Canada-U.S. Blog

Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

Russian Election Hacking – The Cyber Story

Posted in Border Security, Corporate Counsel, Criminal Law, Cybersecurity and Privacy, Elections, Politics, U.S. Federal Government

Originally published by the Journal of Commerce in January 2017

The Senate Armed Services Committee hearing on January 5, 2017 was an opportunity to learn what the intelligence community determined regarding cyber-attacks related to the 2016 Presidential election.  For those of us having to deal with the potential consequences to our businesses, it was the 13 page unclassified report which the Department of Homeland Security and the Federal Bureau of Investigation jointly published that provides the most relevant information.

It has long been understood there are three (3) primary reasons hackers seek access to a system:  criminal intent, corporate espionage or state actors. In the case of the Presidential election hacking, as has been widely reported in the mainstream press, the intelligence community is sure it was state actors, the Russian intelligence services (two distinct programs run by different parts of the Russian government) which conducted the hacking, especially directed at one political party, and did so to influence the outcome of the election. What makes the topic timely for businesses is the tips and recommendations contained in the Joint Analysis Report (JAR).

The JAR begins by explaining how the hacking occurred, and in that sense, the only news is the identity of the hackers. The methods and means disclosed are all widely-used!  The JAR also reiterated that government organizations, critical infrastructure entities, think tanks, universities, political organizations and corporations are constantly under threat of having information stolen.  In this case, third party identities were taken on by the hackers who hid behind false online personas so as to cause the victim to incorrectly attribute the source of the attack, and those efforts continued even after the election!

The information which starts on page 6 of the JAR is of most interest to the private sector. DHS and the FBI have put together a recommended list of mitigation steps:   “A commitment to good cybersecurity and best practices is critical to protecting networks and systems”.

The JAR goes on to list questions companies should ask about their cybersecurity programs:

Backups: Do we backup all critical information? Are the backups stored offline? Have we tested our ability to revert to backups during an incident?

Risk Analysis: Have we conducted a cybersecurity risk analysis of the organization?

Staff Training: Have we trained staff on cybersecurity best practices?

Vulnerability Scanning and Patching: Have we implemented regular scans of our networks and systems? Do we appropriately patch known system vulnerabilities?

Application Whitelisting: Do we allow only approved programs to run on our networks?

Incident Response: Do we have an incident response plan? Have we practiced it?

Business Continuity: Are we able to sustain business operations without access to certain systems? For how long?

Penetration Testing: Have we attempted to hack into our own systems to test the security of our systems and our ability to defend against attacks?

These questions are followed by a list of  “Top Seven Mitigation Strategies”, supposedly able to  prevent up to 85% of cyber-attacks.  For most companies the list is all too familiar, but according to DHS, these basic measures are not being followed by an alarmingly large number of companies, even today!

  1. Patch applications and operating systems – Vulnerable applications and operating systems are the targets of most attacks. Ensuring these are patched with the latest updates greatly reduces the number of exploitable entry points available to an attacker. Use best practices when updating software and patches by only downloading updates from authenticated vendor sites.
  2. Application whitelisting – Whitelisting is one of the best security strategies because it allows only specified programs to run while blocking all others, including malicious software.
  3. Restrict administrative privileges – Threat actors are increasingly focused on gaining control of legitimate credentials, especially those associated with highly privileged accounts. Reduce privileges to only those needed for a user’s duties. Separate administrators into privilege tiers with limited access to other tiers.
  4. Network Segmentation and Segregation into Security Zones – Segment networks into logical enclaves and restrict host-to-host communications paths. This helps protect sensitive information and critical services and limits damage from network perimeter breaches.
  5. Input validation – Input validation is a method of sanitizing untrusted user input provided by users of a web application, and may prevent many types of web application security flaws, such as SQLi, XSS, and command injection.
  6. File Reputation – Tune Anti-Virus file reputation systems to the most aggressive setting possible; some products can limit execution to only the highest reputation files, stopping a wide range of untrustworthy code from gaining control.
  7. Understanding firewalls – When anyone or anything can access your network at any time, your network is more susceptible to being attacked. Firewalls can be configured to block data from certain locations (IP whitelisting) or applications while allowing relevant and necessary data through.

