/

ABERDEEN BUSINESS SCHOOL Copyright Declaration Form
Name Email/contact tel no.: Course: Module: Dissertation Title: SupervisorlTutor: Mr Nicholas Anderson 0813056@rgu.ac.uk / 07527 971 506

MSc Degree in Purchasing & Supply Chain Management BSM581 An examination into the impact that investment in trade compliance has upon a firm's competitive advantaqe Mr Bryan McNay

Before submitting confirm: a) b) c) that the work Lderti=lken for this assignment is entirely my own and that I have not made use of any unauthorised assistance that the sources of all reference material have been properly acknowledged that, where necessary, I have obtained permission from the owners of third party copyrighted material to include this material in my dissertation.

I have read and agree to comply with the requirements for submitting the dissertation as an electronic document. I agree: • That an electronic copy of the dissertation may be held and made available on restricted access for a period of 3 or more years to students and staff of the University through The Robert Gordon University Moodie. That during the period that it is accessible on Moodie the work shall be licensed under the Creative Commons Attribution-Non Commercial-Share A like 2.5 Licence to the end-user - http://creativecommons.org/licenses/by-nc-sa/2.5/ ~.~ .. f\.~.~~ Date

Signed

~./.~.I.i.1.

.

THE

ROBERT GORDON UNIVERSITY
ABERDEEN

FACULTY OF MANAGEMENT Aberdeen Business School Title: An examination
into the impact that investment has upon a firm's competitive advantage in trade compliance

Name: Mr Nicholas Anderson Matriculation Number: 0813056 Submission Date: 9th May 2011 Supervisor:
Mr Bryan McNay in trade compliance

Aim: An examination

into the impact that investment has upon a firm's competitive advantage.

Objectives: 1.
The Author will examine the effects of globalisation on today's oil and gas industry with hope that findings will assist in solidifying the increased role that trade compliance can and should play. The various Regulatory Bodies with acts governing numerous international markets will be assessed in relation to the ever increasing and complex role of the trade compliance function. A study of the most recent import and export compliance topics will further outline the complex nature of today's global market place. A review of published historic violations and their settlements with corresponding share price movements will provide sufficient support for/against an increased investment in trade compliance.

2.

3.

4.

5.

As a project which will run in conjunction with the dissertation, the author will conduct a harmonised tariff classification analysis. The findings of which should support an 'argument that trade compliance can offer competitive advantage. The latest information systems and technology available offering support to the trade compliance function will be reviewed.

6.

Signed: Total word count (excluding acknowledgements ,diagrams, references, bibliography and appendices) - 18,402 words. A Dissertation submitted in partial fulfilment of the requirements for the MSc Degree in Purchasing & Supply Chain Management.

I ABSTRACT
The purpose of this study aimed to uncover organisations advantage. trade compliance group would whether an investment in an

have impact

on competitive

The author has examined, trade compliance

in detail, whether greater focus and investment advantage.

in

can lead to competitive

On the flip side, the

author also examined the cost of non-compliance performance, in particular,

and its damaging effects on

share price performance.

There is evidence to suggest that trade compliance market

can, coupled with other

specific tools, offer itself as a unique selling point to the customer. itself

Evidence was found which suggested that compliance alone manifested as competitive advantage through enhanced corporate

image and customer

assurance of product delivery.

Advancements opportunity forthcoming, contributing

in

information

technology

capabilities

have

afforded

an is in

to excel in the field of trade compliance. evidence to competitive existed gain. confirming the

Assuming investment role of compliance

Through

a mixture

of primary

and secondary

research and qualitative objectives;

and

quantitative

data, the author set out capture the following

The Author will examine the effects of globalisation gas industry with hope that findings will assist

on today's oil and in solidifying the

increased role that trade compliance can and should play.

The

various

Regulatory

Bodies with

acts

governing

numerous

international markets will be assessed in relation to the ever increasing and complex role of the trade compliance function.

A study of the most recent import and export compliance topics will further outline the complex nature of today's global market place.

A review of published historic violations and their settlements with corresponding share price movements will provide sufficient support for/against an increased investment in trade compliance.

As a project which will run in conjunction with the dissertation, the author will conduct a harmonised tariff classification analysis. The

findings of which should support an argument that trade compliance can offer competitive advantage.

The latest information

systems and technology

available offering

support to the trade compliance function will be reviewed.

Accordingly, three hypotheses, surrounding the aim and objectives, were designed and satisfied.

The author concludes with recommendations.

ii

I ACKNOWLEDGEMENTS
~------------------------------------------------------------~
The author wishes to thank those who have assisted and advised during the project, with particular mention to:-

Employer, throughout.

Company

A,

for

continued

support

and

guidance

The Robert

Gordon

University

for

their

professional

guidance

and

facilities at hand.

To all persons who kindly participated the purpose of this study.

in the research undertaken

for

To all my friends during my studies.

and family

for their

continued

help and support

iii

I

CONFIDENTIALITY

REQUEST

l

The dissertation is strictly confidential and is only available for assessment purposes with all copies to be returned to the author after the assessment board has agreed the grade.

iv

I
L

TABLE OF CONTENTS
_

-------

I
No

Page
Abstract Acknowledgements Confidentiality Request iii iv

Table of Contents List of Tables

v
vii

1.0
1.1

CHAPTER 1 INTRODUCTION Aim Objectives Company A Confidentiality Statement

1 3 3

1.2 1.3 1.4 II 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 II 3.0 3.1

4
5

CHAPTER 2 LITERATURE REVIEW International Trade - The Global Marketplace

6 6 10 15 18

HTC/ECCN Classification ECCN Violation Denied Parties International Regulatory Trade - Summary Bodies Compliance Programs Case

19 20 23 31
34

Import/Export Information

Systems and Technologies

Third Party Service Providers Violations/Settlements

36

CHAPTER 3 RESEARCH METHODOLOGY Prospective Techniques of Investigation

44
44

v

3.1.1 3.1.2 3.1.2.1
3.2 Rationale

Secondary

Research

44 46

Primary Research Quantitative v Qualitative Research Methods

46 47 48 49

for Choice of Research Method Probing Steering Close-ended Questions Questions

3.2.1 3.2.2 3.2.3 3.2.4
3.3 3.4 3.5 1Ill 4.0 4.1 4.2

49 50 50

Open-ended Interviews Limitations Hypotheses

of Research

51 52

CHAPER 4 -DATA ANALYSIS Company A - Overview Classification Analysis Analysis

53 53 57 66 67 68

4.2.1 4.2.2
4.3 II 5.0 5.1 5.2

Kazakhstan

Australia Analysis Technology Review

CHAPTER 5 - CONCLUSIONS

& RECOMMENDATIONS

73 73 79

Conclusions and Recommendations Summary

III
Referencesl Appendix A Appendix B Bibliography 81

vi

i

I LIST

OF TABLES

Page

No
Table 1 Market-Adjusted Price Reactions to FCPA-Related News and Announcements

42

vii

INTRODUCTION

CHAPTER

1

1.0

CHAPTER 1 - INTRODUCTION

Complying with national and international trade laws and regulations is a priority for organisations operating globally.

Research has confirmed that compliance can be challenging and costly due to regulations ever changing. However, the cost of non-compliance is soaring.

Expanding

markets

have

increased the

need for

robust

compliance

structures, systems and processes.

In order for such structures, systems

and processes to be effective, compliance, the function, must have strong leadership from top down.

The author has examined, in detail, whether greater focus and investment in trade compliance can lead to competitive advantage. On the flip side, the

author also examines the cost of non-compliance and its detrimental effects on performance, in particular, share price performance.

There is evidence to suggest that trade compliance can, coupled with other market specific tools, offer itself as a unique selling point to the customer. But firstly, compliance as a tool offering competitive advantage must be sold successfully to the board room.

Advancements

in information

technology

capabilities

have afforded

an

opportunity to excel in the field of trade compliance.

Again, if this can be

sold to the board room, evidence suggests that compliance will offer an organisation competitive advantage.

Specifically in the US, the oil and gas sector has been descended on by government agencies - Customs, the Office of Export Control (commerce) and the Department of Justice. perspective,
1

The fines for violations are high. For

An examination

into the impact that investment in trade compliance advantage

has upon a firm's competitive

INTRODUCTION

CHAPTER

1

EXPORT ADMINISTRATION

REGULATIONS (EAR) (per violation)

Civil • • • up to $250,000 or 2 times the value of the export Corporate Criminal - up to $1 million or 5 times value of export Individual Criminal - up to $1 million and/or 20 years imprisonment

United Kingdom • • Civil - Greater of 3 times the value of the goods or £1,000 Criminal - 7 years in prison and unlimited fines

China • 50,000 and 250,000 yuan where the value of the transaction is less than 50,000 yuan, but between 100% and 500% of the transaction value for higher-value transactions

Antiboycott • • • Civil - up to $250,000 or 2 times the value of the transaction Criminal - up to $1,000,000 and/or up to 20 years imprisonment Denial of foreign tax credits

(Company A, Presentation)

In the most serious of cases, a denial of export and import be sought and clearly, this would have a devastating

privileges impact

could on an

organisation

operating on the international

stage.

In recent years, Cameron, and BJ Services amongst

FMC, Weatherford,

NOV, Baker Hughes, NALCO

many others have had published export violations, review. Evidently, share at the
2

each will be looked at in more detail during the literature published violations price. Again, will have a detrimental the literature

impact on an organisations the author will look

during

review,

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

INTRODUCTION

CHAPTER

1

correlation penalties

between and negative

non-compliance publicity

with

trade

regulations

resulting

in

and share price movements. the importance

With huge of a smooth, can play in

efforts and focus on supply chain effectiveness, unproblematic

and reliable supply chain and the role compliance

assuring this should not be understated.

I 1.1

_-_A_-i_m

.

_

J

An examination firm's competitive

into what impact investment advantage.

in trade compliance

has upon a

r 1.2
With

Objectives

~----------------------------------------------------------------~ reference to the Oil and Gas service industry, as global markets

increase in size (Namibia, Coast) decrease

Falkland Islands) and in certain cases (Libya, Ivory governing international soaring, business greater

in size, the laws and regulations

trade become more complex. coupled with the damaging operations investment and impact

With the cost of non-compliance non-compliance author has on future whether

opportunities,

the

examines

in trade compliance can lead to competitive

advantage.

With

the

central

aim

of

the

dissertation advantage certain

focusing in today's factors

on

whether

trade it is global

compliance necessary operations;

can offer competitive for the author

global market, that influence

to examine

The Author will examine the effects of globalisation gas industry with hope that findings will assist

on today's oil and in solidifying the

increased role that trade compliance can and should play.

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

3

INTRODUCTION

CHAPTER

1

The

various

Regulatory

Bodies

with

acts

governing

numerous

international

markets will be assessed in relation to the ever increasing

and complex role of the trade compliance function.

A study of the most recent import further

and export

compliance

topics will

outline the complex nature of today's global market place.

A review

of published

historic

violations

and their

settlements sufficient

with

corresponding for/against

share price movements

will provide

support

an increased investment

in trade compliance.

As a project author findings

which will run in conjunction a harmonised tariff

with the dissertation, classification analysis.

the The

will conduct

of which should support advantage.

an argument

that trade compliance

can offer competitive

The

latest

information

systems

and

technology

available

offering

support to the trade compliance function will be reviewed.

The objectives

outlined above will be achieved by examining coupled with focussed primary

the most recent the key

academic literature

research targeting

personnel and available data within company A.

E
the

CompanyA

Company A has over 13,000 employees world. The organisation is a key

in more than 75 countries part of the world's

around

hydrocarbon

An examination

into the impact that investment in trade compliance has upon a firm's competitive advantage

4

INTRODUCTION

CHAPTER 1

exploration and production industry.

The organisation has over 400 service

locations and, therefore, operates on a global scale.

1

11.4

Confidentiality Statement

_

In order to examine truly the impact that investment in trade compliance can have on a firm's competitive advantage the author has chosen to base the bulk of research, primary and secondary, qualitative and quantitative, on his current employer. For confidentiality reasons, the author will refer

throughout the dissertation to company A, the employer.

An examination

into the impact that investment in trade compliance has upon a firm's competitive advantage

5

LITERATURE REVIEW

CHAPTER 2

I 2.0
I

CHAPTER 2 - LITERATURE REVIEW

This chapter will focus on literature gathered in relation to the aim and objectives of the thesis topic, in order to help provide evaluation and understanding around compliance functions and whether they can provide competitive advantage. Literature has been taken from Company A in-house presentations, academic journals, textbooks and websites.

r 2.1
!

International Trade - The Global Marketplace

In conjunction with the aim of this thesis and with reference to the Oil and Gas service sector, it could be argued that global markets are fluid. Most

recently, the drilling fluids industry has seen expansion in areas such as Namibia and the Falkland Islands with increased investment and focus on oil and gas exploration. In certain countries such as Libya and the Ivory Coast,

due to political troubles, markets have closed as a result of government enforced sanctions. Clearly, with new markets comes new regulations and with closed markets also comes new regulations. Therefore, the laws and

regulations governing international trade are also fluid adding complexity to the trade compliance task. With the cost of non-compliance soaring, coupled with the detrimental and impact non-compliance the author has on future whether business greater

operations

opportunities,

examines

investment in trade compliance can lead to competitive advantage.

It could be argued that the term globalisation, which still seems to be an everyday term, is something of the past. It would be more appropriate, in the world we have today, to view the term globalisation as an historic event. Everything we now have, the global market, was a result of globalisation. There is now one global market and, as earlier stated, the market has several doors which open and close at regular intervals. As each door opens, another door closes, and with each swing comes new laws and regulations
An examination into the impact that investment in trade compliance has upon a firm's competitive advantage 6

~

~

~~-------------------

LITERATURE REVIEW

CHAPTER 2

which must be digested prior to stepping in.

The trade compliance

department within an organisation operating globally has a duty to ensure compliance with each law and regulation.

As outlined by Jeffery (2002) in an article published in the UK Guardian newspaper, 'What is Globalisation?' the dictionary definition would tend to agree with the authors previous assessment regarding the term

'globalisation; ,

"Globalisation (n) is the process enabling financial and investment markets to operate internationally, largely as a result of deregulation and improved communications" (Collins) or - from the US - to "make worldwide in scope or application" (Webster)"

(www.guardian.co.uk)

Evidently, financial and investment markets operate internationally with 'at the touch of a button' communications. If we take the Webster definition, 'make worldwide in scope of application' again, we can argue that

globalisation is now an historic event.

As new markets open, for example, if the American administration lifts its embargo on Cuba, it will open up new opportunities for American business. Whether we still class these new opportunities as globalisation is up for argument. The author would argue no, this is not globalisation.

