Preshipment Inspection of Imports

Courtesy of P.A.E.I.

 The Don’t of Exporting

 By Margaret M. Gattis Esquire
(Article appeared in the 1996 official Export Guide)
(Article was revised in October 1999 and in May 2002)

All Rights Reserved

I ‘ve seen many articles that deal with what you should do in exporting (“the do’s in exporting”) but I can’t recall seeing any article that deal with what you shouldn’t do in exporting (“the do’s in exporting”). I don’t want to seem like a glass is half empty person, but as international business attorney whose practice is limited to international business transactions, I get many new clients because they ‘we committed a “don’t in exporting and because they need an attorney to help them sort through the effects of the “don’t” they’ve committed. In sorting through the effects of the “don’ts” that come to my attention, I often think how much time trouble and expense could have been saved, had the exporter done a little quality control in advance and avoided committing the “don’t” altogether.

The purpose of this article is to tell you how you can quality control your export operations by reviewing some of the “don’ts” I’ve seen U.S. exporters commit.

Don’t # 1 :

Don’t assume that the U.S. Export Controls relevant to your product at one point in time will remain relevant to your product will remain relevant forever. U.S. Export controls, which take the form of export prohibitions and various export, restrictions or license requirements, results from Presidential and / or congressional action triggered by concerns over national security, foreign policy and short supply. Consequently, as Presidential and / or Congressional concerns over these matters shift, export controls are likely to be subjected to change. Violations of U.S. Exports Control Laws have many serious repercussions, ranging from product seizure and denial of export privileges through monetary fines to imprisonment.

Don’t # 2

Don’t forget that you as a U.S. exporter are responsible for maintaining full compliance with all U.S. export control laws that are relevant to your products at the time of your export. Such responsibility makes you liable for the export control violations that you commit while engaging in an export transactions and for the export control violations that you agents (such as freight forwarders) commit while carrying out export operations on your behalf. Furthermore, such responsibility will additionally make you responsible for the export control violations that your customers commit in relation to the U.S. of your products for prohibited purposes and in relation to the illegal transshipment or illegal re-export of your products in whose instances when you have prior awareness of your customers intentions in these regards. Thus, if a U.S. export prohibitions or a U.S. export license requirement applies to your products, you are responsible for (a) maintaining full compliance with such prohibition or restriction in the course of conducting your own export operations (b) making your agents aware or such prohibition or requirement and insuring that your agents observe such prohibition or requirement in their conduct of export operations on your behalf, and (c) determining, transshipping or re-exporting your products while informing your customers of the export compliance obligations that apply to your products.

Don’t # 3

            Don’t neglect to investigate whether the foreign market into which you are exporting your product has any Import Controls related to the sale of your product. Import Controls breakdown into import prohibitions, import restrictions (quotas) and import licensing requirements. They may be based on country of origin, product type, or product characteristics such as products produced by convicts and counterfeit products. Imported products, which contravene an importing country’s import controls, are generally refused entry at the importing country’s border.

Don’t # 4

            Don’t assume that you can sell your products into foreign markets without making any alterations to your products. Many foreign markets attempt to discourage imports by subjecting imported products to various “special requirements” These “special requirements” are generally called non-tariff barriers and typically fall into the following categories:

Product specifications, product testing requirements or product certification requirements;

Marking requirements dealing with country of origin and the country’s unique definition of country or origin;

Labeling requirements;
Packaging requirements; 
or Documentary requirements.

Imported products which do not comply with an importing country’s “special requirements” may be refused entry into the importing country seized at the border assessed a monetary penalty or subject to a program of forced compliance.

 Don’t # 5

            Don’t ignore your responsibilities with regards to the U.S. Export Laws that mandate against certain types of behavior i.e. the Foreign Corrupt Practices Act and the Anti-boycott Act.

            The Foreign Corrupt Practices Act Prohibits U.S. exporters from paying, offering to pay or promising to pay monetary commissions, to a foreign government official or to relatives or friends of a foreign government official for the purpose of closing a deal, i.e. getting the business U.S. exporters, who violate the Foreign Corrupt Practices Act, are subject to fines and possibly imprisonment.

            The Anti-boycott Act Prohibits U.S. exporters from knowingly or inadvertently participating in an other country’s boycott of a country friendly to the U.S.  U.S. exporters, who violate the Anti-boycott Act, are subject to penalties ranging from denial of export privileges through monetary fines to imprisonment.

 Don’t # 6

Don’t neglect to evaluate country risk in addition to buyer risk in selecting the proper payment method for your export transactions. Countries frequently experience political and economic problems so severe that buyers in such countries are precluded from obtaining the necessary foreign currency to pay for their imports. Exporters that ship to such countries without having investigated the country’s political and economic situation and without having selected a payment method appropriate in light of such political and economic situation run the risk of not receiving payment for their export sale, regardless of the good intentions evidenced and fiscal responsibility exercised by their foreign buyers.

 Don’t # 7

            Don’t confuse INCOTERMS with other sales terms formulations, i.e. the Received American Foreign Trade Definitions, the Uniform Commercial Code or the Warsaw Terms. Although all formulations of sales terms are somewhat similar, they are significantly different in that each has its own definitions of each individual term. Consequently, it is important to specify which sales terms formulation applies to your transactions. Additionally, it is important to insure that you don’t misuse the specific INCOTERM selected and that you fully understand the costs, responsibilities, rights and obligations that accompany the U.S. of a specific INCOTERM. The misuse of a selected INCOTERM can lead to over or underpayment of costs and to over or under assumption of responsibilities, rights and obligations.

