Trade compliance keeps getting harder

It was really only if the staff made a serious mistake that trade compliance moved up on the corporate agenda.  Failure to follow rules, such as declaring the wrong code or valuations for products, could result in significant fines and penalties.  But, generally, most trade moved without incident.

As a result, companies probably undervalued the operations and provided only limited resources for staff. 

Increasingly, however, trade compliance has become a focus of attention within firms.  At least four changes have added to the workload: growing trade tensions, supply chain snarls stemming from Covid-19 restrictions, a massive and growing list of sanctions and other types of controls, and the increasing use of economic levers to tackle broader foreign policy issues.

As Talking Trade readers certainly know, the ratcheting up of trade tensions, especially with the imposition of tariff hikes between the US and China in 2018, created a suddenly volatile trade landscape.  Tariffs, which had been largely stable for years, increased to up to 25% on a wide and growing array of products. 

The impact of tariff hikes was not limited to goods moving only between the US and China.  Trade around Asia, and indeed globally, was affected while firms scrambled to find alternatives.  Even companies that would not have expected to get caught in the crossfire found operations suddenly disrupted with costs escalating. 

Trade compliance staff had to quickly ensure that goods moving directly between the US and China had all the required documentation, including information drawn from across the supply chain, often well beyond the traditional first or second tier suppliers. 

Having managed to sort out arrangements to handle an unexpected trade conflict, compliance professionals were next hit with a much bigger problem: how to manage trade under Covid-19 and all the associated movement restrictions.  Getting the appropriate permissions to operate and ensuring that suppliers had similar paperwork in order became a significant challenge for many teams.

Although much of the world has moved on from Covid, the situation is growing increasingly problematic in China.  Until now, Chinese plants have continued to hum and, while port disruptions have been an issue, the situation was manageable.  Wholesale lockdowns are now underway in a rising number of locations within China.  This will clearly add pressures to supply chains and logistics operations.

Having (mostly) weathered a tough storm in Covid, compliance teams have had to grapple with perhaps the biggest challenge yet: the large and rapidly changing number of economic sanctions imposed on Russian firms and operations in response to the invasion of Ukraine.  Even firms that have no connections at all to Russian sanctions are suddenly discovering that proving it involves trade compliance costs and operations. 

The US just tightened restrictions again this week.  These new adjustments are on top of an already challenging set of sanctions.  The Office of Financial Assets Control (OFAC) has, as the Economist noted, nearly 14,000 words just in the Frequently Asked Questions (FAQs) related to sanctions, with changes made every day. 

Although the OFAC handles financial sanctions, there are additional American agencies that are also involved in sanctions including export controls managed by the Commerce Department, visa bans that may be relevant to firms managed by the State Department, and anti-kleptocracy rules managed by Justice. 

To make life even more complicated for compliance professionals, American sanctions do not always line up with the sanctions on offer elsewhere.  As more governments get into the business of sanctions, firms with a regional or global footprint have to spend more and more time working on proving compliance with a growing list of sanctions rules.  Australia, for example, just rolled out another round of sanctions rules this week. There are multiple websites that have sprung up to try to catalogue the list of adjustments made globally.

Many of the sanctions rules have extra-territorial application as well.  This means that firms are not just worried about direct options in and out of Russia, but now need to ensure that products made in other markets do not fall afoul of the rules.  To see how complicated this might be, companies may need to ensure that manufacturing machinery used in a third country (ie not the US or Russia) is not a direct product of US-origin software or technology.

The fines for getting any of this wrong can wipe out firms.  This is leading to unprecedented spending on compliance software and legal advice and support. 

Firms are also discovering that many customs offices have significantly stepped up border checks to ensure compliance.  Even firms that are otherwise not affected by sanctions regimes might discover that goods coming across borders are subject to longer delays than ever with more rigorous inspections.  These inspections also deliver pressure on trade compliance officials to ensure that every product has had all necessary legal and regulatory rules met in addition to meeting any new requirements.

In this disrupted environment, firms are rapidly scrambling to change sourcing or shipping and logistics routes.  Quick adjustments can add to the compliance burden.  Firms need to maintain records of past trade activities for years after goods have crossed a border.  As companies are shutting down or moving operations, these records are at risk of being lost or forgotten.   

Finally, compliance teams are watching other changes on the horizon with a wary eye.  New rules to prevent goods being made with forced labor can result in additional compliance activities for companies.  The growing set of requirements for ESG are also likely to add to the number and range of compliance operations that companies will need to do prior trade. The wide use of economic tools to manage Russia may give way to the application of similar tools for new sets of foreign policy objectives.

Trade compliance has moved from a relatively quiet part of a firm’s operations to become a critically important component.  As companies had probably underinvested in the past, firms are now scrambling to ensure sufficient trained staff are available with tools to deliver successful navigation of a very complex environment.