Globalisation is a past event.

Referring

back to

immediate

communications,

it

was

this

type

of

technological advancements that evolved our old world, encouraging and enabling globalisation. In our present day/state, the technology available

now can also encourage and enable the evolvement in the way organisations manage their trade compliance function. The author will discuss this

An examination into the impact that investment in trade compliancehas upon a firm's competitive advantage

7

UTERATURE

REVIEW

CHAPTER 2

argument in more detail during the information technology review during a later section.

As a clear example of what globalisation created, Company A, which will be studied during this report, now has over 13,000 employees in more than 75 countries around the world. Without the technological advancements this

growth would not have occurred.

Due to Company A's vast global operations, it must abide by the national and local trade laws, the import and export rules in place, and the regional trade laws governing each business unit. more detail, during the report. This also will be discussed further, in

Company A is a Multinational organisation, which put simply, is a company which has subsidiaries in various countries. The headquarters of Company A is in Houston, USA. As a U.S. organisation, the company is subject to U.S. trade laws. Resulting from a global market and operations in 75 countries, the U.S. trade laws governing the business conducted by Company A are complex.

Unique to the U.S., the American administration has re-export laws which mean that U.S. origin materials are not only controlled for export, but also controlled for re-export. As an example, if a UK company purchased U.S.

origin equipment from the U.S., it would not be free to forward the equipment to Nigeria, without abiding by the U.S. re-export control laws. An export is not always tangible; information such as technological drawings sent via email from the U.S. to the UK is also classed as an export and would also be subject to re-export laws.

The U.S. Bureau of Industry and Security (BIS) define export as;

''An export is a shipment or transmission of items out of the United States"

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

8

LITERATURE REVIEW

CHAPTER 2

And a re-export as;

"A re-export

is a shipment or transmission

of items subject to the EAR from

one foreign country to another"

And, finally, a deemed exportjre-export;

"Release of technology abroad"

or source code to foreign

national

in the U.S. or

(http://www.bis.doc.gov/complianceandenforcement/dontletthishappentoyou 2007 sm.pdf)

According to the U.S. business of industry and security;

"Most people think of an export as the shipment of a commodity the United States to a foreign country, Under the EAR, the release

from inside

but that is only one type of export. or source code to a foreign

of technology

national, even if the foreign national is in the United States, is also "deemed" to be an export to the home country or countries of the foreign national and may require a license under the EAR. Technology can be released through visual inspection, oral exchanges

of information,

or

the

application

to

situations

abroad of personal knowledge or technical experience acquired in

the United States. For example, if a graduate student who is an alien with a valid visa reviews controlled technology pursuant to a grant from a private

company that will not publicly release the study, an export license or license exception may be required because the review could be considered a

'deemed export'. "

(http://www.bis.doc.gov/complianceandenforcement/dontletthishappentoyou 2007 sm.pdf)

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

9

LITERATURE

REVIEW

CHAPTER

2

I

I 2.2

HTC I ECCN Classification

In order to export,

import,

or re-export,

material

must be classified.

There

are two types of classification. Export Control Classification

Harmonized

Tariff Classification

(HTC) and

Number (ECCN).

HTC classification imported.

is the process used for describing

items being exported

/

"When trading internationally, you will need to find the correct commodity code for your goods so you can fill out customs paperwork accurately. The code is an eight-digit number for exports outside the EU or goods moving within the EU, but is a ten-digit number for imports from outside the EU. Once you know the commodity code, you can look up other important information such as duty rates and any import or export restrictions. "
(http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1078053656&t ype=RESOURCES)

The reasons for HTC classification country correctly of origin classified. and commodity Local customs

are very simple,

duty rates are set by that goods are paid

code so it is essential authorities

can back date under

duties for incorrectly local authority.

classified goods going back 3-5 years dependent on the while dealing with high value, high dutiable The

Clearly,

products, it makes sense to make sure that the classification first 6 digits of the HTC code are universally country aligned.

is correct.

Digits 7-10 can be of

added by the importing

which, as above along with the country

origin, sets the duty rate. additional investment in

As part of the overall aim to determine trade compliance can result in

whether

competitive

advantage, the author will conduct a detailed classification that savings can be achieved allowing competitive

analysis with hope through a

advantage

reduced total landed cost.

Total landed cost, put simply,

is the total, all in

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

10

UTERATURE

REVIEW

CHAPTER 2

cost, to move a product from one country to another. include the cost of material, broker fees etc. freight

The all in cost would handling, import

costs, duty and tax,

The author will conduct a classification

analysis with focus

on Kazakhstan and Australia during the primary research stage of this report.

The UK government

states that;

"Classifying your goods correctly will help ensure that you: • • pay the right duty and VAT know whether an import or export licence is needed

You are legally responsible for the correct classification of your goods, even if you use an agent. Incorrect classification can lead to your goods being delayed or seized and you will have to pay any duty and tax owed, plus possible financial penalties."
( http://www .businesslink.gov .uk/bdotg/action/detail?itemId = l078053832&t

ype=RESOURCES) ECCN classification is the process of describing items being exported by their

use, which is either dual-use or (single) civilian use. With regards to ECCN classification, "ECCN classification". in the U.S., it is described simply as and

In the UK, it is the "Product Rating classification"

in EU member states, the "Control Number classification".

United States

=

ECCN (Export Control Classification Number)

United Kingdom

=

Product Rating

EU-Member Countries

=

Control Number

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

11

LITERATURE

REVIEW

CHAPTER 2

The U.S. Regime governing exports is the Export Administration Regulations (EAR). The EAR hosts a list of controlled commodities, software, and

technology known as the Commerce Control List (CCl) which sets out:

• • •

The technical parameters of each controlled item; The reason for control; and The circumstances under which the item can be exported.

"Consulting the CCL and properly determining and most important step in determining

the applicable ECCN is the first

whether an export license is required

under the EAR to export a U.S.-origin item"

(Director of Trade Compliance, Company A)

ECCN classification is slightly more complex than HTC classification and distinguishes between commercial materials with no military use and dual use materials which have civilian uses but also military uses. Materials and products which have dual use, such as Teflon coated diaphragm pumps, as

described in the Wilden case below, can be used in the manufacture of chemical and biological weapons. licence prior to export. Dual use materials require an export

Materials which have no dual use have no ECCN number / Product Rating number / Control number. Every day, civilian goods only, are classified in

the US as EAR 99 and in the UK as NlR (No Licence Required).

"The Department responsible Regulations for

of Commerce's Bureau of Industry
implementing which and enforcing the the

and Security Export

(BIS) is

Administration

(EAR),

regulate

export

and

reexport

of

most

commercial items. use" items that

We often refer to the items that BIS regulates as "dualhave both commercial and military or proliferation
12

An examination

into the impact that investment in trade compliance has upon a firm's competitive advantage

LITERATURE REVIEW

CHAPTER 2

applications

- but purely commercial

items without an obvious military

use

are also subject to the EAR"

(http://www.bis.doc.gov/licensing!exportingbasics.htm)

The Bureau of industry and security distinguish follows;

between ECCN and EAR 99 as

"ECCN, stands alpha-numeric

for Export classification

Control

Classification

Number.

An ECCN is an

used in the Commerce Control List to identify from

items for export control purposes. An ECCN is different number,

a Schedule 8
It which is

which is used by the 8ureau of Census to collect trade statistics. from the Harmonized Tariff System Nomenclature,

is also different

used to determine import duties.

All ECCNs will have 5 characters,

for example,

1A001, 48994, or 8DOO1.

There are 10 categories on the Commerce Control List. The first number of the ECCN identifies the category to which it belongs, for example, 1 =

Nuclear Materials Facilities and Equipment,

4

=

Computers,

9

=

Propulsion

Systems, Space Vehicles and Related Equipment.

However, EAR99 is a different

type of classification.

It serves as a "basket"

designation for items that are covered by the EAR, but are not specified on the Commerce Control List. EAR99 items can be shipped without a license to most destinations under most circumstances. the majority There are limitations on the

use of EAR99. However,

of the commercial

exports from the

United States fall into this category"

(http://www.bis.doc.gov/licensing/doneedaneccn.html)

Importantly,

as advised on the

us

BIS website;

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

13

UTERATURE

REVIEW

CHAPTER 2

"To minimize the potential diversion or misuse of licensed exports, BIS adds conditions to nearly all export licenses. License conditions may, among other things, restrict the wayan item is used after export, or it may require certain reports to be made by the exporter. The conditions are created through an interagency process that includes BIS and agencies at the Departments of State and Defense, among others. The use of license conditions allows the Government to approve license applications that might otherwise be denied. Once a license is issued, BIS seeks to ensure compliance with the conditions.

(http://www.bis.doc.gov/complianceandenforcement/dontletthishappentoyou 2007 sm.pdf)

"Violations of the EAR are subject to both criminal and administrative penalties. In some cases, where there has been a willful violation of the EAR, violators may be subject to both criminal fines and administrative penalties. However, for most administrative violations, there is no intent requirement, which means that administrative cases can be brought in a much wider variety of circumstances than criminal cases. Fines for export violations can reach up to $1 million per violation in criminal cases, $50,000 per violation in administrative cases on or after March 9, 2006 (there have been no such cases that have reached a final order yet), and $120,000 per violation in certain administrative cases involving national security issues.1 In addition, criminal violators may be sentenced to prison time and administrative penalties may include the denial of export privileges. A denial of export privileges basically prohibits a person from participating in any way in any transaction subject to the EAR. Furthermore, it is a violation of the EAR for anyone to participate in an export transaction subject to the EAR with a denied person.

It should be noted that in most cases, BIS reaches negotiated settlements in its administrative cases prior to a formal administrative hearing. Those negotiated settlements are often reached as a result of voluntary

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

14

LITERATURE REVIEW

CHAPTER 2

se/fdisclosures considers settlements acceptance appropriate significantly

(VSDs)

of

violations

by

companies

and

individuals. when

BIS

VSDs to be a significant of administrative of responsibility cases, fines

mitigating

factor

negotiating

cases. VSDs reflect a company's or individual's for and EAR violations. other To encourage penalties VSDs, in may be

administrative

reduced as a result of the fact that BIS became aware of the penalties is

violations as a result of a VSD. Guidance regarding administrative

provided in Supplement No. 1 of Part 766 of the EAR and in chapter five of this publication. In that guidance, some factors, including mitigating VSDs, are given violations. In the

"great weight" and are viewed as significantly

following cases, VSD credit is noted where it was given.

As a standard

provtston
referenced

of BIS settlement

agreements,

the respondent

involved neither admits nor denies the charges made against it. Therefore, the violations neither in many of the summaries in this booklet have or

been proven

in court nor been admitted

to by the company

individual. Please also be aware that this letter and booklet are not intended to create, nor do they create, any right or benefit, procedural or substantive, enforceable by law against the Department of Commerce or any other part of the U.S. Government. Nor should the cases in this booklet be interpreted as

precedent in any future actions involving the U.S. Government".

(http://www.bis.doc.gov/complianceandenforcement/dontletthishappentoyou 2007 sm.pdf)

I 2.3

ECCNViolation case

I
to study the below export insight into the risks involved with

It is appropriate, violation

at this stage of the dissertation,

case as it provides a valuable

export compliance.

Further cases will be studied during later chapters.

An examination

into the impact that investment in trade compliance has upon a firm's competitive advantage

15

UTERATURE

REVIEW

CHAPTER 2

"California

Company

Settles

Charges

of

Unauthorized

Exports

to

Iran, Israel, People's Republic of China, Syria, and the United Arab Emirates.

The U.S. Department Engineering California, Co., will pay

of Commerce today announced that Wilden Pump and

LLC (Wilden),

a company

based

in

Grand

Terrace, charges

a $700,000 civil penalty to settle administrative
Regulations

that it violated the Export Administration

(EAR) in connection

with unauthorized exports of diaphragm pumps from the United States to the Iran, Israel, People's Republic of China, Syria, and the United Arab Emirates without the required Department of Commerce export licenses.

The Commerce Department's

Bureau of Industry Wilden committed

and Security (BIS) charged

that, between 2000 and 2003, Specifically, BIS found that

71 violations of the EAR. 26 violations
by exporting

Wilden committed

diaphragm pumps without the required licenses. In connection with 22 of the exports, Wilden violated that violations the EAR by transferring diaphragm pumps with

knowledge

of the EAR would occur. BIS also charged that on

Wilden committed

23 violations of the EAR by making false statements

export control documents.

The size of the penalty assessed to Wilden is due to the significant number of violations, many of them with knowledge that the shipments country. The diaphragm pumps exported were destined by Wilden are Regulations and Regulations. The

to an embargoed

subject to Department the Department

of Commerce's Export Administration Treasury's Iranian Transaction

of the

majority

of the pumps that were exported are controlled for export and re-

export due to concerns that they could be used in chemical and biological weapons proliferation.

"This investigation

demonstrates

the Commerce Department's

commitment

to vigorously pursue those who knowingly

violate U.S. export control law,"

said Wendy L. Wysong, Acting Assistant Secretary for Export Enforcement.

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Wilden also agreed to be subject to a three-year denial of export privileges for items on the Department's Commerce Control List. The denial will be suspended for two years provided that Wilden does not commit any

violations of the EARduring the suspension period.

Acting Assistant Secretary Wysong commended the Special Agents of BIS's Office of Export Enforcement, Los Angeles Field Office, for their work on this investigation. "

(http://www.bis.doc.qov/news/2005/winden.htm)

This case visibly correctly. controlled organisation dependent However, It

illustrates

the importance to distinguish 99 / civil

of classifying between bucket. is going

exported

material is an but,

is important into the

whether Quite

material clearly,

or falls

EAR

NLR

suffering

a $700,000

penalty

to be hurt

on the revenues in question,

a recovery privileges

is likely to be possible. could have been lost, business. The global

as was almost the case, export

which would have had a catastrophic market

affect on future

which is now in place undoubtedly

offers more buyers than a local there will be increased as

market. In this case, going forward post the violation, government scrutiny which is never welcome.

Also, published violations,

it was with this case, (all information

taken from the U.S. Bureau of industry share are

and security website) will have a negative impact on the organisations price, as will be proven during a later study. Furthermore,

violations

published in the Wall Street Journal. with violations will be studied

Share price movement

in conjunction but, quite traded

in more detail

at a later stage

clearly,

as the share price is the number

one driver

of a publicly

company,

it will impact current and future investment. with joint ventures and strategic

In an industry which the negative

is now filled publicity

partnerships,

which surrounds an export violation further

emphasises that export

violations should be avoided at all costs.