The JAR can be found here: https://www.documentcloud.org/documents/3248532-DHS-FBI-JAR-16-20296-Grizzly-Steppe-Russian.html. Every IT administrator in every company should review this report, in order apply the indicators of compromise listed to his or her company’s computer system. Those interested in cybersecurity should also reach out to their local Secret Service office and become a member of the Service’s Electronic Crimes Task Force, which provides a good deal of its private sector members, including hash data and IP addresses which have been compromised.

If you think your system has been infiltrated or you otherwise want assistance, the JAR provides contact information where you can get assistance:  “DHS NCCIC (NCCICCustomerService@hq.dhs.gov or 888-282-0870), the FBI through a local field office or the FBI’s Cyber Division (CyWatch@ic.fbi.gov or 855-292-3937) to report an intrusion and to request incident response resources or technical assistance”.

It is not difficult to quickly come up with ways in which every company’s computer system could be used to provide valuable and compelling information to those wanting to benefit from corporate espionage, especially since so much of American critical infrastructure is in private hands. Of course, we should not forget about the Internet of Things, and how little cybersecurity is actually installed on medical devices, smart watches and similar devices!

A Country Divided!

Posted in Border Security, Corporate Counsel, Cross-border trade, Customs Law, Intellectual Property, Legal Developments, Trade Agreeements, Trade Remedies

Originally published by the Journal of Commerce, December 2016.

Even prior to the election, it was clear the U.S. is a country divided. We are now several weeks removed from the election and the shame of the situation is not one so-called political leader has made any statements which give hope of uniting the country. We have sore winners and sore losers, and not much else!  Given that circumstance, the more remarkable feat is it took the highest ranking civil servant at Customs and Border Protection (CBP) to deliver recent remarks which provide the first sounds of any hope the country will be able to move forward on any front in something approaching a united fashion.

During his lunch remarks at the CBP Trade Symposium on December 2, Deputy Commissioner Kevin McAleenan reinforced trade facilitation and security as the continuing twin missions of CBP (to no one’s surprise) and divided his remarks into three topics: change, opportunity and continuity.  Under the topic of opportunity, Mr. McAleenan noted CBP continues to seek to harmonize single window (the mechanism and the standards), deal with data sharing with other governments in ways that retain confidentiality, and create single unique identifiers for accounts and products.

In the context of change, based on the Trade Facilitate and Trade Enforcement Act (“TFTEA”) , Mr. McAleenan pointed out enforcement remains a high priority. Others priorities include antidumping/countervailing duty, forced labor and intellectual property protection.  In other words, CBP will continue to focus in areas that present the highest risk (again a surprise to no one). Another challenge for CBP is e-commerce which requires a speed and service level never before necessary for other forms of business. The challenge with e-commerce is both illicit commodities and abuse of the di minimis rules (where shipment values are lowered so as to avoid the more formal reporting required of “regular” imports and exports).  According to the Dept. of Commerce, 98% of those conducting e-commerce are small and medium sized companies, so the challenge is significant and those users have less familiarity with the rules, and even less time to spend learning them.

Another significant challenge for CBP is technology. Not just single window (and the open question of what are the next features for ACE when this development cycle is concluded?), but also better coordination with partner government agencies and the Border Interagency Executive Council (“BIEC”). While TFTEA caused ACE to be enacted into law, the BIEC remains a creation of executive order. Will it survive into the new administration, and if not, what vehicle will be available to allow the heads of the relevant agencies to regularly meet and coordinate their agencies’ efforts?

In terms of continuity, CBP learned long ago the best route to success is to work closely with its trade partners, and so the agency intends partnerships to remain strong.  The bottom line message from Mr. McAleenan was CBP acknowledges it needs to continue to move trade through the supply chain so the U.S. can remain competitive.

While Mr. McAleenan’s comments certainly provide a framework for moving forward in a more unified manner, we just do not know what the future holds! In the past, CBP has had limited flexibility to add staff in those areas where it is the most needed. Congress has historically mandated the additional staffing be for border enforcement staff (and one understands the focus), whereas importers and exporters will tell you the staffing is needed most for so to speak backroom support staff and training for CBP staff at many different levels. To be fair, CBP enforces the law on behalf of 40+ agencies and in many cases the current decision-making process is simply too cumbersome and time-consuming. Even so, there are all too many times that CBP’s own staff has difficulty understanding the agency’s regulations and how to properly enforce them.  Another area where CBP needs help is with the Centers of Excellence and Expertise (“CEE”).  For the most part, the CEEs are still new and learning how to operate. Some have done well to mature and others are still in their infancy and still learning how the trade they regulate works and with whom to deal externally. The definition of trusted trader has also still not be finalized.

