How Export Classification Mistakes Impact Global Trade Compliance

Accurate export classification is a cornerstone of trade compliance. A simple string of digits may seem insignificant but determining the correct classification code can make or break not just a single transaction but your entire export operation. 

As an exporter, it is crucial to understand what is at stake when classifying products. Without dwelling excessively on the negative, we’ll provide an overview of the seriousness of proper trade classification and how to avoid costly mistakes and common pitfalls. Understanding the role of export classification in your trade compliance program will help put your organization on the path to long-term success in your industry. 

t is difficult to overstate the importance of accurate product classification in trade compliance, especially when exporting dual-use items (items with both civilian and military applications) and defense articles. Why? Because you cannot determine the licensing requirements of your intended transaction without proper classification. 

Organizations must determine whether the items they intend to export are subject to control and, if so, which regulatory bodies they must answer to. Regulations vary by country, and a single transaction may be subject to multiple regulatory bodies. Necessary authorizations also depend on the parties to the transaction, the final destination, the end-use, and the end-user. 

In the US, for example, some products are subject to Export Administration Regulations (EAR) issued by the Department of Commerce (BIS), while others fall under International Traffic in Arms Regulations (ITAR) issued by the Department of State (DDTC). Both regulatory bodies maintain classification lists, known as the Commerce Control List (CCL) and the United States Munitions List (USML), respectively. 

Only after a product has been accurately classified can the relevant authorizations be determined and applied for, such as export licenses and permits.

What, then, are the consequences associated with product classification mistakes? 

The financial, legal, and reputational repercussions of inaccurate product classification, especially when dealing with EAR or ITAR-controlled products, are quite severe. Risks of inaccurate product classification include:

• Heavy fines – A single Export Administration Regulations (EAR) violation can cost up to $1 million in fines.
• Reputational damage – Prospective business partners may be less keen to deal with a company with known export violations.  
• Revocation of trade privileges – “A denial of export privileges prohibits a person from participating in any transaction subject to the EAR. Furthermore, it is unlawful for other businesses and individuals to participate in any way in an export transaction subject to the EAR with a denied person,” warns BIS. 

• Criminal prosecution – “Under the Export Control Reform Act of 2018 (50 U.S.C. §§ 4801-4852) (ECRA), criminal penalties can include up to 20 years of imprisonment,” adds BIS.   

What are the mistakes that lead to incorrect export classifications?  

Exporters are vulnerable to several product classification mishaps. Here are just a handful of mistakes commonly made when classifying products:  

1. Inadequate internal compliance program – Fledgling startups and globalized enterprises alike need a finely-tuned compliance program outlining clear roles, responsibilities, and standard operating procedures. Organizations must dedicate resources toward compliance processes, integrate export compliance software into their operations, and continually audit and fine-tune internal processes.  

2. Poor understanding of what constitutes an export – The common conception of an export involves the idea of putting a product in a shipping container and sending it to a buyer in another country. However, exports can also come in the form of data or technology shared with foreign nationals living within the country. Depending on the nature of the information, these transactions may be classified as an export requiring particular authorizations.  

3. Failure to use automation tools – Not leveraging export compliance software to automate and validate product classifications can lead to inconsistencies and inaccuracies.   

4. Lack of awareness of the latest regulations – Regulations change over time, especially with frequent geopolitical shifts. Exporters must stay up to date with the most current regulations governing their transactions.    

5. Insufficient record-keeping practices– Organizations need a defensible audit trail detailing their process for each product classification and demonstrating due diligence.

Many businesses utilize export license management solutions to automate key steps in the licensing process. Here’s how automating export licensing can help your organization:  

• Simplify the export licensing process – Robust export compliance software makes it easy to manage applications and monitor changes in real-time. With standardized workflows in one simple electronic portal for application preparation, internal review, submission management, tracking, and reporting.   

• Minimize Errors – An automated solution eliminates error-prone manual processes ensuring the accuracy of product classification and other information gathering activities.  

• Record Storage and Accessibility – Create and deploy uniform and consistent corporate policies and procedures for compliant export license management.  

• Enhanced Due Diligence – Automated screening features continuously monitor and cross-check entities against updated denied party lists, reducing the risk of conducting business with restricted individuals, organizations, and countries.  

• Ensure regulatory compliance – Create and deploy uniform and consistent corporate policies and procedures for compliant export license management.   

Descartes offers a comprehensive solution designed to simplify and streamline the export license and permit acquisition process. With an easy to access web-based platform, flexible denied party screening options, and seamless integration with ERP and CRM systems like Oracle and SAP, Descartes ensures that your business stays compliant with minimal disruption.  

Descartes Export Compliance solutions includes Descartes OCR Export Licenses and Permit Module which provides a clear overview of the export process to help mitigate risks, prevent oversights, promote compliance, and enable businesses confidently manage their export license applications from start to finish. Book a demo today to learn more about how Descartes optimizes export compliance.