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Whether

investment

in the trade compliance is obviously disputable,

function

could have prevented

the case of Wilden

"Wilden violated the EAR by

transferring diaphragm pumps with knowledge that violations of the EAR would occur".
operating However, it does go without saying that organisations

in the new world, the post 9/11 world with ever increasing trade

security measures, who are heavily reliant on exports, should invest in trade compliance dissertation simple as a protective preventive whether measure. trade compliance more in terms Nonetheless, the

hopes to determine protective Although,

can, rather than of competitive in itself a joint of

basic

prevention, perhaps,

offer

advantage.

it could be argued that prevention As an example, organisation before entering

does create competitive venture,

advantage.

it is likely that a compliant

would seek assurance

compliance within the proposed partner, thus creating competitive over a peer with poor compliance history and commitment.

advantage

~I ------------

I

2.4

Denied Parties

l
1

Also falling

into the category

of export

controls,

as was mentioned

in the

Wilden case, is Embargoed countries.

The International legal authority

Emergency for etc.) most

Economic Powers Act (IEEPA) is the primary sanctions programs (Iran, Syria, Sudan,

Burma/Myanmar and permanent

The sanctions aliens

apply to American anywhere in the

citizens/companies world and an

resident

individual/company,

regardless of citizenship,

when in the U.S.

The Trading

with the Enemy Act (TWEA) is the primary The application

legal authority

for

Cuba and North Korea.

is much like IEEPA, but also applies

to foreign organised subsidiaries of U.S. companies.

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The EU, with regards to other sanctions and embargoes on other countries, generally follow the U.N. General Assembly Lead. EU sanctions generally

apply to Member State nationals, wherever located, along with ships and airplanes flagged under member state.

The U.S. and various other governments impose trade sanctions and export controls that prohibit Company A from transacting business with various countries (e.g., Cuba, Iran), organisations (e.g., AI Qaeda or named narcotictraffickers), and persons (e.g., the late Osama Bin Laden). The Bureau of Industry and Security (BIS) will stop items subject to the EAR, including items not on the Commerce Control List, from being exported, re-exported or transferred (in-country) when there is an unacceptable risk that such items will be used in, or diverted to, any of the following proliferation activities nuclear end-uses, certain rocket systems and un-manned air vehicle enduses, certain chemical and biological weapons end-uses.

12.5

International Trade - Summary

Without a doubt, the Global market presents numerous prospects for an organisation such as Company A which holds the resources to capitalise on opportunities. However, as identified by reviewing the most basic of export

regulations, controlling the operations required to succeed within the global market are made complex by the simple export and re-export trade laws governing them. It is the aim of the report to review in further detail the

regulations governing international trade and whether investment in trade compliance can lead to improved operations - whereby improved operations offer competitive advantage. In order to satisfy this argument the author But firstly, the regulatory

must examine and review a number of factors.

bodies with their acts which govern the global market where Company A operates must be reviewed.

An examination

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l2.6

Regulatory Bodies

In order to understand the complexity surrounding international trade as a direct result of the laws set out governing international trade, it is important that the author acknowledges the many acts, regimes, laws and treaties having influence over trade.

Firstly, the export regimes of almost every country are based upon the dictates of several different treaties.

The treaties which dictate the laws set out by the numerous export regimes are noted below;

Wassenaar Arrangement arms/munitions) .

(dual-use items, conventional

Australia Group (chemicals and biological agents).

Nuclear Suppliers Group and Zangger (nuclear material).

Missile

Technology

Control

Regime

(missiles,

Unmanned

Aerial

Vehicles (UAVs), and related technology).

Export Administration Security re-export

Regulations

(EAR) - Bureau

of Industry

and

(BIS), Department

of Commerce - regulates the export and

of dual-use goods, software, and technology.

International

Traffic

in Arms

Regulations

(ITAR)

-

Directorate

of

Defense Trade Controls (DDTC), Department export and re-export technologies.

of State - regulates the

of defense articles, defense services, and related

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Country-Specific

Economic & Trade Sanctions

- administered

by the

Office of Foreign Assets Control (OFAC), Department restrict trade, investment, and financial transactions

of the Treasury by U.S. citizens, and, in some

U.S. companies, non-U.S. branches of U.S. companies,

instances, U.S. -owned or controlled subsidiaries with certain countries, entities, and individuals.

Antiboycott administer

Laws - both antiboycott

the Treasury and Commerce

Departments

laws.

These laws apply directly to U.S. -owned to counter Arab

or controlled

subsidiaries

and are designed primarily

country boycotts of Israel and Israeli goods. (Internal, Company A presentation)

Other U.S. agencies involved in export transactions

are:

Census Bureau's collecting export

Office of Foreign trade statistics

Trade Statistics Electronic

-

charged

with

from

Export Information

(EEl).

U.S. Bureau of Customs and Border Patrol - review exports and assist with enforcement

of U.S. export control laws.

Environmental exportations

Protection

Agency

(EPA)

-

charged

with

ensuring

provide proper notification

of certain chemical agents.

Nuclear

Regulatory

Commission

(NRC) - issues export

and import

licenses for radioactive materials.

Non-U.S. member

Export Regimes - many countries, countries, Japan,

such as the U.K., EUamong others,

China, Canada, Australia,

have export regimes similar to the United States.

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Import Transactions - U.S. Customs and Border Protection (CBP) is an agency of the U.S. Department of Homeland Security charged with the management, control, and protection of U.S. borders, collection of import duties, and enforcement of regulations related to international trade, drugs, immigration, and supply chain security.

Non-U.S. Import Regimes - Almost every country has regulations intended to control imports and addressing the collection of import duties.

(Internal,

Company A presentation)

The BIS states;

"A number of executive branch agencies have responsibilities for regulating exports from the United States. The Department of Commerce is responsible for controlling goods and technology, which are capable of being used for commercial purposes but which also present foreign policy or national security concerns. BIS implements export controls for the Department of Commerce through the Export Administration Regulations (EAR). Other federal agencies with a role in export controls include the State Department, which controls arms exports and re-exports, the Department of Energy, which controls exports and re-exports of technology related to the production
of

special nuclear materials and the Department

of

Treasury, which

administers certain embargoes"

(http://www.bis.doc.gov/complianceandenforcement/dontletthishappentoyou 2007 sm.pdf)

It is worth noting, with regards to company A and the

u.s.

EAR, that the

export control regime of the United States is one of the most complex in the

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world

and

is

regulated

under

several

different

statutes;

• • • •

The Export Administration

Act

The Arms Export Control Act The Emergency Economic Powers Act The Trading with the Enemy Act

(Journal of Institute and Exports, 2006)

of Management and Administration,

Managing Imports

Pupkin, as cited by Hansen (2004), states that;

"Given the complexity of the US regulatory regime, it is important that U.S. exporters take seriously the enforcement of export control laws. "

(Export Regulations and Compliance, Hansen 2004)

Considering exporter,

this statement

further,

it is clear that, as Company A is a U.S. Due to

the enforcement

of export laws should be taking seriously.

the complex nature of the very simple U.S. export laws as discussed earlier, the role compliance essential. must play in assuring full compliance is difficult, but

In order for the author to further

understand the complexity

of the

compliance processes, import and export compliance laws must be studied in further detail.

r;-----------------I

2.7 Import / Export Compliance Programs

-----------------------

Exports and imports fall under some form of export/import Imbriani (2008) acknowledged

control.

Robert

that export controls can be very general, such countries, or very specific,

as not dealing with denied parties or embargoed

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23

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such as requirement destination.

for an export

license for

a specific product or

Of interest, The Aberdeen Group presented research during 2007 which found that enhancing trade compliance and global supply chain visibility were two of the key themes dedicated to improving global trade management. The study found that companies had veered away from viewing import and export compliance as merely a way to reduce penalties, but as a tool that could reduce total landed costs by maximising the use of various free trade zones and preferential trade agreements. The study found that improving total landed cost was ranked as the number one initiative around trade compliance (Aberdeen Group, 2005).

Total landed cost was discussed earlier and, with the help of the planned classification analysis to be conducted during the primary research stage of the dissertation, the author hopes to be able to reduce the total landed cost of a number of imported products through duty minimisation. If successful,

firm evidence will exist confirming the role compliance can play in reducing total landed cost, through duty minimisation enabling competitive advantage. Clearly, in order to conduct a classification analysis, investment must be forth coming. With the primary aim of the thesis striving to examine the link between the impact of investment in the trade compliance function and competitive advantage, it should be proved, assuming saving through investment in trade

reduced total compliance

landed cost can be achieved, that will lead to

competitive

advantage.

In line with this theory and the aim of the thesis, the key findings from the latest research into export compliance programmes, conducted by MK Technology (2009), found that;

"Compliance programmes

are now being viewed as a contributor

to profit

as well as a legal obligation.

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An effectively managed export company's competitive position.

compliance process can improve a Conversely, a badly designed and

implemented process can lead to lost sales, disappointed customers and damage of a company's reputation as a reliable supplier and in many cases carry heavy fines and other penalties.

Participating companies concluded that export compliance programmes contribute to profitability and enhance the corporate profile.

Many companies closely guard their internal compliance procedures as "Proprietary" with the conviction that they provide a competitive

advantage in the global marketplace. "

(Thales

MK

Technology

ECBP

Report)

Brown

(2006)
with

described prevention,

a

compliance detection,

programme

as

a

programme but that

concerned failed to

collaboration

and enforcement research,

mention,

as uncovered

by the

MK Technology

compliance programmes and an enhancement

could be a contributor of corporate image,

to profit, competitive which together,

position as

viewed

proprietary,

enables competitive

advantage.

Brown (2006) stated that;

"It is a system of policies and procedures developed to assure compliance with and conformity to all applicable federal and state laws governing the organisation"

(Journal

of

Health

Care

Compliance,

2006.

Brown)

Research undertaken

by the Aberdeen Group (2005) found that inside small, within two thirds of the companies surveyed,

medium and large companies,

An examination

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25

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improving global trade management was among their top three corporate initiatives. If the reasons for improving global trade management within the

companies surveyed by the Aberdeen Group are in line with the findings uncovered by MK Technologies, (compliance can contribute to profit,

competitive position and enhancement of corporate image) there is good reason to improve global trade management.

In order to improve global trade management, from a compliance stand point, there should be a number of internal programs contributing to the function.

Mckenzie (2006) identified nine key elements that belong in any effective internal export compliance program;

"Statement of corporate compliance commitment from the highest levels of corporation

Identification of resources (internal and external) for export compliance advise and resolving

• • • • • • • •

Questions and disputes about export controls Product/technology/country classification matrix Order entry procedures that include export control analysis Transactions export license analysis against the classification matrix Destination/end use/end use/diversion risk screening Shipping hold until all problems/issues identified and resolved Recordkeeping procedures Procedures for investigating, correcting, and reporting (if applicable) export compliance problems and violations. "

(Mckenzie 2006, Managing Imports and Exports)

Gleason (2006) outlined the following five-point customs compliance best practises programme;

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1. Take

control

of your

related

parties

- audit,

implement

internal

controls, and train.

2. Watch

the

documents triggers

created

in (e.g.

the

United

States

that

are of

independent origin).

of liability

SED and NAFTA certificate

3. Do

not

make

unnecessary

or

inaccurate

statements

on

other

documents

sent abroad (e.g. tariff classification on invoices, generic

on invoices, valuation or origin with no

inconsistencies basis).

certificates

4. Do not change tariff

classifications

or value just

because you are

requested to by a foreign buyer (related party or not).

5. Strive for global customs consistency,
possible and act to protect yourself.

but recognise when that is not

Imbriani

(2006) states that;

"implementing

a programme

of compliances

best practices

protects

you

against fines and penalties,

it also helps you avoid delays and prevent Other benefits include efficiency and job costs. rr

competitors from gaining a tool to use against you. improved satisfaction, customer satisfaction, and increased

employee

reduced

transactional

(Solomon 2006, managing Imports and Exports)

Imbriani

(2006) presented an 18 step programme programme (EMS);

for developing an export

management

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Determine all employees involved in export and import functions and their roles

• • • • •

Appoint a compliance administrator Establish training programmes and records

Review export and import control documents and retention Using the regulations, formalise written procedures

Review your companies order entry process from the point of the shipment or importation

• • • •

Create a flow chart that visually displays the process Develop procedures for the screening of export clients Create 'hold,' 'release' and 'authority' functions

Develop procedures for proper classification of your products under the harmonised tariff

Understand the ECCN classification system and determine classify products being exported

steps to

• •

Access to the regulations and rulings Determine involvement exports and imports of other government agencies with your

Develop procedures to determine imports

proper valuation of your exports and

• • • •

Country or origin marking requirements Power of attorney procedures requirements handled by your

Export and Import documentation

Identify types of exports, imports, and re-exports company.

Pupkin, as cited by Hansen, believes that;

"A solid and workable export compliance programme is one that is tailored to an individual company's procedures. For a compliance programme to work, it must be practical. "

An examination

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2

(Export Regulations and Compliance, Hansen 2004)

Pupkin states that, as a minimum, an export compliance programme should be inclusive of the following; A person responsible for ensuring export

compliance at the company, possibly a dedicated lawyer from the company's office or general counsel. A statement of corporate compliance signed by the company president and distributed to the staff and, also, the presence of an understandable export compliance manual or handbook that can be used by employees to identify problems and provide preliminary advice concerning compliance.

(Export Regulations and Compliance, Hansen 2004)

Ballantine and Clark, as cited by Hansen (2004) advised executives to review their compliance programme for what they described as the following basis elements;

Policy statement issued by senior official

Overall responsibility for the compliance programme

Allocation of particular compliance responsibilities among company officers and employees

Compliance procedures and safeguards

Compliance manual or other documentation informing employees about compliance programme requirements

Training, education and updating regarding legal requirements and compliance programme requirements

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Processesfor employees to secure compliance guidance and to report suspected violations

Internal compliance audits/reviews

(Export Regulations and Compliance, Hansen 2004)

It is argued that the way in which Export Management System (EMS) goals

are accomplished can vary significantly markets in which they operate.

between organisations and the

The actual commodity, technology, or

services provided by a company will affect its programme (lmbriani 2008, Managing Imports and Exports).

Imbriani (2008) states that;

"A company's export compliance programme should be tailored to its specific exports and structures. It would incorporate not only compliance

procedures, but also the company's best business practices for export. When establishing an EMS, a company should aim to implement a basic control plan as quickly as possible, covering all key compliance issues applicable to its exports. A continual improvement process should then be put in place to expand and improve the procedures on an ongoing basis."

(Imbriani 2008, Managing Imports and Exports)

It

is worth

noting that

Williams (2004)

states that

as a compliance

programme matures, each element must be reviewed to ensure processes, procedures, and structure have evolved appropriately (Journal of Health Care Compliance, Williams, 2004).

