliance while managing import in house. And very few organizations (3%) outsource export compliance but retain imports.
Bob Bauman, global trade compliance manager for truck manufacturer International Truck and Engine Corp., is in the outsource camp. He put together a business case for compliance, and it indicated outsourcing. His recommendation to other logistics and supply chain professionals is to take the time to collect the data and build the business case, whether it indicates using a managed service provider or hiring the experts to manage in-house.
The issue of trade management may also be one of corporate culture. Long-time logistics professional Pat Moffett, vice president of global logistics and customs compliance for consumer electronics manufacturer Audiovox Corp., doesn't outsource any trade compliance. The longevity of some of the managers and executives at Audiovox helps Moffett create a compliance culture. He issues monthly guides and the various managers know to come to him with questions — and questions do come up.
For Bauman at International, issues centered first on the North American Free Trade Agreement (NAFTA). Largely a U.S. company, International sourced parts from the U.S. and Canada. It had no problem with the 60% NAFTA content rule. But the business started to expand, and International opened a plant in Mexico and another in Brazil.
At that same time, International's suppliers were using second-tier suppliers outside the NAFTA region and International started to hear from long-time suppliers that some parts and components were ineligible under NAFTA content rules. International itself was sourcing directly from overseas in some cases, and Bauman was seeing a much more complex trade management environment develop, especially if International wanted to continued to meet the 60% NAFTA content requirements. That's when he reassessed his needs and realized he would need as many as eight to 10 additional specialists to manage global trade. That's when International decided to outsource trade compliance to Vastera rather than add the specialized headcount.
"The world is a much smaller, more complex and interrelated place," says Bauman. Each year he must get new NAFTA certificates and every September, when International is soliciting new parts (typically 90,000 a year) and renewing NAFTA certificates, the company hits a peak demand for trade compliance resources. For Bauman, outsourcing keeps his headcount of fulltime and temporary personnel down.
Asked whether it worries him to outsource trade compliance, Bauman says, yes, to some extent. "But," he points out, "it's no different than if I had the staff of 10 here. I manage the staff at Vastera remotely. The only difference is they're not on my headcount."
Bauman started with Vastera building the database on all of International's parts and sources. They have continued to work together as product changes dictate new parts or new sources.
International's goals to become more global have started to broaden the company's scope and are pulling its relationship with Vastera along with it into export compliance. Bauman says with International developing more international business and also bidding on more defense contracts, he faces issues on the export side. He's relying on Vastera's technology and expertise to help with issues like exports of dual-use items and denied-party screening, among other things.
Bauman wasn't interested in logistics third parties because, he says, they would want to manage the logistics and he'd be locked in to their logistics services.
Audiovox's Moffett also eschews third parties. It appears to be part of the corporate culture to have few but deep relationships with suppliers. Of the fewer than 100 major suppliers, two-thirds account for 90% of the Audiovox product, Moffett estimates. Even an acquisition a couple of years ago didn't vary that mix by much. You gain one and lose one, says Moffett, and the acquired company was already using most of the same suppliers. This close relationship is beneficial not only on import compliance but in addressing compliance issues on products that come under the jurisdiction of agencies such as the U.S. Federal Communications Commission.
Third parties would place a level between Audiovox and its suppliers that Moffett indicates is undesirable. In addition to the relationships that have existed, in some cases, nearly since the founding of the company in 1965, Moffett explains the close coordination that is necessary on compliance.
Audiovox has to manage every product description carefully to ensure continued compliance with import regulations. Given the nature of its product and market, the company will make frequent modifications to its product.
"What we have is similar to an item maintenance form," says Moffett. The form starts in engineering. It passes through each area of the company and is signed off by nearly every vice president based on what area of theirs the product touches. Classification and duty rate are developed from the description of what the product does and how it works, based on the input of each of the appropriate parties.
As new products are developed or existing products modified, the issue of compliance grows more complex. Some products don't fit well into existing harmonized descriptions and Moffett notes, he will need a binding ruling from the U.S. Bureau of Customs and Border Protection (CBP) service.
Exports have never been a big subject for Audiovox, says Moffett, in part because the product is already imported in the U.S. The company does a fair amount of business with Canada, and it will occasionally get an export order. Moffett developed a list based on the U.S. Treasury Department's Office of Foreign Asset Control's (OFAC) denied parties list which he issues monthly as part of a compliance manual he wrote for the company.
Moffett learned a lesson on compliance when Audiovox received an order from Yugoslavia. The country had been on and off the OFAC's denied parties list but happened to be back on the list when Audiovox arranged to ship the order. Exports are handled by bank transfer, says Moffett, and the bank reported the transaction to OFAC. Moffett admitted the mistake, Audiovox paid a small fine, and Moffett started issuing the monthly list of denied parties.
Moffett offers an example of the kind of order the sales department might question and bring to his attention. They might get an order that is "FCA Miami," he explains. Under Incoterms (the International Chamber of Commerce's standard trade definitions), FCA means "free carrier, named place," and in this case it doesn't indicate a final destination. If Audiovox is going to be on that commercial invoice, Moffett explains, he wants to know where the goods are headed. In addition to export compliance issues, Audiovox wants to ensure the goods won't end up competing with foreign partners or operations like Audiovox Venezuela, which supplies automotive plants there and does some consumer business.
Compliance is much more than avoiding fines or criminal prosecution. The improved efficiency of proper processes translates into hundreds of thousands of dollars for International, says Bauman. Paying proper duties and the ability to collect on its certificates of NAFTA compliance made the case for trade management, he notes, long before considering duty and penalty avoidance.
That being said, "You don't want to be the CEO of the first company to be convicted of trading with a known terrorist organization," cautions Vastera's Christensen by way of example. "The prosecutors will be looking for jail time for company officers the first time that happens."