The reality is we simply do not know what will be the priorities of the new administration, and how those priorities will impact CBP’s mission and budget. Certainly, it is reasonable to expect a focus on immigration, and volumes can be written on that topic!  At the same time,  those in the new administration surely understand the importance of trade continuing to move through the supply chain in a compliant and expedited manner?  However, we’ll just have to wait and see if that lesson was learned either in business or the military (the two primary sources of the announced cabinet members).  If not, to paraphrase a line from Betty Davis’ character in All About Eve©: “Fasten your seatbelts. It’s going to be a bumpy [ride]”!

NOT SO FAST!

Posted in Aerospace & Defence, Anti-Trust/Competition Law, Antidumping, Border Security, Controlled Goods Program, Corporate Counsel, Cross-border deals, Cross-border trade, Currency Reporting, Customs Law, Export Controls & Economic Sanctions, FCPA/Anti-Corruption, Politics, Tax, Trade Agreeements, Trade Remedies, Transportation

Originally published by the Journal of Commerce – November 2016

Fans of ESPN’s College Game Day© will recognize this tag line from the reaction of Lee Corso when he disagrees with others when panelists predict winners of selected college football games. If you prefer a different sports metaphor, there is Aaron Rodger’s 2014 now famous – RELAX!  Without meaning to make light of the outcome of the Presidential election, we all need to take a breath and pause.  Every campaign at any level finds candidates saying things to fire up their base. The same thing happened in this Presidential cycle, admittedly to a somewhat magnified degree. True, you had one candidate with lengthy position papers covering a wide variety of issues, and another who dealt only in broad statements.  We all know who won and the fact he had little substance to his proposals has many understandably nervous about what the future holds.

Let’s start with some obvious and basic truths. First, business will continue. Second, cargo will continue to flow across borders – in and out. Whether costs will go up and delivery times be delayed remains to be seen.

Yes, Article 2205 of NAFTA does allow any party to withdraw from the agreement upon six (6) months’ notice.  Interestingly, the President-elect has not said he wants to withdraw from NAFTA, rather only he wants to renegotiate it. For international traders, we understand that means the U.S. will sit down with our Canadian and Mexican partners and explain the provisions it wants changed. Traders also understand that means the Canadians and Mexicans will have provisions each wants changed as well. In other words, it won’t be quick and it won’t be easy – and since all one can do at this point is speculate,  how likely is it that if the negotiations get really contentious, any one of the parties could say enough and walk out!

If we continue to speculate and assume the U.S. withdraws from NAFTA in earnest, then what? Sure, trade wars are possible. Sure, the U.S. imposing a surcharge on China’s currency is possible. Yes, there could be 201, 301, antidumping, countervailing or other trade remedy proceedings pursued in the U.S. Traders understand the exercise of any of these options triggers the dispute resolution mechanism before the World Trade Organization or under the given trade agreement. Again, that takes time and while that lengthy process continues, all these non-tariff and tariff barriers are imposed.  Traders also know that if such steps were to be taken, our trading partners would impose similar restrictions on U.S. goods being imported into their countries.  We have already seen examples in recent memory where the U.S. failed to live up to its commitments, lost the complaint brought against it and ended up having serious surcharges imposed on key American products imported into the victor’s country. Time and again, our trading partners figure out who is the primary opposition in the American government, identify key products made by their constituencies, impose significant surcharges on those products, yielding American companies sitting down with government officials and explaining the harm caused – and that is when the view of the government changes. Yes, the current environment may be a bit different, but there is no reason to think the give and take will end up any differently.  The key different fact now is the President-elect has business interests in a particular industry. It won’t be difficult to get his attention by making it very hard for that industry to do business in individual countries.  Our trading partners readily understand how the American government works.

It is important to also think in terms of the role of the United States as a world leader.  As a practical matter, if the U.S. starts to renege on its trade deals, it won’t take long for our trading partners look elsewhere. There is, after all, already an Asian pivot. The most likely impact of any trade war triggered by U.S. actions would be for that pivot to become more pronounced.  Given the serious issues facing the world, the U.S. losing its leadership position is dangerous for America and the world.