The importance

is highlighted

during

investigations

into violations

of

compliance whereby the existence of a functioning compliance programme

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LITERATURE REVIEW

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can be a mitigating Compliance (Imbriani

factor.

Export Management titles for

Systems (EMS) and Export such written and programmes. Exports).

Procedures 2008,

are common Managing

Imports

Clearly,

as has

been

uncovered

during

the

review

of

import

/

export

compliance Research compliance reduction profitability,

programmes, uncovered

there is a vast amount within the global

of literature market,

on the topic. now view A

that,

many

as a tool offering in total were landed all found

something

more than

basic prevention. image,

costs,

enhanced

corporate to the

increased of the

to be linked

closely

activities

compliance function. should entail

The various theories on what a compliance programme and will now be compared, during the

have been reviewed

primary research stage of this thesis, to the functioning in place within Company A. However, prior to

programme the

which is primary

disclosing

research on this topic, it is important systems and technologies

to review the present day information offering a backbone to the

which are available,

compliance programme

and overall function

l

2.8

Information Systems and Technologies

--~
Firstly, as stated by Brynjofsson Salam (2008) the relationship advantage, and Hitt (1998) and as cited by Vannoy and have long sought to understand systems, co~petitive

academics and practitioners between investments

in information

and firm performance.

Although dating from 1985, Rackoff et al systems had performed support systems in

(1985) believed the principal role that information the past was one of operational more recently companies competitive and management

but argued that strategically to

were using information advantage (Information

reap significant Advantage:

Systems For Competitive As

Implementation

of a Planning Process, Rackoff et ai, 1985).

stated, this theory dates from 1985 but the author feels that the statement

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UTERATURE

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holds truth today as the information systems capabilities from 1985 pale in comparison to current information systems.

Again, the aim of this report is to study whether a strong compliance programme, through increased investment in trade compliance, can prevent violations and offer a competitive lead. As a direct result of what Porter

(1985) described as the information revolution, the author will examine whether advancements in information technologies, if utilised proactively, can lead to competitive advantage.

The Aberdeen Group (2005) argued that a $1 billion company could free $10 million to $40 million in cash by improving basic trade processes as a direct result of improvement in information systems. Without doubt, a saving such as this offers a competitive gain.

The research found that the number one pressure compelling firms to improve global trade processes was the avoidance of customs and other regulatory fines and penalties (Aberdeen Group, The CFO'sAgenda for Global Trade Benchmark Report, 2005).

Porter

(1985)

believed that

the

information

revolution

has affected

competition

in three vital ways;

It changes industry structure and, in so doing, alters the rules of competition;

It creates competitive advantage by giving companies new ways to outperform their rivals;

It spawns whole new businesses, often from within a company's existing operations.

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(How Competition Gives You Competitive Advantage, Porter and Millar, 1985)

With

regards to the

trade

compliance function,

assuming that

trade

compliance can provide more than basic prevention, it could definitely be argued that investment in trade compliance, through utilising emerging

technologies, would provide opportunity to outperform the competition.

Damianides (2005), Journal, states that;

as referenced in the Information

Systems Control

"One of the main concepts incorporated into IT governance is the need to align IT with the overall business strategy. Organisations should take

advantage of emerging technologies to drive and execute the business strategy"

(Damianides, Information systems Management, 2005)

Advancements in the use of emerging technologies within Company A will be discussed during the primary research section of the dissertation. to the research gained interviewing key employees of According

Company A,

particularly the Trade Compliance Manager, the Apple I phone was being considered to host various trade compliance applications. Interestingly, the

Trade Compliance Manager, Company A, when asked about his thoughts on emerging technologies and whether they could enhance the trade compliance function, believed they truly could and as an example of his forward thinking, suggested that the organisations IT group work with the Apple I phone (the organisations choice of business phone) to create a trade compliance

application which would allow denied party screening, dual-use / ECCN classification lookup and a harmonised classification search tool. will be discussed in more detail during the primary research stage. This topic

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According to Fox and Noble (2003) and again, as cited by Damianides (2005), building a strong internal control programme within IT can help to gain competitive advantage through more efficient operations (Damianides, Information systems Management, 2005).

Again, referencing the Apple I phone idea, as suggested above, it is clear that, if possible, it would create efficiencies in the denied party screening operation, the ECCN/ dual use look up operation and also the HTC search operation - all of which could be conducted while travelling, out of the office, out of hours etc, adding, as Fox and Noble (2003) argued, competitive advantage to an organisation. These are clearly day to day operational

activities and although improved efficiencies in each would be beneficial, collectively they will not generate the competitive advantage this thesis aims to capture. Coupled with further advancements in technology, should an

organisation be willing to invest, there is definitely an argument for investing in emerging technology and thus creating a competitive improvement.

L2.9

Third Party Service prOv_i_d_e_rs

_

J

It is important to study the role that third party service providers have in assuring compliance.

The BIS state that;

"Primary responsibility for compliance with the EAR generally falls on the "principal parties in interest" in a transaction, who are usually the U.S. seller and the foreign buyer. However, freight forwarders or other agents acting on behalf of the principal parties are responsible for their actions, including the representations they make by signing an export declaration or other export control document. To help avoid liability in an export transaction, agents and exporters must decide whether any aspect of the transaction raises red flags,
34

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inquire about those red flags, and ensure that suspicious circumstances are not ignored. Both the agent and the principal party are responsible for the accuracy of each entry made on an export document. Good faith reliance on information provided by the exporter may excuse an agent's actions in some cases, but the careless use of pre-printed "No License Required" forms or unsupported entries can get an agent into trouble."

(http://www.bis.doc.qov/complianceandenforcement/dontletthishappentoyou 2007 sm.pdf)

Reynolds regulatory

(2009)

suggests

that,

as a result with

of increased

scrutiny and

from

agencies, to

combined

the numerous rules business more from and

regulatory globally service

requirements operating providers

conduct

international expect

transactions, third freight party

organisations such as

should customs

brokers

forwarders.

"Service providers should be more things to more people especially in the area of compliance, education and training and informed compliance. International trade participants, who are preparing service provider reviews or selection criteria need to incorporate the concept of increased service offerings from service providers to match the increased scrutiny that regulatory agencies are placing on the trade community"

(Reynolds (2009),

Managing Imports and Exports)

Company A argued that;

"A review of freight forwarder export procedures to ensure compliance was essential"

(Trade Compliance Manager, Company A)

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Raia (2009)

states that;

"Regardless of whether it's an import or export, ensure your service provider calls you with any question as to the shipment and does not make any entry or export decisions on your behalf - A compliant importer/exporter chooses compliant service providers"

(Raia 2009, Managing Imports

and Exports)

With regards to customs brokers and logistics service providers,

Company A

should have controls in place to monitor the work that the third parties do on their behalf, as the acts performed by third parties concerning the

organisations

goods are legally the acts of the principal.

r

2.10 Violations/Settlements

l
there are various regulatory markets.

As detailed

in section 2.6 of this dissertation,

bodies governing trade within international

In recent years, FCPA violations

have increased steadily.

Since 2002, there involving more

has been over USD 1.2 billion in settlements than 30 countries (Conroy and Wong 2009).

and penalties

The FCPA prohibits the bribery of foreign official and requires that a company retain accurate books and records.

FCPA regulations

are enforced

by the Securities of Justice (DOJ).

and Exchange Commission

(SEC) and the U.S. Department

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LITERATURE

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2

Conroy through

and Wong (2009) to 2008.

reviewed

FCPA settlement

statistics

from

2002 USD

The 10 largest

regulatory

settlements

ranged from

16m to USD 800m.

As identified

by Conroy and Wong (2009) the number of settlements

per year

had generally increased.

As referenced stated that

by Conroy and Wong (2009), had substantially

during

March, 2008, the DOJ its focus on FCPA

the department

increased

violations.

"Following the trend of settlements recent statements

over the past five years, and considering going

made by the DOJ, the total number of settlements

forward may continue to increase"

(http://www.nera.com/extImage/Pub

FCPA Settlements

0109

FinaI2.pdf)

There are a number of reasons for the increase in US export enforcements which have resulted Assistant in increased Secretary violations and severity Enforcement of the penalties. (2007) states the

Jackson, following;

For Export

"The attacks of September 11 were deadlier than Pearl Harbor. World events since then demonstrate that the United States and its allies continue to face

the threat of terrorist attacks. In August 2006, a plot to use a combination of chemicals and explosives on multiple transatlantic flights from the United

Kingdom was disrupted by U.S. and British authorities. osmium tetroxide, destructive fortunate. targeted has a legitimate

One of the chemicals,

use in scientific research, but is highly we are not always so terrorist bombings

to the eyes, lungs and skin. Tragically, On July

7, 2005,

a series

of coordinated
system, killing

London's public

transportation

over 50 innocent

people and injuring

over 700. It was the deadliest attack on London since

An examination

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37

LITERATURE REVIEW

CHAPTER 2

World War II.

These and other events remind us that we must remain

vigilant in the ongoing war against terror. Many products exported from the United States are classified as dual-use. They are intended to be used for commercial purposes, but can also be used by terrorists, or in weapons of mass destruction or conventional weaponry. The U.S. export control laws help foster legitimate trade in dual-use items, while simultaneously keeping our most sensitive goods and technologies away from those who seek to cause us harm. Achieving both of these objectives is crucial. Our economy depends on the development of high technology and legitimate trade in dualuse items. President Bush has said that, "The role of our government is to create an environment in which the entrepreneur can flourish, in which minds can expand, in which technologies can reach new frontiers. " That is especially true when it comes to doing business in the global economy, which involves exports. To remain competitive in today's global business environment, we must continue to open more global business markets and maintain a business environment that encourages entrepreneurship and innovation. Yet, in today's complex world, our innovation has become a tool that our enemies seek to use against us. As the President has stated, "The same technology and global openness that have transformed our lives also threaten our lives. The same innovations that make it easier to build cars and computers make it easier to build weapons of mass destruction." As we engage in legitimate trade, we must not allow that to happen. Denying weapons of mass destruction to countries of concern and their terrorist allies is a key

component of the 2006 National Security Strategy. By understanding and complying with our U.S. dual use export control system, you playa vital role in protecting our national security. This booklet is designed to help you do so. Herein are examples of the serious consequences of violating our export regulations. Each chapter contains actual closed criminal and administrative cases representing violations of particular controls set forth in the Export Administration Regulations (EAR). All parties involved in export transactions have responsibilities under the EAR, including exporters, freight forwarders, carriers and consignees. Serious sanctions are imposed on violators,

An examination

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LITERATURE REVIEW

CHAPTER 2

including prison terms, substantial fines, and denials of export privileges. Such violations can also damage the reputations of companies and their executives.

The Bureau of Industry and Security (BIS) will continue working to keep the most sensitive goods out of the most dangerous hands. We will vigorously pursue enforcement actions against those who violate U.S. export and antiboycott laws. Our national security demands nothing less. But industry compliance is the first and best line of defense in protecting our national security. Indeed, by forging a partnership in compliance, government and industry can protect our national security and promote prosperity. welcome you as our partners in that effort. " We

(http://www.bis.doc.gov/complianceandenforcement/dontletthishappentoyou 2007 sm.pdf)

The

penalties

for

violations

of

international Chapter 1.

trade

laws are

severe,

as

demonstrated

in the introduction,

Referenced below is a short list of export violations penalties.

and their corresponding resulting from in

The list gives precedent to the severe penalties A larger list of U.S. export violations

non-compliance. Appendix A.

can be found

2009 FMC Technologies, Inc. - $610,000 settlement related to 78 unlicensed exports of butterfly and check valves classified under ECCN2B350 to various countries.

2009 DHL - $9.4MM joint settlement with BIS and OFACregarding allegations that DHL unlawfully aided and abetted the illegal exportation of goods into Syria, Iran, and Sudan and failed to comply with record keeping

requirements of the EARand OFACregulations.

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

39

LITERATURE REVIEW

CHAPTER 2

2009 BJ Services - $800,000 voluntary self-disclosure

civil penalty

for 72 violations

of the EAR -

regarding

exports of valves classified under ECCN

2B350 to 11 countries without export licenses

2005 BJ Services - $142,450 destinations

settlement

for exporting

chemicals to various

without the required export licenses and with knowledge that a of SEDs and in AES submittals.

violation would occur; made false statements

2003 OTS Refining Equipment settlement oil-field and industrial of export privileges; equipment

- exports and attempted

exports of

to Iran in 1997 and 1998 - 20-year denial sentenced to 51 months in prison

OTS President

(embargo violation)

2003 Omega Engineering

settlement

- exports of laboratory and administrative

equipment fines;

to

Pakistan in 1997 - $500,000

in criminal

Vice-

President sentenced to 10 months in prison (licensing violation)

2003 Honevwell

settlement

- unlicensed

exports

of hydrogen

fluoride

to

Mexico from 2001 to 2002 - $36,000 fine.

2005 Parker Hannifin settlement

- unlicensed exports of fluid control valves

to Taiwan and China - $185,000 fine.
(Company A, Presentation)

In many of these cases, there

would be an argument

that

investment

in

trade compliance could have prevented the violation from occurring. doubt, investing of the violation in trade compliance function occurring. A

Without

would have minimised the risk internal export / import

functioning

management

control program,

IT systems capable of managing global trade would have minimised

and education of the personnel within the organisation

An examination

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40

LITERATURE

REVIEW

CHAPTER

2

risk;

however,

all of this would require investment. investment in trade compliance

The thesis aimed to competitive

study whether advantage.

could generate

If it is argued that trade compliance, over trade non compliance, advantage through corporate enhancement, it can be

generates competitive

argued, in the simplest of terms that investment to competitive advantage.

in trade compliance will lead

Export violations, such as above, are published in the Wall Street Journal and made aware to investors through corporate notifications organisations share price is immediately influenced to the market. market An is

when the

informed of the violation. exporting

DHL, as above, were fined $9.4M for unlawfully In addition to the settlement,

goods into Syria, Iran, and Sudan.

DHL agreed to improve its compliance program, and hire an outside auditor to mon itor com pliance (http://www.joc.com/government-regu lation/dh 1-

pays-94-million-export-violation). The share price of DHL, on news of the violation, 15.93 USD to a low of 6.64 USD. dropped drastically, the share from price of the given

Post settlement,

recovered, penalty

which suggests the market viewed the potential the violation as more severe than the

severity penalty

for

(http://ir2.flife.de/data/dpwn/dpwn 415&ir charttype=LINE&ir gd1=0&ir

dhl kujchart

e.php?width=600&height= got id bench2=0 tage=1095

got id bench1=0&ir ind=&ir

&ir got id bench3=0&ir

got id bench4=0&ir exc id=258&ir

ind2=&ir

&ir sec id= 1000253911&ir

name).

