The Compliant Organization: Where Does International Trade Compliance Belong?

Where should you place your international trade compliance office within your importing or exporting organization? Should it be part of sales, accounting, shipping, legal, purchasing or supply chain?

My answer may seem flippant, and among readers of this blog, it may even seem controversial.

It really doesn't matter.

The fact that your company recognizes the need for a dedicated trade compliance office is good enough. It really doesn't much matter where the trade compliance team is placed in the organization as long as it can effectively oversee and control the importing and exporting activities of the company.

Experience has shown that trade compliance offices can be more successful when established in certain areas of your organization.

No matter where your company places the group, there will be trade offs. This is because the concept of trade compliance extends across a broad range of business activities within any importing or exporting company.

It is rare, however, that any single group within a company is tasked with all of these activities. Indeed, many organizations are divided into independently operating disciplines sometimes with conflicting business objectives and agendas.

Here are some of the typical places in organizations where trade compliance is placed:

Traffic/Logistics

The logistics or transportation department seems to be a logical location for a trade compliance office. This is because the customs entry, filing your electronic export information (EEI) through the Automated Export System (AES), and logistics processes are intertwined. The group is well positioned to be aware of and respond quickly to issues that arise.

As one of the last links in a commercial supply chain, the transportation team is frequently the victim of some unwitting decision made earlier in the process. Implementing controls and changing upstream behavior can be a challenge for the downstream traffic office.

Sales/Customer Service

It's not uncommon for export trade compliance to fall under the sales arm of an organization. The benefit of such placement is that the sales team has valuable visibility into the end use and end user. Because of this, its well positioned to evaluate the compliance ramifications sooner in the sales cycle, helping the company focus its limited marketing resources on both profitable and compliant business.

The downside is that sales organizations frequently have conflicting short-term sales goals, which might lead the sales team to disregard compliance red flags. An organization that takes a longer term, more measured approach to its markets may be able to temper this inherent conflict. Some companies do this by assigning trade compliance to the inside sales or customer services associates who are able to nurture the customer relationship while ensuring the company remains compliant.

Product Management, Purchasing, or Inventory Management

The mirror image of the above for importers is to assign trade compliance to purchasing or inventory managers. The benefit of such an alliance is that the trade compliance team will be better positioned to influence the beginning of the supply chain.

Purchasing-based compliance teams have advanced notice of new origins, vendors and products to ensure product screening, classification and vendor compliance. Purchasing departments, however, have a vested interest in cost and duty minimization. This may cloud their judgment when assigning HTS codes or screening for anti-dumping duties.

Export offices within sales and customer service organizations and import offices within product procurement offices both suffer from the same structural weakness. They tend to be separated from the logistics of exporting and importing and may face challenges executing delivery of goods. As a result, they may be limited in their ability to respond to in-transit compliance urgencies.

Accounting

Placing trade compliance within the accounting department is another common choice of international companies. Accounting departments are steeped in the concept of control. They are usually responsible for approving new vendor and customer relationships, assigning product codes, and monitoring purchasing and sales commitments.

On the back end of a transaction, accounting is aware of vendor payments, customer receipts, and shipping and receiving variances. These controls and this vantage point complement the responsibilities of a trade compliance office.

Accounting has one of the strongest tools available in business. It controls the corporate purse strings. Withholding payment is a surefire method of gaining a trading partner's attention and eventual cooperation.

As with the sales and purchasing examples above, these offices may be unfamiliar with supply chain management and logistics processes and may face challenges intervening effectively when required.

Legal/Regulatory Compliance

It's not unusual for trade compliance teams to report directly through the legal or regulatory compliance team. Such departments typically have strong influence with senior management and, as such, can be effective at driving compliance strategies throughout all levels of an organization.

As with several of the operations above, such organizations are often removed from day-to-day operations. While effective at driving strategy, they may be less effective at implementing successful tactical controls.

Supply Chain

Some companies have bridged their organizational silos by developing integrated supply chain teams that take a more holistic view of their operations. Placing trade compliance within such a group puts it on par with and gives it the opportunity to influence other critical parts of the supply chain.

Supply chain based trade compliance offices are still distanced somewhat from some of the other areas in the company such as accounting and strategic planning. Placing trade compliance within the supply chain organization can, however, be a reasonable compromise to my first choice—an independent compliance team.

Independent Trade Compliance Office

For some companies, the optimal organizational structure places trade compliance on par with operations, purchasing, finance and legal functions within the company. Such trade compliance offices are organized under a C-level executive such as a chief compliance officer who may have responsibility for several regulatory compliance functions.

This structure is the most effective at providing corporate-wide visibility to trade compliance and for empowering the trade compliance team to take effective action within the company.

The greatest weakness of an independent office is that it risks isolating itself from the organization, which can lead to a "fortress compliance" mindset. When integrated properly into the business, however, centralized independent compliance offices can be effective.

Sometimes a trade compliance office falls under the responsibility of a specific area of the company because the C-level executive or vice president of that area happens to have some experience with international trade and trade compliance or simply has the time to take on the responsibility.