The handwringing that has occurred so far has also omitted any consideration of what Congress might do. One party is now in charge across the board. That party has been viewed as typically favorable to business.  There are three (3) branches of government.  Having the Members, Senators and President all from one party does have the potential to result in laws being enacted more smoothly. At the same time, there is no reason to think Congress will ignore its role in the checks and balance process that is the American government.  Most Members and Senators will be there long after the President-elect leaves office, so the leadership can be expected to do what is best for the Congress while still cooperating with the President-elect.

Yes, things are uneasy right now. At the same time, traders understand history. By way of example, the Smoot-Hawley Tariff Act of 1930 and the 1971 Nixon 10% import surcharge are actions which seriously and negatively impacted the U.S. economy.  Protectionism did not work then, when the world was less globally connected. There is no reason to think it will work any better now.

There is no question the new administration could nonetheless have an immediate and disturbing impact on traders. We should keep in mind much of the export license reforms that have occurred in the Obama Administration were the result of executive orders. Similarly, there is the ACE computer system that CBP is finalizing. Much of the push for its completion came by way of executive order. Executive orders can be countermanded, so the fate of both could change – but will they?

The Transpacific Partnership is done, at least for now.  The Transatlantic Trade and Investment Partnership got its burial with the outcome of the Brexit vote.  In the immediate future, no more trade agreements.  What happens instead? Business will not stop.  Whether revisions to the tax, trade and immigration rules are favorable or hinder business remains to be seen. No one really knows what will happen, and so wisdom suggests we wait to see what the President-elect actually proposes. Once there is something concrete to discuss, we should by all means have a vigorous, but courteous, discussion. Just because the administration changes, that does not mean the trade community will be any less vocal about what is best for it in the global marketplace, even while the new administration seeks ways to address manufacturing and jobs.

Fruit and Vegetable/All Importers Beware

Posted in Agriculture, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Exports, valuation

In July 2016, the Houston Regulatory Audit office sent a letter to a number of large importers cautioning them to be sure their value declarations were correct, underscoring CBP’s position by pointing recipients to a long list of CBP informed compliance publications, and touting the advantages of correcting any errors by way of a prior disclosure.

Now we see Round 2. In early October 2016, the Agriculture and Prepared Products Center for Excellence and Expertise (“Center”) sent a letter to many fruit and vegetable importers asking more value questions. Specifically, the Center wanted to know

1)         Was the importer purchasing his goods or receiving them on consignment?

2)         Are the parties related?

3)         From which suppliers is the importer purchasing?

4)         From which suppliers are the goods received on consignment?

5)         If on consignment, how are the goods being valued at time of entry?

6)         Is reconciliation filed?  If not, what actions does the company take to determine if the actual cost of goods is more or less than the value declared at time of entry?

It is this last question that ties right into the revenue collection role of Customs and Border Protection (CBP). Is CBP collecting the right amount at time of entry? If the value is too low at time of entry, it must be corrected. Similarly, if it is too high, it should also be correct.

The reaction of the trade community has been exactly what one would expect. Many produce importers are stunned to learn they may not have been correctly declaring their goods at time of entry, despite the efforts of many customs brokers to make sure importers understood the legal requirements. The reaction of many is my produce is duty free, why is CBP making such a big deal? I’ve never heard of this before is another typical reaction.

The starting point for this discussion is what does the law require? The value law and related regulations have been almost without change for about 20 years. The standard is transaction value or the freely offered or arms’ length price for a given shipment; in simplest terms – what is the sale price? If goods are imported on consignment, there is no sale price as there is no sale. Therefore, another method of value must be used. At the same time, the reasonable care standard (enacted in 1994) requires that if the importer cannot accurately state information on his entry, he is to flag that issue (classification, value, etc.) and provide the correct information when available by way of reconciliation. So, the required process is equally long-standing.

A stated purpose of the Centers for Excellence and Expertise was to become familiar with given industries and seek uniformity.   The Center’s letter seeks to do just that.  We can disagree whether this letter was the “best” method by which to accomplish the intended goal, but regardless of the product one imports, the classification and value must be correct at time of entry.  So, what happens next?

There are on-going discussions between the trade community and CBP. Some have suggested the USDA Agriculture Marketing Service prices be used in lieu of actual sales prices, and thereby eliminate the need for reconciliation. Others have pointed out that could mean a higher price is declared at time of entry for some companies and a lower price for others.  There is some produce that is subject to duty and various produce is subject to user fees, so there exists a financial consequence to this inquiry, including how invalid prices distort the balance of trade between countries.