The below table has been adapted from research undertaking Wong (2009) world, violation and published in their article,

by Conroy and its a small

FCPA settlements,

The figures in the table detail the negative impact which news of a can have on an organisations share price. It also details the

settlement figure.

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

41

LITERATURE REVIEW

CHAPTER 2

Figure 1 Market-Adjusted Announcements Price Reactions to FCPA-Related News and

Company

Date of First News of Potential FCPA Action

MarketAdjusted Price Reaction 1 -44.95%

MarketAdjusted Market Cap Impact ($M) (343.17)

Total Regulatory Settlement ($M) 0.50

Syncor Internationa I Corporation Willbros Group, Inc Immucor, Invision Technologies, Inc Schnitzer Industries, Siemens Aktiengesellschaft BJ Services Baker Hughes, Inc Statoil, ASA Chevron Corporation Inc Steel Inc

6/11/02

16/5/05 2/11/04 30/7/04

-39.04% -19.21% -14.37%

(133.95) (176.38) (121.80)

32.30 0 1.12

1/12/04

-12.71%

(145.45)

15.23

28/10/05

0.18%

8.36

800

10/3/04 13/6/03 10/9/03 11/9/03

-5.01% -3.90% -2.59% -0.45%

(350.35) (461.55) (529.84) (349.22)

0 44.08 21 55

(http://www.nera.com/extlmage/Pub

FCPA Settlements

0109

FinaI2.pdf)

As detailed above, the news of the potential the share price of Syncor International with the share price dropping clearly, -44.95%

FCPA violation severely affected and Willbros Group, Inc respectively. of a publicly Baker Quite traded Hughes

Corporation

and -39.04% one driver

as the share price is the number it will impact current

company,

and future

investment.

witnessed a relatively market capitalisation.

small percentage Interestingly,

drop but still lost $461.55M from its suffered the
42

Siemens Aktiengesellschaft

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

UTERATURE

REVIEW

CHAPTER 2

highest ever FCPA settlement news of the potential 0.18% increase.

which totalled

$800M and on the date of the stable, at

FCPA violation,

the share price remained

Conroy and Wong (2009) believed that;

"The table indicates that in some instances the implication of an alleged FCPA violation is considered serious by the market, over and above what one fines, or penalties

might expect given the magnitude

of any disgorgements,

paid. For example, when Syncor International public that it was investigating violated adjusted

Corporation announced to the in Asia that may have

suspicious payments

the FCPA, its stock price plummeted basis, implying a loss of $343

almost 45% on a marketin market capitalization, with the

million

despite the relative small amount paid in its eventual settlement SEC and the DOJ"

(http://www.nera.com/extImage/Pub

FCPA Settlements

0109

FinaI2.pdf)

An examination

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43

RESEARCH METHODOLOGY

CHAPTER 3

CHAPTER 3 - RESEARCH METHODOLOGY

This chapter will focus on the subject of research methodology and aims to discuss the research methods surrounding the aims and objectives of the thesis. used. Further to this, why and how the chosen research methods were Justification and rejection for the most appropriate approach of Lastly, to conclude, the chapter will

methodology will also be discussed.

assess certain limitations of the research.

r-3~i-------P~ospective Techniques
~

of Investigation

The potential research methods available will be identified within this section, which the author feels could be used for the purpose of the thesis.

3.1.1

Secondary Research

Malhorta (1993) explains secondary research involves the gathering of data for a purpose other than just the particular problem at hand. It allows the expansion of opinion when reading about the subject as opposed to one single definitive answer. As explained below secondary research is based...

"with someone else's rationale and assumptions about what is important. That is, if they carry the possible risk of constraining your freedom to interpret findings because of the authors emphasis or selectivity. "

(Jankowicz 2005, p.60)

Secondary research is valuable and reliable when used in certain perspective to support and confirm an argument, links theoretical assumptions to specific circumstances and adds critical assessments to one's work (Cameron 1999).
An examination into the impact that investment in trade compliance has upon a firm's competitive advantage 44

RESEARCH METHODOLOGY

CHAPTER 3

With secondary research being easily accessible, relatively quick to collect and inexpensive it makes this type of research very beneficial to any researcher. Malhorta (1993) states it further helps to recognise a problem,

enhance definition of a problem, build a method to solving the problem, formulate an suitable research design, answer specific questions and

examine, understand and evaluate primary data to then prove objectives more insightfully.

The main types of secondary information used by the author within this thesis came from resources available in the Georgina Scott Sutherland library at The Robert Gordon University. internet from research companies The journals obtained were from the including Aberdeen Group and MK

Technology.

Further to this journals were obtained from the The Robert

Gordon University's Athens database which comprises; Mintel Reports, FT Intelligence, Keynote, Business Source Premier and Emerald. The author

was also lucky enough to take advantage of the internal presentations submitted within Company A on the subject of compliance.

Although the author understands that while journals

provide up-to-date

opinions of business leaders and journalists, the support of textbooks will provide the thesis with academic backbone. However, early data gathering would imply that detailed secondary research in the form of academic textbooks, directly linked to the aims and objectives of this report, will be limited and therefore the need for detailed primary research is essential.

Careful investigation was allowed with the huge collection of secondary information, however time was needed to ensure only relevant data was selected on the subject of the thesis. The author was then able to develop on academic theory to provide a basis for evaluation and discussion, supported by each kind of secondary research gathered.

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45

RESEARCH METHODOLOGY

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When satisfied with concluding the search of secondary research, the author was then readily prepared to build a basis for the start of primary research.

"Examination

of available secondary data is a prerequisite

to the collection of

primary data. "

(Malhorta 1993, p.118)

3.1.2

Primary Research

A simple definition of primary research is given below;

"primary data comprise information

collected or generated by the researcher at hand. "

for the purpose of the project immediately

(Weiers 1988, p.64)

Ultimately collection of new data has been gathered for the topic of this thesis. This type of research can be time consuming in comparison to The primary research

secondary research, proving more challenging.

gathered coupled with the key findings within the literature review will provide discussion for the data analysis chapter.

Primary research falls into two categories; Quantitative techniques.

and Qualitative

3.1.2.1

Quantitative vs. Qualitative Research Methods

Quantitative is typically expressed in numerical form incorporating facts and figures that can be counted and measured.

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46

RESEARCH METHODOLOGY

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"A research methodology

which seeks to quantify

the data and, typically,

applies some form of statistical analysis. "

(Malhorta 1993)

Qualitative research is, as described by Dibb et al (1997), research that deals with information believed to be too complex to quantify, for example opinions and value verdicts. As opposed to quantitative research, qualitative focuses on understanding rather than measurement.

"Research which blends detailed understanding open-ended questioning often very revealing.
rr

with quantitative

measures

by providing

a more

of customer demand. and probing.

Qualitative

techniques involve

The data is rich, human, subtle, and

(McDaniel Marketing Research Essentials, 1995)

Individual advantages and disadvantages can be drawn from each type of primary research type. For example, quantitative research generalises

results from a large sample to the population of interest, it is structured, statistical and the outcome easily recommends a final course of action. Whereas qualitative comes from a smaller sample of unrepresentative cases, it is unstructured, non-statistical and the outcome helps develop an

understanding. appropriately objectives.

Therefore the author must best employ each method for the types of answers required to prove the thesis

Rationale for Choice of Research Method

____ I

As the author is an employee of Company A, a vast amount of data, both qualitative and quantitative is readily available. When using quantitative

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

47

RESEARCH METHODOLOGY

CHAPTER 3

data,

the

author

collected

numerical

information

mainly

being

HTC

classification data which in turn allowed the author to reference the levels of duty attached to each classification which then allowed review into the volume and cost of products, ultimately looking for savings. This information is helpful and easy to conclude answers on the thesis topic, as the data is structured and statistical.

Further to this key personnel within Company A will be interviewed with the aim of generating rich amounts of qualitative data which will include the employees of the following departments; compliance, legal counsel, research and development brokers. (technicians), country specific managers, agents and

From the entire collection of research, a best practice can then be

recommended to the countries being affected by classification variances, and with help of information technologies available to Company A, ideas will be put forward for the implementation system. of a globally reaching classification

Several techniques can be used when conducting interviews, which will now be discussed.

3.2.1

Probing

To help acquire significant answers and concealed issues, probing is a technique which allows the author to push for opinions that are specifically required on the thesis subject.

"A motivational

technique

used

when

asking

questions

to

induce

the

respondents to enlarge on, clarity, or explain their answers. "

(Malhorta and Birks, 2000)

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For example, questions such as, "Can you explain why you say this?" "Is there a specific reason why this is the case?" "Would you like to add anything to your answer?"

Whilst the interviewer must achieve responses on the matters important to their aims, the respondent must be given the opportunity to answer the questions in full, allowing them to say all that they have to say on each question. The interviewer, using the 'probing' technique, must use it in a in a respondents answer, giving a more

way of seeing the potential illustrative reply.

3.2.2

Steering

Steering can ultimately dictate the direction of conversation, providing a guide through the question asked and comments made by the respondents (Jankowizc 2005).

In order for the respondent to answer in the correct context, steering is an intelligent skill to prompt and direct answers wanted.

"The exact way which you phrase your question can have a significant
on the answers you are given by the interviewee.
H

effect

(Cameron 1999, p.265).

3.2.3

Close-ended Questions

Quantitative research mainly uses the technique of close-ended questions giving short and to the point answers, in the manner of 'yes' or 'no.' are instances were qualitative research can also utilise There

close-ended

questions. However, for the subject of this thesis, the author did not feel this

An examination into the impact that investment in trade compliance has upon a firm's competitive advantage

49

RESEARCH METHODOLOGY

CHAPTER 3

technique was appropriate in trying to achieve the aim and objectives, therefore were avoided where possible.

Malhorta and Birks (2000, p.326);

"Questions that pre-specify format. "

the set of response alternatives

and the response

3.2.4

Open-ended Questions

Open-ended questions leave respondents open to express replies in their own words, as stated by Kent (1993). They facilitate in respondents being able to convey their own casual attitude and beliefs towards the questions being asked. The researcher benefits richer insights as Malhorta and Birks (2000) suggests a lot less influence is given to the type of response given by the respondent, with non-biased questions allowing for a non-structured answer, that close-ended questions give.

13.3

Interviews

There are two characteristics of interviews, as described by Tull and Hawkins (1990), which are structured and unstructured. For the purpose of meeting

the central aim of the thesis, unstructured interviews were appropriate. However, during investigation into interview techniques the author Smith

discovered that Smith (1972) referenced semi-structured interviews. (1972) stated;

"an interview guide is usually provided in order that information about the same topics can be obtained from all respondents but the order in which the information is elicited and the extent of the probing and exploration depends on the interviewer.
If

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RESEARCH METHODOLOGY

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(Smith 1972, p.120).

Taking the view of Smith (1972) into account it could be argued that the interviews undertaken with the key personnel within Company A were semistru ctu red.

!

i

3.4

Limitations of Research

Compliance is viewed as proprietary

With regards to primary data, as compliance operations are viewed as proprietary, it was near impossible for the author, taking account of the aim of the thesis, to gather the data necessary to achieve the aim. As a result, the primary data available was limited to Company A. Secondary literature was also limited as trade compliance is a relatively new subject with few studies focussed on investment and competitive advantage. It would have

been beneficial to compare Company A with a peer but, due to the sensitive nature of the topic, this was not possible.

Time Restraints

Each area covered during the literature review could have been studied in greater detail had there been more time. Essentially, as the subject of trade

compliance is fluid, each of the topics studied during this project could have potentially had their own in-depth study and analysis. With regards to the

classification analysis, the author only managed to analyse the data covering two countries due to the time and effort taken to retrieve the available data. With more time, the author would have achieved greater depth to the results.

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Location Restraint

As the Author was based in Aberdeen and the Company A's compliance group were based in the US, face to face interviews were not possible. However, telephone interviews sufficed. The data gathering for the classification

analysis would have been made simpler had the author direct access to the Australian and Kazakhstan facilities but, with the help of email

communications and shared systems, it was possible to conduct the analysis.

Cost Restraints

Linked with location constraints, cost constraints prohibited direct access to the locations under review. interviews impossible. Costs restraints also made face to face

13.5
Hi

Hypotheses

The author designed the hypotheses as follows;

Increased investment competitive advantage.

in the field of compliance will lead to

H2

Information systems can facilitate an internal globally reaching classification programme.

H3

In certain cases, a products total landed cost will be reduced as a result of greater efforts in classification.

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52

DATA ANALYSIS

CHAPTER 4

1

CHAPTER 4 - DATA ANALYSIS

Within this chapter the author will take key findings from secondary research from the literature review and linked with the primary research (both

quantitative related

and qualitative)

will provide discussion for the reason of proving Important outcomes and analysis will

objectives

and hypotheses.

enable the author to then provide suitable conclusions.

14.1

Company A - Overview

During interviews

with the key personnel,

Company A, it was important

to

gather their personal thoughts function could offer Company A.

on what they believed the trade compliance

The main points are noted below;

• • •

Avoidance of penalties and seizures Customer's assurance of product delivery Customer assurance of compliance

It is clear from these responses that Company A believe trade compliance can offer customers' competitive assurance advantage. of product Avoidance delivery and edge. of penalties customers' and seizures, assurance of

compliance definitely

generate a competitive

Company A argued that there was a potential government only suspects a violation

for severe penalties, or might

even if

has occurred

occur (fines

and/or imprisonment);

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53

DATA ANALYSIS

CHAPTER 4

"There would be disruption

to business during

investigation,

loss of

reputation, loss of government contracts, loss of export privileges and most importantly, an impact on stock value based on corporate governance. "

(Trade Compliance Manager, Company A)

Again, as discovered and discussed during the secondary research, non compliance and a negative share price movement are entwined. positive that Company A are aware of this fact. It is a

Also, the study conducted

by MK Technologies found that efforts in compliance could enhance corporate image, so, when the Trade Compliance Manager speaks of a loss of reputation, it is in-line with the MK Technology study. something which many market As reputation is

leaders rely on, a compliance program In line with

offering protection should be a sought after as an internal tool. this thought, the Trade Compliance Manager stated the following;

"Our customers are assured of product delivery through our commitment to compliance. "

(Trade Compliance Manager, Company A)

This statement provided further evidence that the work of the compliance department within Company A assures the customer of product delivery through a commitment to compliance. As touched on during the introduction to the thesis - with huge efforts and focus on supply chain effectiveness, the importance of a smooth, unproblematic and reliable supply chain and the role compliance can play in assuring this should not be understated. First hand,

primary evidence now exists supporting the role of compliance in assuring an effective supply chain, and, clearly, an effective supply chain offers

competitive advantage.

