As an entrepreneur of a startup, international trade compliance is probably not high on your priority list right now. After all, you have a boatload of other responsibilities to take care of, from cash flow to landing sales to inventory management to generally getting your new company off the ground.
While these activities are certainly important, you also need to be equally mindful of the implications of export compliance laws. Neglecting this factor and getting in trouble with the law later can greatly slow your progress; as a result, paying attention to compliance now means better growth and development in the long run.
This article covers the major points that startups need to know vis-à-vis U.S. trade regulation compliance. If you plan on or currently are operating internationally, this information is just as important as knowing how to get your products and services out to customers.
Economic Sanctions Awareness
If your startup is based in the United States, you must follow U.S. sanctions laws. Doing business within a sanctioned country or a denied party is forbidden and can result in significant legal fines and a loss in trust with your partners and clients.
Embargoed countries include North Korea, Cuba, Iran, and Syria amongst others. The U.S. has made it clear that businesses themselves are responsible for their own compliance. If you have operations in countries other than the U.S., you will need to be aware of similar regulations in those jurisdictions, as well.
Working with Controlled Goods
An export license is sometimes necessary when an international transaction involves the shipping of controlled goods, technologies and even technical data to overseas markets. Licenses also apply to domestic U.S. situations where foreign employees are able to access your products and technologies that can be categorized as controlled goods.
But another concept to keep in mind is the export classification. This helps determine whether licenses are required.
What is an Export Classification?
The Export Administration Regulations (EAR) controls the transfer of goods from the United States to foreign parties. You as a business must specify:
- The products being exported
- The destination of the shipment
- The recipient of the package
- The intended end-use
The Commerce Department’s Bureau of Industry and Security handles enforcement and the licensing required for the transfer of such products, especially for products that can have dual military and civilian use. Defense and space related items, meanwhile, fall under the State Department’s International Traffic in Arms Regulations (ITAR), as defined in the United States Munitions List (USML).
Why Does Export Classification Matter?
Why should you bother with knowing the export classification of the products you intend to work with?
- You will need this to set up your shipping documents.
- Even after the sale, you will still be held liable for export violations, so you must communicate the risk to third-parties involved in the transaction.
- The government or your clients may ask you directly for this information.
- Potential investors and people who buy your business from you will want to know about these liabilities.
Denied Parties Screening
You will have to make sure that you are not entering into business dealings with denied parties, also known as restricted, debarred, sanctioned or blocked parties. The best way to keep your transactions legal is to screen for these so-called “bad actors” against multiple watchlists maintained by the government. This also applies to securing funding, mergers and acquisitions and foreign shareholding.
Note also that denied parties can exist domestically in the U.S., as well as abroad because some individuals and companies caught breaching compliance laws were operating on American soil.
Sanctioned Ownership Screening
Your ability to do business with a firm is impacted by how much that firm is owned directly or indirectly by denied parties. How much is too much? Those aiming for OFAC compliance should consult the OFAC 50 percent rule, which puts the threshold of combined sanctioned party ownership at 50% or more. In the European Union, the ownership level is much more stringent.
Compliance in this case though is more challenging because there are no official lists to screen against, however, robust export compliance software solutions should easily address your needs.
The U.S. Customs and Border Protection (CBP) handles any and all border regulations for transactions that enter the U.S. including:
- Import tariffs
- Intellectual property violations
- Safety regulations
- Consumer protection
What kind of penalties should be expected? If you are caught infringing on trademarks, for instance, then you may have your goods confiscated without any compensation, and have to pay a fine. Some of the tariffs are significant as well, such as the taxes on foreign imports designed to protect local industry.
As cross-border trade becomes more complicated legally, startups must pay attention to trade compliance and should not rely on others such as the customs broker to cover it for them.
Improve Trade Compliance with Descartes
Startups likely don’t have the resources to handle all the complexities of international trade compliance. But thankfully, they can still avoid costly fines and losses in consumer trust by adopting a digital platform with compliance features.
Descartes produces solutions for global trade intelligence. Features like the following will protect you from non-compliance sanctions:
- Denied party screening
- 3rd-Party Risk Management
- Trade content for leading business systems, including SAP, Oracle, Salesforce, Netsuite and others
- Product classification
- Tariff data
- Trade and supply chain intelligence
Make sure your startup gets going on the right foot. Get in contact with us to learn more about how you can build the compliance foundation needed for achieving long-term success.