Centralized versus Decentralized Supply Chain

When deciding where to place a trade compliance office within a corporation, we must also consider the structure of that organization. Some companies are centralized with a headquarters that manages all activities within the firm. Other companies are decentralized, consisting of a series of loosely affiliated subsidiary businesses or divisions that ultimately report to a parent corporation or headquarters.

The centralized organization lends itself well to trade compliance. Clearly the trade compliance team will be situated within the headquarters and drive policies and procedures for the company.

Decentralized organizations are a challenge for trade compliance. Each subsidiary or division is structured as a separate profit and loss center and is usually permitted to do business as it sees fit, as long as it meets its financial objectives.

In the realm of trade compliance, however, a corporate import-export program is only as strong as its weakest link. If one division of a corporation is found to be lacking, it could put the importing and exporting activities of its related companies at risk.

To ensure trade compliance is evenly implemented within a decentralized corporation, it is common that the corporation develop a hybrid approach. To understand this hybrid model, we must first review the tenets of trade compliance. U.S. Customs and Border Protection’s Regulatory Audit Division describes five areas of internal control. Those of you familiar with financial controls will recognize these categories.

1. The Control Environment

The Control Environment refers to the organizational culture and the tone set by management. CBP sees this as the foundation for effective internal controls. A good control environment places a priority on business controls and ethics. It values competence and makes a commitment to hire, train and retain qualified staff.

2. Risk Assessment

Risk Assessment looks to a company’s strategies for reviewing and responding to challenges within its import program and greater business environment.

How does the company respond to change within its import program? Does the company address growth, new services, or complex import programs proactively? How does the company respond to personnel turnover? Is the company overly dependent on its third party provider? Has the company changed its business behavior as a result of previous compliance issues?

3. Internal Control Activities

Internal Control Activities are the tactical things a company does to ensure regulatory compliance. Has the company identified and documented specific control activities? Control activities can be proactive and preventive, or they could be reactive and investigative.

4. Information and Communication

Information and Communication describes how a company shares information internally within the organization and externally with vendors and service providers. Customs is checking to see that communication is reliable and ongoing.

5. Monitoring

Monitoring is a macro, strategic process wherein a company reviews the control environment for effectiveness and makes changes if necessary. Internal or external resources could perform the monitoring process.

Creating a Centralized Trade Compliance Team

A successful compliance model for a decentralized corporation starts by creating a centralized compliance team within the company's headquarters tasked with strategic areas of compliance. The central compliance office is augmented by assigning more tactical responsibilities to the subsidiaries.

This structure helps create a consistent strong compliance environment while still permitting the field operations to address day-to-day activities. The devil is in the details and the division of responsibilities.

The centralized team should be tasked with the more strategic elements of the internal controls listed above. The centralized team might undertake some of the following:

• Establishing a consistent corporate compliance policy.
• Establishing minimum standards for control activities such as (1) record keeping, (2) product screening, (3) product classification, (4) valuation, and (5) screening parties.
• Providing a structural outline for import-export compliance manuals.
• Selecting and managing relationships with third-party vendors such as brokers, forwarders, consultants and attorneys.
• Providing corporate awareness and skills training.
• Notifying divisions of changes in regulations.
• Providing leadership in any communication with regulators.
• Providing internal management support to compliance specialists in the divisional offices.
• Monitoring and auditing the divisions for compliance against corporate compliance standards.

These activities generally fall under the internal control categories of control environment, risk assessment, information, and communication and monitoring.

Each division within the greater corporation would then be required to maintain a team that manages day-to-day activities. The divisional offices would take on the tactical issues such as:

• Classification.
• Maintaining records per corporate policies.
• Completing a compliance manual for the division.
• Communicating needs and compliance issues to corporate.
• Monitoring daily shipments and resolving issues.
• Altering procedures to react to changes in the supply chain.

These activities generally fall under the control activities category listed above. However they also cross over into the elements of information and communication and risk assessment.

The Challenges of Decentralized Trade Compliance

A decentralized compliance organization can require additional work and deliberation to be successful. Some organizations undertake the following actions to ensure robust and consistent compliance across the organization.

• Holding periodic conference calls to discuss issues.
• Assigning dotted line reporting between the centralized compliance office and divisional field offices.
• Holding periodic on-site conferences for all compliance staff.
• Requiring divisional compliance managers to audit the operations of other divisions or subsidiaries.

Some decentralized organizations face the challenge that each of the subsidiaries has a different importing and exporting profile. While some of the divisions are infrequent importers and exporters, others have larger international trade programs.

The infrequent trader represents a risk to the corporation as it will likely be unable to assign effective, knowledgeable staff to manage its import/export activities. In this instance the company may wish to develop a modified version of the above structure.

Some companies have taken the drastic measure of forbidding smaller divisions from importing or exporting until such time as their volumes can support the hiring of full-time compliance staff. In the interim, any direct importing or exporting is performed by the corporate headquarters or assigned to one of the other divisions.

Acknowledging Trade Offs

Wherever trade compliance is placed within your organization, there will always be trade offs. Acknowledging inherent organizational disadvantages and conflicts can help companies temper and overcome them. You'll have to explore this road on your own and decide where your trade compliance office will be most successful.

This article was first published in August 2010 and has been updated to include current information, links and formatting.