As the issue is only newly raised, it is not clear what will be the outcome. What is clear is importers need to be sure their entry declarations are correct when made. Importers should also consider the value issue is one long overlooked by Customs and Border Protection and has now become a focus for the agency with its renewed efforts to train staff and pass along institutional knowledge.

Companies that export would be well-advised to also consider their value declarations. Periodically, various federal agencies look at exports and incorrect values often lead these agencies (typically of a law enforcement ilk) to conclude money laundering is taking place. The most recent example of this sort of mess was the auto export headaches that occurred recently.

Importers should take this opportunity to make sure their entries are correct when filed. Mistakes happen, and need to be promptly correct. The real challenge, however, comes when the entries are wrong and the company has lax procedures. Taking the two letters together – from Regulatory Audit and the Center – CBP may have hit the so the speak tip of the iceberg. Entries should be correct at time of declaration and mistakes identified and corrected promptly. Importers of all products should take this opportunity to make sure their compliance programs are robust and lead to the highest level of compliance possible.

It Remains All About Compliance Programs!

Posted in Agriculture, Corporate Counsel, Cross-border trade, Customs Law

Originally published by the Journal of Commerce – November 2016

In early October, Customs and Border Protection (CBP) sent a letter to all the fruit and vegetable importers asking them to identify the basis on which they are declaring the value of their imported produce. The precursor was a realization by CBP that not all these imports were being correctly declared at time of entry. The consignment value was often based on an educated guess, if that, and generally not later updated to reflect actual sales values.  The questions asked by CBP included whether the produce was purchased or on consignment, whether the parties were related, how the consigned value was determined and why reconciliation was not filed.  Correctly, this sent chills throughout the industry and caused everyone to make sure to consult with appropriate advisors before responding.

If an importer knows his value (and other selected topics) at time of entry is not 100% correct, he runs the risk of penalty if he does not flag the discrepancy and then file reconciliation in order to report his true sales values later. Due to misunderstandings within the agency, those dealing with fruits and vegetables did not realize the disconnect until recently. In reality, what importers often overlook is the penalty for a failure to make a correct declaration when there is no duty difference is greater than when the full duty is not paid at time of entry. Perhaps this lax attitude can be traced to a lack of understanding, but it is also likely the result of the philosophy underpinning the CBP enforcement system.

When CBP enforces the law, it typically thinks first about civil penalties, for all but the most serious violations, and criminal later. When it comes to exports, however, those enforcement agencies (for good reason) think first jail first and civil penalties second. No one is suggesting CBP should change its philosophy. Rather, the point is that importers should know the requirements and abide by them, and so should exporters.

No doubt exporters pay far more attention to their levels of compliance, due in large measure to the many companies that recognize the national security and foreign policy implications of the products they sell, along with their own compliance standards, but it is also a matter that when it comes to enforcement, Commerce and State have vigorous outreach programs and make a point of talking about their successes, whereas CBP is typically silent on this topic.

By way of example, last week was the annual Bureau of Industry and Security Update. The program featured representatives of Commerce but from many other agencies as well, including State, the Office of Foreign Assets Control and the Defense Technology Security Administration.  Perhaps one of the most striking discussions had to do with voluntary disclosures.  On a dais consisting of three investigators, the Office of Export Enforcement Director proudly pointed out that not one voluntary disclosure had ever led to a criminal investigation. – imagine how quickly disclosures would stop if one was ever turned into a criminal case! What was particularly noteworthy was the Director’s comment that OEE routinely consults with the Dept. of Justice (Justice) before deciding disclosures.  When was the last time you heard CBP talk about the disclosures it receives?

What made the discussion even more topical was the early October National Security Division at Justice guidance issued regarding voluntary self-disclosures , see https://www.justice.gov/nsd/file/902491/download.  The focus of this guidance was described as “willful export control and sanctions violations” by companies and their employees.  Aiming yet again to find ways to hold individuals responsible for violations which occur, this Justice guidance requests companies to continue to file their voluntary self-disclosures with the agency having jurisdiction over the alleged violation, but to also submit a disclosure to Justice.  What makes this particular guidance unique is its focus on “willful” violations. What this tells the trade community is that generally less egregious mistakes will not lead to criminal prosecution, a philosophy the agencies generally follow when it comes to setting civil fines. In reality, any company that finds itself suffering a willful violation will most likely first fire the people involved and upgrade its compliance program.  This must be done quickly, which again points to why having processes and procedures in place, fully supported by upper management, are critical. The need for prompt action relates to a disclosure only being valid if it is reported before an investigation is opened, or if one is opened, before the company has notice of its existence. Once the remedial action has been completed, the disclosure is filed and steps taken are reported as part of the company seeking cooperation credit.