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DATA ANALYSIS

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During the literature review, the author discovered that the most basic US export regulations were extremely complex and there were numerous

regimes governing global trade. A, stated;

The Trade Compliance Manager, Company

"Creation of Company A's trade compliance group with responsibility for overseeing the Company's trade compliance program was to insure business unit compliance with the export regimes of all countries in which Company A operates or with which the company has business interaction. This trade

compliance program includes training and site assessment methodology for Company A business units"

(Trade Compliance Manager, Company A)

In order to be fully compliant with the various and varying trade laws, from a purely protective preventative stand point, (which, however, contributes to competitive advantage, through, as previously stated by the Compliance Manager, customer assurance of product delivery) the investment Company A makes advantage. in its compliance program does contribute to competitive

With regards to controlled, dual-use technologies, as discussed earlier, products with either a US ECCN Classification number, a UK Product Rating number or an EU Control Number, the compliance manager within Company A believed;

"There is a competitive strength in answering our customers concerns affirmatively, that we will not contaminate their supply chain with controlled goods. I am curious how our peers approach this. Our strategy is to keep controlled goods out of the Company A inventory list. For example, our centrifuges on the ES side are not controlled at this time, and we are doing

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DATA ANALYSIS

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our best to keep them this way. In the chemistry, we deliberately use "DEA" instead of TEAsimply to keep our goods clear of controls"

(Compliance

Manager, Company A)

From

this

response,

it

is clear

that thought

Company

A are

qivmq

the

trade with

compliance respect.

role some calculated

and clearly view the function technologies from their

The decision to exclude controlled of a commitment advantage

supply

chain assures the customer generates researched minimises controlled the competitive

to compliance, on above

which not only but also, as

touched

during the violations the risk of potential technologies.

section of the literature export violations through

review,

completely of

export / import

Although the risk

excluding of

controlled

technologies with the

from the supply chain minimises regimes governing controlled

non-compliance

technologies, following high;

the Trade Compliance

Manager,

Company

A, argued that the risks were still

new changes highlighted

that the export compliance

"Dramatic increases in number and magnitude of administrative cases by the 815 and DOTe. (focus on freight forwarders).

Increasingly aggressive criminal enforcement/theories of prosecution.

New regulations

on exports

to

China which control previously

uncontrolled items if they are destined for a military end use.

Lifting of U.S. sanctions on Libya in 2004 and removal of AT designation on August 31, 2006. New sanctions against Libya 2011.

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DATA ANALYSIS

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Significant new sanctions imposed on Syria (May 2004). Accountability Act. rr

Syria

(Trade Compliance Manager, Company A)

It is clear that investment in trade compliance minimises the risk of non compliance and compliance creates competitive advantage through

customer's assurance of product delivery and customer's assurance of compliance, which was highlighted within both the primary and secondary research. Within Company A, to the extent of generating a compliance program, it is evident that investment to do so had taken place, which, as stated by the Compliance Manager, gives Company A a competitive edge. However, it is difficult to quantify a competitive advantage through customer satisfaction as a result of compliance. Company A have had no export

violations which could be quantified as a competitive advantage over their peers. However, the author decided, in order to quantify competitive

advantage within Company A for the purposes of this examination, it was important to conduct a classification analysis which would hope to find reduction in total landed cost through duty minimisation.

14.2
L

Classification analysis

i

.J
sets the rate of duty. Incorrect

Classification and country

of orrqm

classification affects duty rates, value added tax rates, origin, labelling, permit requirements, license requirements, and export controls (Customs, Kerr 2009).

In order to understand the importance of classification compliance, it should be recognised that where goods have been incorrectly classified, it can be

An examination

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DATA ANALYSIS

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possible to reclaim duties going back three years. On the same hand, it is possible for customs authorities to also claim back duties.

Holly

(2004)

states

that;

"Many organisations

are unaware

that the classification

of their imported to freight agents,

goods can be so important. acting on their behalf, goods are. responsible freight It

They leave the classification

who may not be fully aware of what the imported to bear in mind classification that the importer is legally

is important

for the correct tariff

of their goods, and not the

agent.

In a worse case situation,

customs can severely penalise duties"

companies

underpaying

(Store

Manager:

Import

Duty,

Holly

2004)

Compliance in this area is of vital importance as U.S. customs and border protection's office do conduct yearly 'focussed assessments'. A focus

assessment (FA) is the largest audit conducted by customs and will involve a review of customs tariff codes. FA's can and often do result in large revenue recoveries for customs (The journal of Commerce, Pisani).

Although reducing total landed costs and increasing competitive advantage is a common theme this covered by various report researchers, will academics the and

organisations,

section of the

investigate

use of

Harmonised Tariff codes (HTS) within Company A as a means of reducing total landed cost through duty minimisation.

As previously stated Company A has locations in more than 75 countries and employs approximately 13,000 persons in over 400 service locations around the world. The trade compliance function must ensure compliance in each of the 400 service locations.

As discussed, a big part of trade compliance is ensuring HTC harmonisation.

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In order to tackle global HTC harmonisation, investment must be made.

In an operational reality, as a result of lower oil and gas prices, many of the world's largest oil and gas producers are cutting costs and actively searching for cost reductions. Service companies such as Company A have found

2009/2010 to be significantly more challenging than previous years with revenues and profits down. contracts and re-tendering Many operators are now reviewing existing expired deals. As the industry remains In times

competitive, aggressive tendering has become common practice.

such as these it has never been as important to have ways and means of gaining competitive advantage.

Harmonised tariff codes or commodity codes as they are also referred to, drive duty rates and make up a substantial part of the products landed cost wherever the material there is imported. Although the codes are labelled

"harmonized," differences

are, as the author from country

has uncovered, wide ranging to country.

The negative impacts associated with inaccurate trade documentation are increased duty payments, inaccurate declarations, discrepant letters of credit charges, and expediting costs due to customs clearance delays.

From a U.S. stand point, the author has gathered the codes Company A have been using throughout Kazakhstan and Australia. The codes have been

gathered for products which are important to the organisation by dollar and by volume and they will then be compared to those used for U.S. imports. The codes used for U.S. imports have been verified by the company's trained scientists and chemists.

The quantitative data will be carefully analysed with the hope that variances in codes can be identified and opportunities to argue for better codes at destination, based on the codes already in use within the U.S., implemented.

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Where high dollar savings possibilities are found, the changes will be discussed with the significant stakeholders. As a direct result of the

qualitative data gathered, the information systems available to the company will be examined, and plausible strategies will be recommended to

management with the hope that the systems can incorporate a fully functional, globally reaching classification programme.

The codes which Company A have used for U.S. imports have been analysed with the companies specialist scientists, and there is a consensus that the codes being used are correct and also to advantage. Importantly, the codes are accepted by U.S. customs. It is apparent, within Company A, that there is a need for global control concerning classification. As an employee of

Company A, based in the U.K. and responsible for exporting materials to a vast amount of countries, the author can confirm that no such controls currently exist.

Interestingly,

Imbriani, along with Mckenzie and Gleson (2008),

suggest

that developing procedures for the proper classification of products be part of an export management programme. Qualitative research will attempt to

uncover whether there are procedures in place to correctly classify the exported materials. It should be highlighted at this point that Company A

and its employees are not classifying, for example, woollen jumpers and cotton shirts, they are, in fact, classifying complex manufactured drilling solutions containing many components. To illustrate the ambiguity

commonly faced with customs tariffs, Holly (2004) provides an excellent example of a case whereby 10% of the total landed costs were saved through a reduction in duty charges.

It involved an organisation operating within the furniture industry. The code for (cushions - parts of furniture) attracts a 2.7% duty rate whereas the tariff code for (cut and sewn fabric cushion) attracts a 12% duty rate. It is clear that while operating within a global market, taking into consideration

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language

and cultural

differences;

it would

be easy to use either

of the

classifications. successfully furniture

In this case, the organisation

in question was able to argue

with customs that the cushions should be classified as parts of duty, Holly,

and charged a 2.7% duty rate (Store manager, Import

2004).

The central

aim of this thesis, evidence resulting is forthcoming. in that

if successful, links

will provide

the reader with with

unquestionable compliance, investment

information competitive

management advantage,

notable

assuming

Although, consultants

as the

author

found to take

during control

the

classification

review,

outside

are pushing

of an organisations

classification

analysis programme,

most of which request a 15% cut on the savings found,

dating back 3-4 years, this exercise was conducted in-house and not with the use of an outside consultant. saving current on a high volume market, if the It could be argued, successfully, that a 5% in the with time

/ high cost product is conducted

would

be beneficial 5% diluted

analysis

in-house.

consultant

fees may not be cost effective.

This was not a hugely

consuming project as the HS codes were already in place.

Also, it is important

that globally, the organisation

is operating correctly with to self audit

regards to classification. the various possible to import/export harmonise

This project also offers an opportunity

business units - until a time comes where it is (at least the first 6 digits) globally within the

organisation, opportunities prevention, savings.

this will always be a worthwhile are obviously an added bonus.

compliance Again,

project. than

Savings simple costs

rather

evidence exists supporting

competitive

advantage through

By conducting

the exercise

in the manner

set out above, the chances of was zero. The author would

disclosing confidential/proprietary

information

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be handling HS codes and although confidential in the sense that Company A would not want their competitors to gain access to a list of utilised HS codes, it was conducted in-house. The disclosure of proprietary information was a worry for Company A which links well with the research conducted by MK Technology. proprietary. The compliance programme, as a whole, is now viewed as

During the interview, when asked about a potential classification analysis project, aimed at proving the latest research by the Aberdeen Group and MK Technologies correct, in that compliance can in fact reduce total landed costs creating competitive advantage, the Trade Compliance Manager, Company A, stated;

"1 think the issue is optimising landed cost by duty minimisation, which can only be accomplished by serious efforts at classification, in the destination country. However, it isn't practical to expect all import points to have the resources to classify (chemists, engineers, customs geeks) so an effort emanating out from excellence centers (or HQ, regional or otherwise) can bring serious savings to the field offices.

1 think there is also a way to enjoin classification efforts with supply chain security initiatives. The harmonised codes are now being used by

governments for visibility into ocean containers (preventing WMD,monitoring Haz Mat, etc)."

(Trade Compliance Manager, Company A)

As stated earlier, the disclosure of proprietary information was a worry for Company A. During an interview with the Intellectual Property Counsel,

Company A, the following was noted;

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"Many of our flagship products have proprietary formulations. The ownership of the intellectual property associated with a specific formulation may vary depending upon the circumstances surrounding the development of the product. Thus, each product will have to be looked at individually to

determine what (if any) legal obligation may encumber the disclosure of that formulation.

I would recommend that this process of evaluation for cost savings begin with the preparation of a prioritised list of products. We can then engage in a systematic determination as to the legal obligations that may preclude disclosure.

I fully support the initiative and drive to reduce costs associated with our products. However we must engage in this process in a way that manages the legal and business risks in an appropriate manner. Or perhaps put in plainer terms, it does not make good business sense to save $50,000 in tax tariffs only to incur $250,000 in legal expenses because in our efforts to save money we breached a confidentiality obligation."

(Intellectual

Property Counsel, Company A)

When pressed further disclosure responded;

on whether the analysis would be possible without the compositions, the Intellectual Property Counsel

of the chemical

"This type of detailed chemical composition is normally not disclosed, as very often it is the property of the chemical manufacturer - not of Company A.

Where there is a legal requirement we can obtain permission to disclose the composition from the manufacturers but this can be a lengthy process in some cases.

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Do you have a comprehensive list of what materials we are talking about here?

We do have a trade compliance group in Houston who (using a trained PhD Chemist) initially evaluate the detailed chemistry of each of our products and based on this assign the correct tariff codes that are used for import/export. "

(Legal Counsel, Company A)

In order to move forward, within the legal scope desired by the Intellectual Property Counsel, it was important to discuss and outline a plan with the Trade Compliance Manager.

The following was decided;

"The purpose of the exercise is twofold - depending on who you are, you can rearrange the priority of these: A) Look for savings B) Compliance (which now includes cargo security).

You are right that our systems are synchronised, and yes, they carry the US codes. This, coupled with feedback from the destination countries, is enough to begin a comparison. Then, looking at differences, especially on products with high volume, high cost, can really make a savings impact (and foster compliance).

Singapore I believe has GSTat 7% - that is kind of like your VAT.

There are countries this project won't help - if a country says everything is 'free,' there is nothing to save (however they may need 'compliance' help).

One of the efforts Company A has advocated is to compare in country Harmonised Customs Classification use with what we know to be the

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American codes - not saying codes in Australia,

for example, are wrong, but

there could be differences and we should take a look. Since we have access to the chemists and mechanical engineers here in the Houston HQ, we are able to generate transportation confident classifications, but due to lack of one unified Worldwide, the

system, our lists of codes may not be in sync.

codes tend to be harmonised out to 6 digits - which is a very good place to begin the comparison. An example of reviewing codes during a tender, a

Statoil tender in Brazil a couple of years back, my assistant and I looked at the high value / high volume items involved, at the codes our Rio office was applying, the comparative US code to its equivalent the US codes we are confident in, and mapped our in Brazil, to see if we could find savings. In the a 12% savings opportunity, among

example of Conqor 404, we identified

others. And Conqor 404 is a very expensive product.

So the approach for this project

would be to assemble the list of items you

import, sorted by high value / high volume, and the harmonised classification codes applied by your broker to each item. (Your broker can likely run this report, easily).

We will then compare to the US choices, looking for differences. find differences, possibly increase) we will report back, noting

Where we - or

the duty rate (savings

It will be up to your office in Australia to decide to apply

which code; it is always up to the importer of record.

An importer has discretion to choose its codes. If customs issues a challenge, then information on composition can (with permission from legal) be

disclosed to the authority

as confidential

(I am sure AU customs would treat Two things that will help us of PhD chemists in our own

it as such) and/or a lab sample can be taken. avoid going down this road are our involvement

labs & not going back and chasing any refund money - we just fix the code going forward, is my suggestion. Don't anger Customs by chasing money we paid in error.

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So where changes are found, we will support you with reasoning that justifies choice of harmonised code. Internally, our scientists know the confidential makeup, and they give us the code. Most often they can describe why a code is picked without disclosing composition.

The end game here is what I've underlined. Don't give out the makeup of the goods. We tackle the project in the manner above - which is what I've been suggesting to x.

Keep in mind, the metric everyone is eager for is to show savings. So the ensuing measures will be "how much of each item @ what price is coming in", what is forecast" and this will be multiplied by old & new duty rate to show (and claim) dollars saved.

