Inconsistent regulations challenge companies, raising costs

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Susan Kohn Ross

In writing this outlook, it was interesting to look back and see whether the crystal ball was accurate in its predictions in earlier years. I expected to find similar themes over the years, and I did. Those earlier articles certainly made one thing clear: The challenges facing businesses involved in imports and exports are complex.

One constant theme, for example, is the rising cost of compliance. A related theme has to do with the expanding complexity of issues demanding compliance efforts. Two years ago, we wrote that “companies could expect the rules surrounding import-export compliance were limited to the movement of a given shipment. That has changed dramatically in recent years. It has mushroomed to include a host of worthwhile social accountability concerns which are typically uncoordinated between countries.”

This attempt to prognosticate included mention of the Foreign Corrupt Practices Act (and the closely related U.K. Bribery Act of 2010 and the Organization for Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions), along with the expanding demand for social accountability in nations around the globe.

“Companies are faced with inconsistent rules and regulations, some totally transparent and others terribly opaque,” we wrote. “The result is more challenges, higher cost and higher risk to companies, which will be forced to add a host of additional complex considerations to evaluating where to do business, where to expand and what to value for each merger or acquisition. Add to that the current penchant in the U.S. to criminalize trading violations, and you have significant challenges for companies of all sizes.”

These themes sound intimately familiar and somewhat bleak. They continue to present significant challenges, and it doesn’t look like good news is in the cards for 2016, at least not if the definition of “good news” is an expectation that importing and exporting will get less complex or costly. If anything, quite the opposite seems likely.

Let’s start with Customs and Border Protection’s efforts. The brain drain hampering most companies — that is, the loss of institutional knowledge — is the same for the government. Customs seeks to retain and maximize its knowledge through 10 Centers for Excellence and Expertise, all of which have been rolled out and are in various stages of operation. Each center has a virtual group within the agency that works together, thereby retaining the institutional knowledge. Because each CEE focuses on one industry, the members of each center get to know the industry and the interests — and the industry gets to know Customs — better.

Next, the U.S. as a whole is getting close to the full rollout of the Automated Commercial Environment, the new computer platform through which all imports and exports will be reported. December 2016 is the deadline for full implementation of the single window via ACE system, meaning all agencies and users must be able to process all required data for their imports and exports through the system by late this year.

A more immediate deadline is Feb. 28, when use of ACE becomes mandatory for all Customs transactions, as well as for all Food and Drug Administration, National Highway Transportation Safety Administration, and Animal and Plant Health Inspection Service data. Between February and December, all the remaining functions and agencies must join the program and become fully operational.

To this sequence of events, add the Trek Leather case, in which the Court of Appeals for the Federal Circuit held a corporate officer liable for his own acts of gross negligence even while he was an agent of the corporation. If you haven’t read that decision, it can be found at: http://www.msk.com/images/ps_attachment/attachment257.pdf.

Combining these factors, the trade community finds itself in a position where Customs will be able to rely on the most current computer system and, in working with its sister agencies, more easily identify anomalies. This is cause for concern. Customs has a long history of dealing with detentions and seizures and a robust legal framework in which such cases are resolved. The same ability to resolve discrepancies in such a well-defined legal framework isn’t necessarily true for most other agencies.

Customs, along with the Census Bureau (via the Automated Export System) and the FDA are the only agencies with jurisdiction over imported and exported goods that have a history of receiving real-time shipment data. The remaining agencies joining ACE have relied on paper, and that paper was typically received long after the shipment moved.

Those agencies now will receive that data in real time. Will they know what to do with it? Will they be able to distinguish the minor discrepancy from the significant misdeclaration? If history is an indicator, the odds aren’t good that this will go smoothly.

Every few years, we have an indicator of how jumbled things get when an agency that lacks knowledge or experience messes with import and export goods. Most recently, we pointed to the U.S. Secret Service misunderstanding how motor vehicles are purchased and exported. It took costly legal action to get the Secret Service to understand how badly it stepped out of line. It’s only a matter of time before we have the next illustration (supported by data in ACE).

On the export side, the strength of the U.S. dollar, the ever-more complicated nature of U.S. export controls and economic sanctions, and increasing competition in the marketplace are significant challenges.

There are two other significant challenges to mention. One is cybersecurity — and there are really only two types of companies: those that have been hacked and know it, and those that have been hacked and don’t know it. Trying to stay ahead of hackers and protect a company’s most precious assets is perhaps today’s single biggest challenge.

The other major cause for consternation is the Trans-Pacific Partnership. Although the U.S. Congress has yet to ratify the 12-nation trade pact, there is much for companies to do to prepare to implement it.

Susan Kohn Ross is an international trade attorney with Mitchell Silberberg & Knupp in Los Angeles. Contact her at skr@msk.com.