 Don’t # 8

            Don’t forget to analyze the adequacy of insurance coverage on your export transactions, given the transfer points for title and risk of loss and given the payment method selected. Determine the type, extent and tenure of insurance coverage required and deliberately assigns responsibility for insurance procurement and premium payment. Exporters who ignore insurance issues never comprehend the extent of the risk to which they are exposed until the risk becomes actual and they abruptly (and most unexpectedly) discover that they are either uninsured or underinsured.

 Don’t # 9

            Don’t think that your U.S. of a letter of credit is a substitute for a valid, enforceable export sales contract. A letter of credit deals only with payment and the documents, which must be presented to obtain payment.  It does not deal with many other equally important issues, such as product acceptance, product warranties or dispute resolution procedures.  These issues are typically dealt with in an export sales contract. An export sales contract should prescribe and incorporate the selected payment method and deal with any issue deemed significant by the exporter and importer. Exporters who undertake an export transaction without having entered into an export sales contract are exposed to significant transaction risk over which they are unable to exercise much control.

 Don’t # 10

     Don’t neglect to give a letter of instruction to your freight forwarder and to make sure that your freight forwarder carries errors and omission insurance. Exporter who fails to provide forwarders with written instructions leave too much to fate and often find themselves without recourse when they discover that their forwarder has made a costly error against the exporter interest. This discovery is further exacerbated when a “guilty” forwarder doesn’t carry errors and omissions insurance and can’t or won’t make good on the expense that the forwarder’s action has forced on an exporter.

 Don’t # 11

     Don’t forget to insure consistency in your export transactions. By reviewing your selection of payment terms, sales terms and insurance coverage against the terms of your export sales contract and the instruction letter given to your forwarder, you insure your transactions against problems that result from contradictory, overlapping information.  Exporters who fail to perform a consistency check expose themselves to unnecessary problems that quickly and effortlessly unravel even the most soundly structured transaction.

 Don’t # 12

            Don’t randomly assign your product a harmonized code number. Most countries in the world subscribe to the Harmonized Tariff schedule to classify products for duty purposes.  There is, however, often some room to maneuver with regard to the applicable harmonized code for a particular product, i.e. there is generally not one absolutely correct product code, but rather several possible choices. Since the choice of a harmonized code impact the duty rate that will be applied against a product and since duty rates vary country by country, it does not make sense to select one harmonized code over another, without also considering the applicable duty rates.

 Don’t # 13

     Don’t ignore your responsibility to comply with the U.S. Export Laws as they relate to required export documents. Exporters are required to prepare and submit a Shippers Export Declaration (SED) for each export unless an exemption applies.  The SED must list the contents of each shipment cite the appropriate export license, and identify the final destination and user and end use. Failure to provide a SED exposes and exporter to civil and or criminal penalties.

 Don’t # 14

            Don’t make any misrepresentations on your SED. Exporters are responsible for accurate SED’s.

             Don’t under-invoice and over-invoice your products on your SED to help an importing customer avoid tariffs or taxes.

             Don’t misrepresent the place of origin on your SED in order to assist your foreign buyer to gain access to a preferential duty program to which your foreign buyer is not legitimately entitled.

            Don’t incorrectly identify the contents of your shipment in an effort to evade the U.S. export controls that apply to your product.

             These activities violate U.S. export laws and expose a U.S. exporter to civil and or criminal penalties.  In addition, they expose the U.S. exporter to a potential violation of the importing country’s tax law under the theory that the exporter and abetted the importer in committing tax fraud.

 Don’t # 15

            Don’t neglect to comply with the record keeping requirements of U.S Export Law.  Exporters must maintain records of all exports for a period of 5 years.  Exporters that fail to comply with the record keeping requirements of U.S. Export Law expose themselves to civil and or criminal penalties.

 Don’t # 16

     Don’t forget to check out the possible applicability of two (2) U.S. Government sponsored programs available to U.S. exporters i.e. the Extraterritorial Income Excl U.S. ion (EIE) and duty drawback.

             The Extraterritorial Income Exclusion is a program available under the Provisions of the U.S. Internal Revenue Code that offers U.S. exporters the opportunity to reduce Federal Income taxes on their export sales profits. (The EIE replaced the FSC provisions of the U.S. Internal Revenue Code)

             Duty drawback offers U.S. exporters the opportunity to obtain a 99% duty refund on products that they import and subsequently export.

 Don’t # 17

     Don’t he greedy – if an export opportunity looks too good to be true, if often isn’t true! Just think of all the U.S. exporters who have gotten caught in export scam – several thousand in 2001 alone – and don’t get lured into participation by thoughts of the millions of U.S. Dollars available to you for little or nothing in return.  Don’t loose your good business sense in the face of an export opportunity and give export sales opportunities the same level of scrutiny that you would give any business deal.

 (Margaret Gatti, Esquire is the founder of Gatti and Associates. Her firm provides comprehensive legal services for customs matters, international trade transactions, international corporate operations and international tax matters. Ms. Gatti is a frequent supporter of our newsletter and enjoys hearing your comments or questions regarding all aspects of international trade. You may contact her at ingatti@gattisassociates.com, or 856-428-3104)