It is a good project - let's just do it the smart way. Also, the reason AU would be focused on first, is because like the US, UK, Canada, there are very automated systems brokers use with Customs and reports are easy to run. rr

(Trade Compliance Manager, Company A)

4.2.1

Kazakhstan Analysis

Savings Opportunity - $328305

There are savings to be made if Company A in Kazakhstan

implement the

codes used in the US, however, there are instances where Company A in Kazakhstan have been saving on duty payments as the codes they have been using do not match those used in the US. For the purpose of this exercise,

the author will exclude the codes used in Kazakhstan which differed from the US codes which attracted a higher duty date. If Kazakhstan were to begin

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utilising the codes used in the US which differ from the codes in place which attract a lesser duty, the Company could save $64.661 / year. As this can be dated back 3-5 years, there is a substantial saving opportunity.

32 products were selected for review due to their high value and high volume. Of the 32 products selected, there were 8 variances found totalling A 25% variance in codes between country to country,

25% of the sample.

the US and Kazakhstan, proves the worth of this project from a purely protective preventative compliance perspective. bonus. The savings are an added

Throughout this report it must be remembered that compliance in

itself allows for competitive advantage through preventative action which manifests itself in customer assurance.

4.2.2

Australia Analysis

Savings Opportunity - $425,000

The data gathered in Australia differed from that gathered in Kazakhstan as the codes in use for the high value high volume products were in line, 100%, with the codes utilised in the US. However, within Australia, there are many free trade agreements in place and what is known as Tariff concessions. The Tariff concession system is described below;

How the Tariff Concession System Works

A Tariff Concession Order (TCO) will be granted on imported goods if substitutable goods are not produced in Australia. Substitutable goods are Australian-made goods which have a use corresponding to a use of the imported goods. It is important to note that, in determining whether

substitutable goods are available, the assessment does not consider whether the Australian goods compete with the imported goods in any market. A local

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manufacturer may object to the making of a Tca and can request an existing TCa be revoked, as described later in this document .

(http://www.customs.gov.au/webdata/resources/files/commerOl.pdf)

During the classification analysis for Australia, although the codes in place were harmonised with those in the US, it was found that for one particular product an applicable TCa was not being utilized. This resulted in a potential for $85,000 per year which has a potential to date back 5 years, totaling $425,000. Company A has submitted an application to the Australian

customs authority for a refund.

The classification project, both for Australia and Kazakhstan, has proved worthy, and has provided excellent, first hand evidence, backing the theory that investment in trade compliance will lead to competitive advantage.

r 4.3

Technology Review

With regards to technology, and whether Company A were aware of any in which could contribute to their compliance task, the Compliance Manager suggested the following;

"Would it be a crazy idea to ask your iphone/ped App developers to consider helping us make a simple TCC app. It would be an easy to use portable

compliance tool that would do the following things:

Denied Parties Search

Dual Use/ ECCNclassification lookup

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Harmonized Classification Search Tool (US Census Schedule B version for reference)

Since it relies on paid access to two of the three sites, it would be for internal employee use only.

And since we are just

making

neat looking

hyperlinks,

I doubt

we'd be

getting a patent, but I always like to CC a lawyer with crazy ideas"

As discussed during the literature and, as cited by Damianides

review, according to Fox and Noble (2003) (2005), building a strong advantage internal through control more

programme

within

IT can help to gain competitive (Damianides, Information

efficient operations

systems Management,

2005).

Again, referencing that, if possible,

the Apple I phone idea, as suggested it would create efficiencies

above, it is clear

in the denied party screening and also the HTC search out of the office, competitive

operation, operation

the ECCN / dual Use look up operation

- all of which could be conducted while travelling, etc, adding, as Fox and Noble (2003)

out of hours

argued,

advantage to an organisation.

There are providers Oracle commanding of the International

of global the majority

trade

management

software

with

SAP and

of the market.

As the author is a member Association (ICPA), it

Trade Compliance

Professionals

was possible to reach out to the membership management software possibilities.

for their views on global trade for one particular reason

Unfortunately,

- the software capabilities

are extremely

new, the responses were sparse.

A summary of the responses are noted below;

"While

SAP developed

their

GTM module

6-7 years

ago,

Oracle just

introduced

their first module (export)

last year. It took Oracle 2-3 years to
69

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develop the functionality. Sun Microsystems who they eventually acquired was a beta site for the past year. "

"The single biggest issue with the ERP GTM modules is that they are data shells and all the regulatory rules need to be configured by the business team. For example on the licensing side, you have to set-up the licensing matrix with the country of origin/destination and export control (rules) for their system to work. Our system intuitively does the licensing determination and license management for you. This involves additional headcount

considering compliance management and keeping abreast of the regulations is now your responsibility. "

"Oracle took 2-3 years to develop their export module, they do not have a import and Trade Agreements module. How long would it take them to add import and trade agreements. Imagine SAPhas been at export for 6-7 years and still does not have Import or Trade Agreements. "

"Trade management is not their core competency compared to vendors such as us. In the past, management has deviated resources to other projects considered to be of higher priority. "

"Oracle like SAP does not offer integrated regulatory content. That is a key issue considering Stryker has no choice but work with their 3rd party vendors to integrate content. If there are issues, Oracle will look to point fingers at the content vendor and vice versa. Also, they work with several different content vendors depending on the regulations and that only adds to the complexity. "

"Oracle only offers behind the firewall solutions. It is not a good fit for It teams that do not have the resources to support the application in-house. It is further complicated by working with 3rd party content vendors and dealing
I

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with content updates. Unless they have a push system, Stryker would need to assign resources to pull the content at designated time intervals. rr "Oracle uses 3rd party integrators to configure and implement the solutions. Between Oracle, the content vendor and integrator there are several 3rd parties involved With Obama proposing to rewrite the laws to create a single unified licensing agency for both commerce and state shipments, how long would it take companies like Oracle to recode the rules in their system. Don't depend on them for their flexibility and nimbleness. Trade is not a priority like it is the 'only' priority to us."

"Considering they use 3rd parties to configure and integrate the software, Oracle's implementations are extremely expensive and take a long time as compared to best of breed vendors such as us. From a comparison standpoint their implementations are 2-3 times our costs and end up always being a + 2 year project.
rr

"We have been building trade solutions for 20 years. Oracle has been at it for the last 2-3. Imagine the depth and breadth of our functionality versus what they offer. No Comparison. Other Oracle users are speaking to them but they are not considered a serious contender at least in the near future. That's not to say they will not be but not in the short term. You will need to engage their partner eco-system for setting-up the trade configs, system integrator for integration and then multiple partners for content integration. "

(ICPA Membership)

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Hypotheses

The author designed the hypotheses as follows;

HI

Increased investment in the field of compliance will lead to competitive advantage.

H2

Information systems can facilitate an internal globally reaching classification programme.

H3

In certain cases, a products total landed cost will be reduced as a resuIt of greater efforts in classification.

With regards to hypotheses 1, 2 and 3 the author believes that they were proved to be correct.

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15.0
i

CHAPTER 5 - CONCLUSION

AND RECOMMENDATIONS

The underlying principle of this chapter is to conclude on previous chapters and provide appropriate recommendations from the specific findings from the literature review and primary research for the purpose of proving the aim of the thesis; 'An examination into the impact that investment in trade

compliance has upon a firm's competitive advantage.'

i

I

5.1

Conclusion and Recommendations

J

Without a doubt, the Global market presents numerous prospects for an organisation such as Company A which holds the resources to capitalise on opportunities. However, as identified by reviewing the most basic of export

regulations, controlling the operations required to succeed within the global market are made complex by the simple export and re-export trade laws governing them.

It was the aim of the report to review in further detail the regulations governing international trade and whether investment in trade compliance could lead to improved operations. In order to satisfy this argument the Firstly, the regulatory

author examined and reviewed a number of factors.

bodies with their acts which govern the global market where Company A operates. The number of bodies, regimes and acts governing international

trade was immense. The number of laws a multinational organisation must adhere to was also staggering. Investment in trade compliance should be of primary importance within Company A.

It is a competitive advantage to be compliant.

Global organisations seek

compliant partners. Therefore, evidently, from the vast amount of research undertaken, a functioning compliance program will allow an opportunity for competitive advantage, through basic preventative actions.
An examination into the impact that investment in trade compliance has upon a firm's competitive advantage 73

CONCLUSIONS

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The primary aim of compliance should be preventive, protective action. However, rather than simple preventative tasks, with further emphasis

placed on the capabilities of the compliance role coupled with further investment, the function can, and should, do more to create a competitive edge. In order to accomplish competitive advantage and further the scope of their compliance group, the author would recommend that the structure of the department within Company A be broken into reactive and proactive groups.

The proactive responsibilities,

group

should focus on and

policies, a

standards, of

guidelines, all existing

procedures,

finalise

review

policies/guidelines.

The group should develop materials to communicate the The reactive

compliance role in customs matters to area management.

group should formalise a process for rolling-out compliance changes and updates and develop a recognition program for compliance as a business enabler.

The reactive group should establish a process to capture compliance costs (shipment aversion) delays, fine/penalties) they should and savings (penalty reduction, risk

also advance the

global

classification

projects

regarding ECCNand HTC. Company A should dedicate a resource to address compliance work with IT to modify systems and software to reflect

compliance controls. They must develop a process for handling Denied Party Screening for those business units with activities in embargoed destinations.

Again, referencing the Apple I phone idea, as suggested above, it is clear that, if possible, it would create efficiencies in the denied party screening operation, the ECCN/ dual use look up operation and also the HTC search operation - all of which could be conducted while travelling, out of the office, out of hours etc, adding, as Fox and Noble (2003) argued, competitive

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advantage

to an organisation.

There is definitely

an argument advantage.

for investing

in emerging technology

and thus creating competitive

The Global HTC Classification improved customs processing,

Project will result reduced entry

in reduced duty

payment, broker with a

errors,

and improved in conjunction

relationship.

HTC classification

should be conducted

global duty recovery effort which will:

Identify

overpayment

of duties and seek refunds (where

applicable) Determine where TCOs can be used to reduce or

eliminate duties Confirm country of origin and eligibility for trade

preference programs Significantly eliminate Company A's import exposure

Within Company A, new products tend to evolve from older versions. is, therefore, a possibility to retrospectively clean up classifications and significant

There

on legacy

items - as needed. opportunities

A review for mismatches globally.

duty savings

should be conducted,

The correct countries;

codes & justification

support

should

be offered

to importing

outside counselor

in country customs experts available to support

change with local customs should be called upon.

The business investment, straightforward;

case for which

a global in

classification turn create

effort,

which

would

involve is

would

competitive

advantage,

A Harmonised Tariff Code HTC is required for every product that is imported or exported determine from a country. The HTC is used by customs agencies to

the product being imported and the applicable rate of duty.

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Use of incorrect HTCs can result in the overpayment of duties (and possible underpayment). Failure to identify the correct country of origin can result in

an inability to take advantage of various duty reduction programs.

All customs agencies require the HTC and the COO be correctly identified on all applicable import/export documents. Submitting incorrect import/export

documents to customs agencies is a violation of the law and can result in civil fines/penalties and, in certain cases, criminal penalties.

Imports or exports that incorrectly identify controlled materials or sensitive items (e.g., explosives, certain chemicals, etc.) are viewed as a national security risk. Penalties/fines for incorrect HTC and/or COO are very high

(e.g., in the U.S. the penalty can be up to three times the entered value of the goods plus additional fines).

The business need is also clear;

Global HTC classification will allow Company A to take advantage of all available duty savings opportunities and implement a process which

significantly reduces import compliance risk and exposure.

Opportunity exists to significantly increase import compliance and identify global duty savings however, problems exist with:

Company A's ability to take advantage of various duty savings programs;

Company A's ability to comply with customs agencies requirements for import/export;

Company A's ability to reduce overall compliance risk related to imports; and

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Company A's ability to populate the HTC and COO in all existing systems to ensure compliance.

There should be accurate HTC classifications that are populated in all systems as necessary to ensure import compliance. A full optimisation of

duty savings through correct HTC classification and utilisation of preference programs, foreign-trade zones, temporary imports, and duty drawback, as applicable, should also be implemented. As a result, there should be a due to classification or

reduction in customs' detention of imports/exports

origin issues (including detention for failure to provide sufficient product descriptions on the import documentation).

Currently HTC and country of origin are populated within the local U.S. systems but efforts must be focussed on expanding the scope and education surrounding the global effort. At the moment, from the sample data

gathered during the literature review, the classifications are inconsistent, not verified, and often times incorrect. As a result, Company A is, in certain

instances, paying more duties than would be ordinarily owed if classified under the correct HTC. Further, without the correct HTC and COO, Company A is unable to take advantage of various duty savings programs. Company A's inability to correctly provide the HTC and COO results in the filing of import/export documents that are incorrect. Incorrect HTC and COO

information results in significant compliance exposure.

This is a global issue that has only been addressed on a country-by-country basis until now.

Company A have an ongoing effort to identify the export control classification number (ECCN) for all their made and sourced products. The HTC project is an essential compliment to the ECCN project in order to ensure full Company A

compliance on both import and export side of their transactions.

must address this issue now because customs agencies are focusing on the

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oil and gas industry and the exposure is too high.

Note, in the U.S., for

example, if Company A continue to use incorrect HTC's after they were aware of the mistake then they are subject to heightened penalties and/or jail time for making knowing fraudulent filings with the government.

This effort should be implemented globally. As the codes are verified within the U.S., the first stage should begin in America and then be replicated globally. The trade compliance team and key personnel within the supply chain should be the responsible parties for the global project.

Company A has a number of strengths, but also weaknesses threats and opportunities;

Strengths: • • • Senior management commitment Experience within the trade compliance department Function support from legal, R&D, Supply chain

Weaknesses: • Requirements for trade compliance are not embedded in culture

Opportunities: • • Integrate with functions Demonstrate value of trade compliance to operations (Compliance is a business enabler) • Compliance can be sold to the customer.

Threats: • • • • Changing regulations Government enforcements Emerging markets Higher scrutiny
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• •

Business growth Misperception that 'it won't happen to us'

I
I

I

5.2

Summary

During the introduction,

the author set out the following objectives;

The Author will examine the effects of globalisation gas industry with hope that findings will assist

on today's oil and in solidifying the

increased role that trade compliance can and should play. The author global trade. reviewed the term 'globalisation' and its influencing function effect on to

It is clear that the trade compliance

is strategic

effective supply chain management.

The

various

Regulatory

Bodies

with

acts

governing

numerous

international

markets will be assessed in relation to the ever increasing

and complex role the of the trade compliance function. Evidently, regimes function as a result governing of the vast amount the of bodies, role of the treaties, trade acts and compliance

international

trade,

is complex and, again, must be given respect in that it can assure resulting in customer assurance and competitive

supply chain effectiveness advantage.

