What is trade compliance and why does it matter?

Mike Melia

October 16th, 2019

Trade compliance means operating within the many global regulations that surround trading activities and the import and export of products, services and technology.

That means complying with international export, trade, and financial laws.

Who is required to comply?

You may think this will have little relevance to you, but in reality, businesses from across all industries have an obligation to adhere to compliance requirements.

It is not a regulation in place for only security-sensitive industries such as aerospace, defence, telecommunications, IT, energy, research or financial institutions.

And the penalties for non-compliance can be severe.

And yes, when you’re already dealing with a complex supply chain, I can appreciate how challenging this can be!

Who is getting caught out?

A quick look at the website of the Office of Foreign Asset Control (OFAC) for starters gives us a good indication of how many businesses, and also the range of businesses, that are fined each year for flouting regulations.

The most recent case cited (1 October 2019) involved The General Electric Company (GE) – a company the New York Times refers to as one of the ‘most storied conglomerates in the United States’.

Founded in 1889, GE is a very well known and very well established business that should be in no position to breach regulations. However, that's exactly what happened.

Between December 2010 and February 2014, the GE Companies accepted payment from a company that has been on the Specially Designated Nationals and Blocked Persons (SDN) list since 1985.

So how does this affect you?

This case demonstrates an example of the importance of conducting appropriate due diligence on customers and other counter-parties when initiating and renewing customer relationships.

What is important to understand though, is that due diligence and ongoing screening form only one part of trade compliance.

There are several other elements to consider in order to be fully compliant.

If you break trade compliance down, it’s easier to understand

I like to consider trade compliance as consisting of several key elements (Figure 1). When you piece all these properly functioning elements together with the correct policies and procedures, you create a solid foundation for a successful trade compliance programme.

The Key Elements of Trade Compliance

Why does trade compliance matter?

Trade compliance is a responsibility for all businesses and especially important for those importing and exporting. The bigger the business, the greater the compliance expectations. You should fully understand what rules and regulations apply to you, and how to manage these to be compliant.

Getting trade compliance right means you’ll meet the demands of customers and suppliers while supporting long-term growth, sustainability and competitive advantage. It’s one of the hidden elements of a successful global supply chain.

The weight of today’s regulatory pressures makes robust trade compliance controls especially important for mitigating risk:

- Protects corporate reputations and employees by facilitating legal and responsible trading
- Minimises exposure to fines and penalties
- Promotes customer satisfactions by avoiding shipment delays
- Ultimately saves money by avoiding delays, investigations and penalties

A competitive advantage in competitive markets

The most successful businesses recognise a truly integrated and effective trade compliance strategy creates a significant competitive supply chain advantage. Rather than getting stuck at borders and interrogated by customs, trade compliance ensures goods move swiftly across borders.

For all businesses, regardless of size, the only way to manage trade compliance risk is to have an effective trade compliance programme.

What are the consequences of non-compliance?

As the trade compliance landscape is becoming increasingly complex, so are the consequences of failing to comply. Repercussions range from shipment delays for minor breaches to financial penalties and criminal sanctions for serious offences.

Regardless of the specific consequence, what is certain is non-compliance will ultimately eat into your bottom line.


Key elements of trade compliance

1. Tariff classification

The correct classification of goods using commodity and tariff codes is fundamental for customs compliance as well as establishing correct duty rates, origin of goods, Intrastat, export control and many other customs procedures.

It is relatively easy to get this wrong if you don’t fully understand the classifications.

If customs detect you’re using the wrong classification, it will raise a red flag for your internal procedures, which can lead to further investigations. Getting the tariff classification wrong can also lead to fines and penalties at the border along with an incorrect payment of customs duty. If the duty you’ve been paying is too little, you may have to pay the deficiency while if you’ve been paying too much, you are unlikely to be refunded.

As with all aspects of trade compliance, do not rely on your broker to get the tariff classification right.

2. Preferential origin

Preferential origin is associated with a specific trade agreement between two countries or blocks of countries. If the goods you’re exporting have preferential origin, they are likely to attract reduced or nil rates of duty when they enter your customer’s country.

As an exporter it is your responsibility to ensure the rules of preferential origin have been carefully followed.

If you do not process the associated data and paperwork correctly you can be liable for unpaid or incorrectly paid duty for up to three years.

Non-preferential origin

Non-preferential origin is a data element required on each international shipment. It dictates the origin of the product being shipped. The rules associated with identification of origin are specific to the rules of the import country.

Errors can lead to the product’s origin being incorrectly declared and lead to fines and penalties.