This latest Justice memo builds on the now somewhat infamous Yates memo regarding individual liability. See https://www.justice.gov/dag/file/769036/download. Both guidance documents underscore the same standard of full disclosure prior to any investigation having been initiated, with cooperation, including providing evidence and witnesses, and facilitation of third-party evidence, remains the norm at Justice.

Taken together, these various publications and events serve to remind all importers and exporters the key to financial success is a compliance program that actually works!

 

What Does The Election of President Trump Mean For Canada?

Posted in Aerospace & Defence, Agriculture, Antidumping, Border Security, Buy America, Cross-border deals, Cross-border trade, Elections, Export Controls & Economic Sanctions, Immigration law, NAFTA, Softwood Lumber, State Governments, Trade Agreeements, Trade Remedies

Canada-US FlagsOn November 8, 2016, Donald Trump was elected President of the United States.  What does this mean for Canadian businesses in terms of trade?

  1. President-elect Trump has said he is opposed to the TransPacific Partnership Agreement (“TPP”).  It is highly unlikely that TPP will be ratified.  Canada will have to negotiate strategic bilateral free trade agreements with TPP countries, starting with Japan, Australia, New Zealand and Malaysia.
  2. President-elect Trump has said he will renegotiate NAFTA.  What this means is unclear. Until we figure out what “renegotiation” means, it should be expected that there will be uncertainty in the Canada-US trade relationship.
  3. President-elect Trump is not a fan of the removal of U.S. unilateral economic sanctions against Iran.  It should be expected that new economic and trade sanctions will be implemented against Iran. We call this a “snap-back” of the sanctions.  The new sanctions may be worse than the old sanctions.  Canadian businesses with U.S. parents or subsidiaries or who use U.S. -made inputs should be very cautious when pursuing opportunities in Iran.  What may be permissible under Canadian law may become impermissible under U.S. law in 2017 (President-elect Trump takes the oath of office on January 20, 2017).
  4. “Thickening of the border” – Canada should expect that President-elect will implement new border security measures that will have an effect on Canada-US trade.  The flow of goods and services will slow down for a period of time until Trump realizes that he is hurting manufacturing businesses.  Canadian companies must join Partners in Protection and C-TPAT in the United States ASAP in order to reduce risks associated with new border security laws/policies.
  5. The buzz word will be “protectionism”.  Canadians should expect to see renewed protectionism. Expect new forms of protectionism that we have never considered.  It will not just be “Buy America” policies; which Canadians are used to seeing.
  6. Canada’s JLT Division (government trade lawyers) will be very busy filing cases with the World Trade Organization to react to President-elect Trump’s protectionist measures.  These cases take 3-4 years to run their course.  We won’t project a second term yet, but if there is one, expect to learn the word “retaliation”.  “Retaliation” is Canada being entitled to deny WTO benefits to goods/services from the United States to retaliate for the U.S. not bringing offending measures into compliance with WTO rules after Canada wins a case.
  7. Hollywood North will be booming. Many American celebrities have said they will move to Canada. There will be more filming in Canada.  The St.Lawrence Market district of Toronto looks a lot like Boston.
  8. Canada’s technology industry will see an increase in U.S. investment.  Many of the Silicon Valley establishment were in the Stop Trump movement.
  9. Canada should expect to see an increase in antidumping and countervailing duty cases in the United States.
  10. Canada should expect a revival of global safeguard cases brought in the the United States.  It is likely that President-elect Trump will implement safeguard measures if the procedures are taken so he can receive recommendations.  A safeguard is a form of trade remedy where U.S. manufacturing shows a surge of imports from all global sources and there is a finding that the imports caused or threatens to cause serious injury to the domestic industry.

For more information about what to expect in terms of Canada-U.S. trade relations, please continue to watch Canada-US Blog. Please contact Cyndee Todgham Cherniak (I have a Canadian law degree, a U.S. law degree and a Masters of Laws in international trade law) at 416-307-4168.