A study of the most recent import

and export

compliance

topics will

further outline the complex nature of today's global market place. The author focussed on is satisfied, through a comprehensive that study of the literature on trade

import/export

compliance, edge.

efforts

focussed

compliance will provide a competitive

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A review of published historic violations and their settlements with corresponding share price movements will provide sufficient support for/against an increased investment in trade compliance.

The serious nature of a violation,

in terms of loss of reputation

and

importantly share price reaction provide sufficient support for investment in trade compliance.

As a project which will run in conjunction with the dissertation, the author will conduct a harmonised tariff classification analysis. The

findings of which should support an argument that trade compliance can offer competitive advantage. This project proved its worth as savings were achieved. It is clear that, if

conducted on a global scale, the project alone can offer competitive advantage.

The latest information

systems and technology available offering

support to the trade compliance function will be reviewed. Secondary and primary research proved that investment in technology can lead to competitive advantage.

An examination

into the impact that investment in trade compliance advantage

has upon a firm's competitive

80

L--

I

REFERENCES

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~

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KERR, T., 2009, ramping up customs compliance reviews, March-April, pp,48-S1. Available from: www.chinabusinessreview.com.

HOLLY,A., 2004, Store Manager: Import Duty, Don't Be Flattened by Codes, July, pp.13. Available from: http://web.ebscohost.com/ehost.

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EDMONSON,R., 2009, The Journal of Commerce, customs, January, pp70. Available from http://web.ebscohost.com/ehost. YOUNG, c., Journal of Health Care Compliance, compliance prfesionals often have to focus their resources on areas that pose greater risk, May-June, pp61-63. Available from http://web.ebscohost.comiehost.

LEON, C & PISANI, R., The Journal of Commerce, assessing the customs audit, pp53. Available from http://web.ebscohost.comiehost.

DAMIANIDES, M., 2005, Information systems management, Sarbanes-Oxley and its governance: new guidance on control and compliance, pp77-85. Available from http://web.ebscohost.comiehost.

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SALAM, F.A., Managerial Interpretations

of the Role of

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ULLRICH, A., W., Information

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FADEL, J., BROWN, A., Communications of the Association for Information systems, pp108-126. Available from http://web.ebscohost.com/ehost.

ABERDEENGROUP,2005, how companies control global sourcing and selling to improve cash and profitability, September.

MK TECHNOLOGY, 009, Export Control best practices Act. 2

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http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1078053656&ty pe=RESOURCES.

http://www .businesslink.gov .uk/bdotg/action/detail?itemId pe=RESOURCES.

= 1078053832&ty

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R.M.,

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DIBB, S., SIMKIN, P., PRIDE, J.e. & FERRELL, J., 1997. and Strategies. Boston: Houghton Mifflin.

Marketing:

Concepts

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Marketing Research in Action.

London: Routledge.

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85

Criminal and Administrative Case Examples

HITTITE MICROWAVE CORPORATION The Violation: Hittite Microwave Corporation, Chelmsford, Massachusetts, on six

occasions, exported microwave solid state amplifiers and related equipment, including downconverters, from the United States to Russia, China and Latvia, without obtaining licenses from the U.S. Department of Commerce. In addition, on one occasion, Hittite made a false statement to the U.S. Government on a Shipper's Export Declaration (SED). The Penalty: Hittite agreed to a $221,250 administrative penalty.

AVIACSA AIRLINES The Violation: Between February 2002 and May 2003, in conjunction with exports of aircraft parts to Mexico, Aviacsa Airlines on 75 occasions failed to file with the U.S. Government the SEDs required by the EAR. The Penalty: Aviacsa agreed to administrative penalties totaling $450,000, of which $225,000 was suspended.

ASHER KARNI The Violation: Asher Karni, a South African businessman, conspired to violate and violated U.S. export restrictions arising out of unlawful exports to Pakistan and India of U.S.-origin goods controlled for nuclear nonproliferation reasons. Humayan Khan, of Islamabad, Pakistan was indicted for conspiring to violate and violating U.S. export restrictions on goods controlled for nuclear nonproliferation reasons. Khan arranged, through Karni, the purchase and export to Pakistan of U.S.-origin triggered spark gaps, which can be used as nuclear weapons detonators. Khan falsely indicated that the goods were intended for medical use. The Penalty: On August 4, 2005, Karni was sentenced to three years' imprisonment. On April 8, 2005, Khan was indicted for his role in diverting the controlled goods. On

August 1/ 2006/ BIS issued a 10-year denial of export privileges against Karni and related parties/ Pakland PMECorporation and Khan.

SCP GLOBAL TEc:HNOLOGIES,

INC.

The Violation: Between May 2003 and January 2005/ SCP Global Technologies/ Inc. ("SCP") made 45 exports of controlled pumps and valves to Taiwan/ China/ and Israel/ without the required export licenses. The items are controlled for their potential use in chemical and biological weapons/ and would have required a license for shipment to Taiwan/ China/ or Israel. SCP had previously received a Warning Letter for the unlicensed export of controlled pumps. The Penalty: SCPagreed to a $264/000 administrative penalty.

METRIC EQUIPMENT SALES The Violation: On March 21/ 2005, Metric Equipment Sales pled guilty in the Northern District of California to one felony count of exporting digital oscilloscopes controlled for nuclear nonproliferation reasons to Israel without a BIS license. The oscilloscopes, with sampling rates exceeding 1 GHz, are capable of being utilized in WMD development and missile delivery fields. The Penalty: Metric was sentenced to a $50,000 criminal fine. Metric agreed to a $150,000 administrative penalty and a five-year suspended denial of export privileges.

VALTEX INTERNATIONAL The Violation: Vladimir Alexanyan and his company, Valtex International, committed export violations and made false statements in connection with the attempted export of satellite/missile insulation blankets to the Chinese Academy of Space Technology in Beijing. BIS had previously rejected Valtex's application for an export license for these items. The Penalty: Alexanyan was sentenced to pay a $12,000 criminal fine, to serve three years' probation, and was barred from any international activities or trade for the term of his probation. Valtex was ordered to pay a $250,000 criminal fine. In addition, Alexanyan agreed to an $88,000 administrative $77,000 administrative penalty and Valtex agreed to pay a

penalty. Alexanyan's and Valtex's export privileges to China

were denied for five years. Valtex also agreed to implement an export management system.

WILDEN PUMP AND ENGINEERING The Violation: Wilden Pump and Engineering Co., LLC (Wilden), a company based in Grand Terrace, California, violated the EAR in connection with unauthorized exports of diaphragm pumps from the United States to the Iran, Israel, the People's Republic of China, Syria, and the United Arab Emirates without the required Department of

Commerce export licenses between 2000 and 2003. In some cases, Wilden transferred diaphragm pumps with knowledge that violations of the EAR would occur. Wilden also made false statements on export control documents related to these transactions. The Penalty: Wilden agreed to a $700,000 administrative penalty. It also agreed to be subject to a three-year denial of export privileges for items on the CCL. The denial was suspended in its entirety for two years provided that Wilden did not commit any violations of the EARduring the suspension period.

JOHN CARRINGTON The Violation: and John a Carrington, former North the former president State of Sirchie illegally Fingerprint exported

Laboratories approximately

Carolina

Senator,

$1.2 million dollars in crime control equipment

to China through

intermediaries in Italy and Hong Kong.

The Penalty: In the criminal case, Carrington was sentenced in March 2006 to 12 months' probation and agreed to pay an $850,000 criminal penalty. In the related administrative case, Carrington accepted a fiveyear denial of his export privileges. penalty and accepted a five-year

Sirchie also agreed to a $400,000 administrative suspended denial.

BJ SERVICES COMPANY The Violation: Between 1999 and 2002, BJ Services Company of Tomball, Texas committed 37 violations of the EAR in connection with 13 exports of items controlled for chemical and biological weapons reasons to various destinations without obtaining the required export licenses.

The Penalty: BJ Services agreed to a $142,450 administrative penalty and to perform an audit of its internal compliance program to be submitted to BIS. Mitigating Circumstances: BJ Services voluntarily self-disclosed these violations and cooperated fully with the investigation.

NING WEN The Violation: Ning Wen and Hailin Lin used a business called "Wen Enterprises," which they operated from their home in Wisconsin, to ship semiconductors and other controlled electronic components with radar and satellite applications, both military and civilian, to Jian Guo Qu and Ruo Ling Wang at Beijing Rich Linscience Electronic Company in China. For most of these transactions, Lin obtained the restricted

technology from a United States manufacturer or supplier based on a request from Wang or Qu; falsified shipping documents at

the direction of Qu by concealing the true nature of the shipments and stating that a
license was not required for the shipments; and then shipped the product to Wang and/or Qu in China, without obtaining the required export license. The Penalty: In 2005, Qu was sentenced to 46 months' imprisonment (later reduced to 22 months based on his cooperation in the prosecution of the co-defendants), a $2,000 criminal fine, and two years' supervised release. Lin was also sentenced in 2005 to 42 months in prison and a $50,000 fine for her role in these unauthorized exports. In 2006, Wen was sentenced to five years in prison, a $50,000 fine and two
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Wen and Lin and over $329,000 in cash.

MANTEN ELECTRONICS The Violation: Four former employees of Manten Electronics, Weibu Xu, aka Xu

Weibu, aka Kevin Wu, Hao Li Chen, aka Ali Chan, Xiu Ling Chen, aka Linda Chen, Kwan Chun Chan, aka Jenny Chan, illegally exported millions of dollars of sensitive national security controlled items, with applications in radar, electronic warfare and

communications systems, to state-sponsored institutes in China. On September 13, 2005, Kevin Wu pled guilty to violating the Export Administration Act and the Arms Export Control Act. Wu and the other defendants also pled guilty to conspiracy charges.

The Penalty: On May 1, 2006, the four defendants were sentenced. Specifically, Kevin Xu was sentenced to 44 months in prison, and two years' probation; Ali Chan was sentenced to 30 months in prison and two years' probation; Linda Chen was sentenced to 18 months in prison and two years' probation; and Jenny Chan was sentenced to six months' home confinement and two years' probation. The defendants also agreed to forfeit $391,337, their profits from the illegal exports.

ELAN PHARMACEUTICALS The Violation: Between May 2000 and April 2002, Elan Pharmaceuticals, Inc. (Elan), of San Francisco, California, made four exports of a synthetic conopeptide MVIIA medical product, ziconotide (trade named PRIALT) to Belgium, without the required export licenses. PRIALT is the synthetic equivalent of a nontoxic peptide that is a component of the venom produced by the marine cone snail. Elan was studying and developing PRIALT as a new therapy for pain management. PRIALT is controlled for chemical and

biological chemical warfare, and anti-terrorism reasons. The Penalty: Elan agreed to a $31,000 civil penalty, and to perform an internal audit of its export compliance program one year from the date of the agreement. Mitigating Circumstances: Elan voluntarily self-disclosed these violations and

cooperated fully with the investigation.

EMD BIOSCIENCES, The Violation:

INC.

EMD Biosciences, Inc. (EMD) of San Diego, California exported

biological toxins to Canada in violation of the EAR. Between June 2002 and July 2003, EMD committed 134 violations of the EAR in connection with 67 exports of biological toxins to Canada that were made without obtaining required Department of Commerce export licenses. The Penalty: EMD agreed to a $904,500 civil penalty and to a two-year suspended denial order.

ZHAOXIN ZHU The Violation: On May 6, 2004, Zhaoxin Zhu of Shenzhen, China pled guilty to conspiring to purchase controlled satellite and radar technology for illegal export to China. Zhu negotiated with undercover federal agents to purchase a variety of

sensitive goods, including traveling wave tubes with satellite and radar applications, for export to China. The Penalty: Zhu was sentenced to twenty-four supervised release. months in prison and three years'

STOELTING COMPANY The Violation: Stoelting Company, of Wood Dale, Illinois, and its president, LaVern Miller, illegally exported polygraph machines to China without required export licenses. These items are restricted to China for human rights reasons. The Penalty: Stoelting was sentenced to two and a half years' corporate probation and a $20,000 criminal fine. Miller was sentenced to two and a half years' probation, including six months of electronically monitored home confinement, 500 hours

community service and a criminal fine equivalent to the costs of his probation and monitoring, estimated to be $18,000. In addition, Stoelting and Miller each agreed to $44,000 in administrative denial of export privileges. penalties, and Stoelting agreed to a five-year suspended

BASS PRO, INC. The Violation: Bass Pro, Inc. exported gun sights to a variety of destinations without a license in violation of the EAR. Gun sights are controlled pursuant to U.S. treaty obligations, as well as for human rights and antiterrorism reasons. The Penalty: Bass Pro agreed to a $510,000 administrative penalty.

DR. THOMAS BUTLER The Violation: On January 14, 2003, Dr. Thomas Campbell Butler, M.D., a professor at Texas Tech University in Lubbock, Texas reported to the FBI that thirty vials of a potentially deadly plague bacteria, Yersinia pestis (the causative agent of human plague), were missing and presumed stolen from his research lab. The report sparked

a bio-terrorism alert in west Texas and President Bush was informed of the incident. However, investigation proved that Dr. Butler had illegally exported the Yersinia pestis, which is a controlled item under the EAR and cannot be exported without the required export licenses from BIS. On January 15, 2003, Dr. Butler was arrested. Dr. Butler was found guilty of numerous charges at trial, two of which were export control-related: making false, fraudulent and fictitious statements

regarding the exports to federal agents and making an unauthorized export to Tanzania. The Penalty: Dr. Butler was convicted of forty-seven counts of a sixty-nine count indictment that stemmed from BIS's investigation. He was sentenced to two years in prison on March 10, 2004, and he resigned from Texas Tech. On October 24, 2005, the U.S. Court of Appeals for the Fifth Circuit affirmed his earlier conviction. In the administrative case, Dr. Butler agreed to a $37,400 administrative penalty and to

accept a denial of his export privileges for a period of ten years.

OMEGA ENGINEERING

INC.

The Violation: Omega Engineering Inc., of Stamford, Connecticut and its former Vice President, Ralph Michel, violated the EAR by exporting certain laboratory equipment to Pakistan in 1997 after BIS had denied a license for the same shipment earlier that year.
The Penalty: In the criminal cases, Michel was sentenced to ten months'

imprisonment and fined $50,000, and Omega was sentenced to a $313,000 criminal penalty and five years' corporate probation. In the administrative cases, Omega agreed to a $187,000 penalty and to a five-year denial of export privileges to Pakistan. BIS also denied Michel's export privileges to Pakistan for five years.

[APPENDIX

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