3. Incoterms

Incoterms are globally recognised trade terms used to clearly define the responsibilities of the buyer and seller along the shipment lifecycle. They are integral to a contract so
that both parties are clear on delivery, costs, risk and responsibility.

Incoterms should be established, read and applied by all those involved in import and export. This will achieve benefits including significantly reduced risk of misunderstanding and disputes.

Getting incoterms wrong can lead to overpayment and confusion along the supply chain.

4. Licenses and permits

When importing or exporting certain products it is your responsibility to check if you require a license or permit. There are controls, for example, on military/paramilitary goods, technology, medicines, chemicals, artworks, plants and animals.

Exporting or importing controlled goods without the right licence is a criminal offence. Your goods will be delayed at customs and could be confiscated.

The best way to stay compliant is to establish specific license management controls with clear lines of responsibility.

5. Export controls

Certain products and underlying technology are subject to export control legislation as they could have harmful other uses. As part of product classification, it is your responsibility to classify all products against the appropriate legislation. This will ensure the correct license requirements can be established.

Different controls apply depending on whether the goods are under ITAR (International Traffic in Arms Regulations) or EAR (Export Administration Regulations).

Non-compliance with this legislation can lead to substantial fines and even imprisonment.

6. Customs management

If your business happens to be the subject of a customs investigation, how will you manage it? It’s important to have a clear action plan to help any trade compliance issues be resolved quickly and smoothly.

Effective broker management is integral to ensuring your customs management is spot on.

7. Screening

Screening customers, vendors and transaction data against sanctioned, politically exposed persons and other risky entities will help ensure you are not inadvertently doing business with an undesirable person or party.

The basic principle is fairly simple: compare all data relating to the customer, supplier, employee or transaction with the data contained in the relevant external list(s), such as those from the Office of Foreign Assets Control, The United Nations, or the Office of Financial Sanctions Implementation (among many others depending on your business).

To mitigate risk, screening should be conducted not only at the beginning of a new relationship, but on a daily basis and when dealing with transactions that include a party that is not within the organisation (for example, payment screening).

Sanction breaches are criminal offences and can lead to fines and even imprisonment.

Napier provides comprehensive screening solutions for trade compliance.


8. Valuation

HMRC needs to establish a value for imported goods in order to calculate customs duty, import VAT and trade statistics.

Every shipment must have an appropriate valuation associated with it, which should be defendable if challenged. The valuation must comply with one of the six valuation methodologies approved by the World Trade Organisation (WTO) and be declared on the Single Administrative Document (SAD or form C88).

Valuation errors can lead to fines and penalties, along with under or over payment of duties. This can lead to customs authorities challenging the valuation methodology, so it is important to take care to assess shipments and applied values to identify and correct discrepancies.

A proactive approach is best

Above all, it’s important to take a proactive approach to trade compliance and keep ahead of regulatory changes. Automated tools should be your best friend. Once the authorities sink their teeth into you, it can ultimately open a massive can of worms.

Bear in mind that your broker’s job is to get goods through as quickly and cheaply as possible. Your job is to do it compliantly.

How can we help?

Napier is here to make the world a safer place through Intelligent Compliance. We’re a new breed of anti-money laundering (AML) and trade compliance business. Our advanced products increase efficiency and minimise risk by successfully combining big data technologies with artificial intelligence (AI) and machine learning. It adds up to the world’s first truly intelligent compliance platform.

To see how our intelligent compliance solution can help your business save time and reduce costs, please get in touch.

Look out for our white paper coming out soon which looks at the role of screening in trade compliance; and why all businesses, not only financial institutions,  should understand how using modern screening technology can help achieve compliance with regulations, and increase efficiency.

EVENT: BREAKFAST MEETING 6 NOVEMBER 2019

Join us at Napier’s breakfast meeting to launch our white paper Trade Compliance: The Role of Screening in Reducing the Risk of Sanctions Breaches in the Corporate Environment.


In this breakfast meeting, Mike Melia, Board Adviser to Napier, and Former Global Trade Compliance Programme Director at a FTSE 100 pharmaceutical company, will explain sanctions and the associated risks for trade compliance.

He will then describe the important role of advanced technology, process and policy as part of a sanctions compliance programme. He will also discuss the advantages and disadvantages of the various ways he has observed organisations addressing these challenges.

About Mike Melia
Having spent over 40 years working in the pharmaceutical industry, Mike successfully led and delivered global programmes in supply chain, logistics and trade compliance. Mike’s latest project was the successful implementation of an industry leading visionary global trade compliance solution for a major pharmaceutical company. This solution resulted in the company having a reduced risk profile and a significant increase of value for the company in terms of efficiencies and cost savings across the globe.

Register for breakfast meeting

Read more from the blog...