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Know Your Customers, Or Else

Going global? Get ready to master a web of regulations, or face steep penalties.
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Cincinnati Thermal Spray manufactures high-performance coatings for the aerospace, steel, and energy industries. The 200-employee company also exports its products to Great Britain, France, Italy, Singapore, and Turkey.

Part of a day's work? Making sure the company doesn't accidentally sell its technology to U.S. enemies overseas, giving them a technological edge or a competitive advantage that might threaten U.S. economic leadership or domestic security.

Like banks, all export and import businesses have to follow federal "know your customer" regulations to make sure they are not doing business with criminals, fraudsters, or even terrorists. Trade regulations have become more numerous and complicated in recent years, and as small businesses look overseas to boost business, they confront an increasingly challenging and restrictive regulatory landscape.

If companies don't comply, they could face hefty fines, or even imprisonment. The International Emergency Economic Powers Enhancement Act of 2007 says penalties for administrative trade violations can be as high as $250,000 per infraction. Criminal violations can be as high as $1 million, or up to 20 years in prison.

The regulations are byzantine. For example, there are separate lists of 120,000 restricted trading entities issued by different government agencies. Exporting small businesses must frequently obtain licenses to sell their prodcuts, and these licenses can include ongoing restrictions for the goods they export, which means companies must monitor where their goods ultimately wind up. And small business exporters must be careful not to sell to shell companies that are set up to disguise the intentions of owners, who could be dangerous groups or governments.

About 500,000 U.S. businesses are involved in import export trade. Unfortunately, most small businesses don't have a big staff to decipher and continuously monitor the vagaries of export control and compliance. "It is fair to say the main cause of export problems is ignorance; many companies don’t understand how they are impacted," says Don Buehler, president of Export Solutions, an export trade consultancy in Clermont, Florida.

Educate and Train

But there are ways to take control of the process. First, know which set of regulations you're dealing with. Exporters and importers must comply with both International Traffic and Armaments Regulations (ITAR) and Export Administration Regulations (EAR).

Generally speaking, ITAR falls under the jurisdiction of the U.S. Department of State, which deals with all exported items that could threaten national security, including armaments, missiles, handguns, nuclear weapons and soldier armaments. EAR regulations are instituted by the U.S. Department of Commerce, and they apply to trade that could threaten U.S. competitiveness. Small business owners will most likely deal with EAR regulations.

The Department of Commerce's Bureau of Industry and Security sets a number of standards that can help small businesses stay in compliance and prove to government investigators that they are operating in good faith.

For example, BIS says companies should perform a risk analysis examining the types of goods they export and their destination. Companies should also come up with a written compliance program that they communicate to senior officers and employees. The company should also teach employees what is required of them to remain in compliance.

Small business owners also need to provide proof that they screen customers and transactions, keep good records, and have an internal system for reporting export violations. Finally, companies should document if they've undertaken remedial action in response to any violations, and they should regularly review and update their compliance programs.

While that seems like a lot of hoops for a small company, there are ways to get help.

Cincinnati Thermal Spray used Export Solutions to come up with a formal compliance program about two years ago.

"We recognized there were regulations out there that we were not fully familiar with and we wanted to get familiar with them," says Dale Harmon, director of quality and training at CTS.

Developing a program required analyzing the entire production process, and took between two and three months to complete, Harmon says. First, the company wanted to determine the status of all the parts it exports, and what kind of licensing was required. Then it turned its attention to creating a documented export program and then conducted a formal training for employees in its Cincinnati, Newark, Houston, and Wilmington, North Carolina offices.

Among the most labor-intensive tasks the company performs is its annual "denied party" screening for every existing employee, customer and vendor it has contact with, making sure no one is forbidden to work in the U.S., or to trade with. For this, CTS relies on Export. There's no single source of information, so export checks databases from BIS, Office of Foreign Assets Control, and the Directorate of Defense Trade Controls.

Trust Your Gut

Even companies that export products with no obvious connection to defense or sensitive technology need to be careful.

Schilling Ventures in Naperville, Illinois, owns four companies that manufacture non-auto transportation and water filtration components in China, Eastern Europe, and India. Schilling has long relationships with its overseas partners, but it must be careful about new ones.

Recently, a company in Ivory Coast approached Schilling to purchase a component that controls the flow rates of different chemicals using complex algorithms.

Schilling founder and chief executive Paul Golden knew nothing about the company and found the request odd. The customer asked for no details about the price and didn't attempt to negotiate.

"The typical customer buying this product would be a major chemical or pharmaceutical firm looking for precision, and it was hazy as to what they were," Golden says, adding he knew of no such related industries where the company was located.

Golden decided not go through with the sale, even though it would have meant about half a million dollars in new business.

Golden says it's important to do due diligence--and to trust your gut. Its freight forwarder, for example, does credit checks and examines the businesses to which it ships, to make sure they are legitimate. Schilling also does some sleuth work of its own.

"We believe if we do our best to confirm that a particular customer is a legitimate business, for example getting a letter of credit from them from an established bank, that we are doing the right thing," Golden says.

In addition to reaching out to the Departments of State and Commerce with questions, or using the services of freight forwarders, shippers like Federal Express and UPS offer trade expedition services, and software providers Amber Road and Oracle do too, says Charles Trimarco, senior manager of North American Supply Chain Technologies at Cap Gemini, says.

"The global economy is expanding and people are shipping goods all over the world and it comes back to the question for small businesses is there a cost-benefit of doing it yourself versus having someone manage it for you," Trimarco says.

And it's not just exporters. Since 2008, importers have been subject to something called Importer Security Filings, also known as "10+2," because they require shippers to file 10 data points to Customs and Border Patrol about the origin of the goods, plus two data points about the shipper. The filings are meant to secure against dangerous material entering the U.S., such as explosives.

The Obama administration is attempting to reduce the obstacle course for exporters and importers by consolidating agencies and authority, as well as the multiple lists of restricted entities. But it hasn't happened yet.

"The Obama administration has undertaken a significant [export control] initiative we hope will simplifiy things to some extent, and not penalize American business," Buehler says.

IMAGE: 99%: "Meh"'s/Flickr
Last updated: Jan 25, 2013

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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