Here we look at some of the compliance issues to be addressed and considers how 2004/ 2005 will be a watershed for compliance on Customs and export controls.
Many proposals that have been "in the pipeline" for some time are coming to fruition all at once. The new UK Export Control Act will dramatically change the compliance situation in the UK and expose companies to severe penalties and adverse publicity as never before. HM Revenue & Customs have introduced new computer systems and a new civil penalty regime. Customs have reinforced their compliance audit teams, designed computer checks and now also include export controls in their reviews.
Looking at other regimes, the US and Japan have extended their regulations and enforcement, and emerging technology is bringing more exports within the scope of the more restrictive regimes.
The UK Export Control Act 2001
This new Act sweeps up all types of export control and sanctions legislation including UN, EU and existing Customs legislation. In some ways, it is like the US Export Administration Regulations and The International Traffic in Arms Regulations (ITAR). A number of orders have been published, each with their own appeals and penalty provisions. Essentially this is an enabling Act which gives the Secretary of State powers to present a series of Statutory Orders two of which have been issued namely those on Transfers of Technology and Trade Controls. All companies engaged in High Tech or Defence Sales at home or abroad– however tangentially, need to be aware of how one or other or both of these regulations will affect them.
Although the Trade Controls are a response to British nationals at home or abroad who deal in arms and related materiel , Military use is very widely defined and the range of products caught is extensive including Computer Security. The extension of the Transfer Controls on Technology are to inhibit proliferation, not just to terrorists and rogue nations but to many other destinations. Under the "catch-all" provisions, almost anything may be controlled by reasons of military use, embargoed destinations or use in manufacture, research or deployment of Weapons of Mass Destruction and Missiles. The Act also imposes controls on "technical assistance overseas" if it is related to Weapons of Mass Destruction and any persons engaged in arms brokering.
The physical export of certain technical data, documents and research is already subject to export control. Export of these over the Internet will now need a licence, as will certain oral disclosures and e-mails of restricted information.
Implications for exporters
Not to have taken compliance measures could be judged legally as "reckless" and may leave members of the Board of any public or private sector institution open to prosecution, with minimal legal grounds of defence, if goods or technology gets into the wrong hands. The onus will be firmly on the exporter not the DTI. The Bill provides for maximum penalties of up to 10 years’ imprisonment in the event of a serious breach.
UK Customs civil penalties
Customs have now published a booklet detailing how and when Civil Penalties will be levied. Some observers believe that they will change the whole nature of relations between traders, forwarders and Customs. Their earlier briefing paper referred to "misdemeanours" , a criminal law term, and it seems that errors leading to duty, excise or VAT "evasion" will be taken to mean dishonest conduct. If so, an upsurge in appeals to the VAT and Duty Tribunal can be expected.
A number of types of error have been brought within the penalty regime including:
unauthorised use of deferment accounts, errors in or failure to maintain adequate records
failure to notify diversions, "end of transit", itinerary changes and Customs warehouse stock losses.

Examples of misdemeanours under economic reliefs ( such as IPR, OPR, End Use), Customs warehousing and transit authorisations include:

  • any false information

  • failure to abide by the conditions of the authorisation

  • late returns

  • failure to declare home-use diversions

  • poor security of premises

  • exceeding time limits.
Errors found in tariff classification, valuation audits, CAP Imports and Exports, general export procedures and duty Free Preferences are especially likely to attract high penalties because of their complexity, high values and a decline in the expertise necessary to ensure compliance. Detailed company information must be provided; companies cannot leave it all to the forwarding agents.
Customs systems and procedures
Major systems will came into full stream in 2003 and now impose disciplines for which traders and agents need to be prepared if they are to avoid penalties. Also, there is evidence that many simplified procedures and economic reliefs have not been taken up and that obsolete methods have been perpetuated, despite the fact that cost-effective systems packages are now available.
For example, with the reduction of tariff rates under GATT and WTO over several years, many old IPR systems will need slimming down and may be uneconomic against the cost of processing. Under Pareto’s Law, 80 per cent of the savings will be found in 20 per cent of the transactions. Conversely the withdrawal of GSP General System of Preference status from China and other countries will expose many unprepared companies not only to duty but to close scrutiny of their classification and valuation for the first time.
What is different this year is that errors and serious offenders will be "flushed out" by new systems like CFSP and the New Export System, and give rise to penalties on a cumulative basis. Examples of such misdemeanours include:

- late declarations

  • errors in commodity codes, values and tax override codes

  • ineligible goods.
Assessing penalties
A penalty of up to £2500 for any contravention of a Community Customs provision may be levied, with the possibility of appeal to Customs for review, and to the VAT and Duties Tribunal. Customs propose to follow VAT principles by issuing penalty letters, progressively increasing penalties and considering mitigation of penalties. Insufficient funds to pay or reliance on another such as a forwarding agent will not be accepted as reasonable excuses. Where subsequent audits reveal further failures then the withdrawal of approval for the relief, authorisation or access to the computer system will be considered.
Compliance from an international perspective
The United States - inside the beltway in Washington DC
Exporters, importers and users of US products, technology and software could be forgiven for being confused about what is happening to US Export Controls. In the wake of 11 September, there has been a furore in Congress, with several Bills promising penalties sufficient to put even blue chip companies out of business. This would seem to be an academic issue but for the fact that the policy vacuum has been filled by the military. The practical experience of lawyers and consultants currently engaged in compliance or in obtaining export licences is of inordinate delays and licence conditions, constraints on technology transfer even to allies and restrictive policies towards non-NATO countries.
Of particular danger to the subsidiaries of US companies and non-US companies with subsidiaries in the United States (or US nationals as employees) is the increased regulation to counter the Arab League boycott of Israel. Penalties for taking part in the boycott have now increased to $11,000 per offence. US Customs have also been active at home and abroad in extending physical controls on container traffic under threat of a ban on entry to the United States. "Watch this space" is the message from Washington.
Japanese, US and British "catch-all" rules and audits
In 2001, Japan introduced "catch-all" legislation like that in Europe and the United States. A licence is required where a company is informed by the Japanese authorities that there is a risk of diversion to nuclear, biological or chemical weapons or missile development or manufacture. Similarly, if "information is available" or the exporter "has information" about such use, authorisation must be obtained. This is comparable to the British rules about "grounds for suspicion" and the US rule "know or have reason to know". In all three cases, the company’s internal checks by implication must embrace overseas subsidiaries, agents and distributors, and what is published in official documents or on official websites. The range of goods and technologies has been extended to encompass practically everything.
Like the UK, Japan does not like to think of its rules as "extra-territorial". Effectively, however, this legislation is extended de facto to all subsidiaries of Japanese companies by rolling audits of compliance programmes spun out from Japan. In the light of increasingly global threats and common responses to them by the developed world, "extra-territoriality", whether American, British or Japanese, does not excite the same adverse reactions that it did in the past.
Moving forward with compliance
Now that UK and Japanese legislation also operates extra-territorially in certain circumstances (like US Legislation), most company compliance programmes will need updating and staff should be retrained. For many companies, a synthesis between these regulations must be achieved. Unfortunately, in-house expertise in both Customs and Export Control is fast disappearing. The risks of detection, costs and penalties where a company leaves matters to its forwarder, which are properly the responsibility of the company itself, have been greatly increased. Compliance audits by the DTI, Revenue & Customs or other officials and for some companies by their overseas parent companies should be seen as inevitable. They should be planned for as part of day-to-day operations. Proactive measures such as system checks, staff training, feasibility studies and audits, which were much more commonly a feature of earlier generations must be re-introduced.
Compliance failures in these fields can be just as disastrous as those seen in Financial Services and Accounting Standards. In a world still living with the fallout from 11 September, the odium may well be even greater. Compliance programmes, training and internal audits are comparatively cheap forms of insurance. The "stick" is that non-compliance may well put board members at risk. The "carrot" is that duty and cost savings can often be identified far in excess of the cost of implementing both types of compliance safeguards, if a company’s entire international operations are reviewed.

An earlier version of this article first appeared in Croner’s Trade International Digest magazine in December 2002. For subscription enquiries, please ring: 020 82457 1261.