CBP C-TPAT Top Ten Tips for Points of Contact

Posted in Border Security, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Legal Developments

Thanks to one of the CBP Supply Chain Security Specialists for sharing this top ten list for portal points of contract – make sure:

  1.  All Point of Contacts in web portal are current.
  1.  All your C-TPAT partners SVI numbers are listed in the web portal field.
  2.  You have a list of all your non-C-TPAT global supply chain to include foreign site transportation providers, freight forwarders, sea carriers, etc.
  1.  To update any company changes into the web portal, e.g. address, personnel, security additions, etc.
  1.  You have uploaded monthly/quarterly/bi-annual and/or annual internal/external security audits of your business partners, (foreign site factories, transportation providers, etc. ). This must be done at least annually to be compliant with the C-TPAT program.
  1.  You have a system in place that includes risk assessment in your global supply chain that is similar to the C-TPAT 5 Step Risk Assessment process guide. These documents must be uploaded to the web portal.
  1.  You have a blank copy and a completed copy of the C-TPAT questionnaire(s) that your company uses to mail and/or physically use to assure compliance with the C-TPAT program. These documents must be uploaded to the web portal.
  1.  Your Importer of Record (IOR), Manufacturer Identification  (MID), FMC, SCAC and NVOCC numbers are listed in the web portal and are accurate to your supply chain address.
  1.  The company adheres to all the MUST’S and SHOULD’S in the C-TPAT criteria.
  2. Although it is not a requirement, it is suggested that you have a written C-TPAT manual or company/corporate policies and procedures that address the C-TPAT criteria for your respective entity type, e.g. Importer, foreign site factory, Highway carrier, Sea carrier, etc.

It’s All About Compliance – Part 2 – Import Classification

Posted in Aerospace & Defence, Corporate Counsel, Customs Law, tariff classification

This Alert is one in an occasional series of articles providing tips about various topics which come up routinely with import and export transactions.  These articles/tips are published with the intention to provide suggestions to aid international traders in their on-going efforts to get their declarations right the first time, and are based on situations we commonly see arising. Whether it is reasonable care on the import side or not self-blinding on the export side, compliance is a key for many different reasons, including protecting your bottom line.

Part 1 of this series addressed how to value goods correctly. It can also be found on this blog. This edition provides import classification tips.

Under U.S. law, imported goods are classified for duty assessment and statistical reporting using the Harmonized Commodity Description and Coding System.  This compilation of 97 Chapters and approximately 5,000 product descriptions, known in the U.S. as the Harmonized Tariff Schedule of the United States (HTSUS), provides a single modern structure for product classification and is used by more than 200 countries as a basis for their customs tariff and collection of international trade statistics.  The first six digits and their corresponding product descriptions are enacted by the countries World Trade Organization member countries. The remaining digits in any tariff number (which total 10 in the U.S.) and their corresponding duty rates are set individually by each country.  The HTSUS in the U.S. has 99 chapters, with the two unique ones intended to cover product specific provisions, such as American goods returned, products assembled abroad, special rules imposed on given products (for example, temporary quotas), and so on.

Tariff classification of goods under the HTSUS is governed by the General Rules of Interpretation (“GRIs”) which are analyzed in order until one applies.  In so doing, don’t forget to also check the additional U.S. rules of interpretation.

Classifying goods correctly is important not only for duty purposes, but also to determine whether the goods are subject to quotas, restraints, embargoes or other restrictions, and whether they are eligible for preferential duty rates or reductions. Incorrect classifications can lead to higher duty costs than necessary, unpleasant unplanned additional duty bills, lost sales/non-competitive pricing, liquidated damages, loss of business and even sizable penalties imposed for sufficiently egregious misdeclarations.  Although the importer is responsible for correctly declaring product classification, customs brokers (and even freight forwarders when they stray into this area) are at risk if they are not careful about the documentation they prepare on behalf of their customers.

Against that background, here are some tips for setting up a viable classification system.

1)         Review the product itself, and maybe even its specifications and other details, to verify the product description includes all the information reasonably needed for proper classification and then, and only then, classify the product;

2)         Periodically review products for any design or component changes which affect classification and update descriptions on invoices and tariff classifications accordingly;

3)         Prepare written classification procedures for internal and service provider use; for example, do you have your customs broker classify your goods or must they use your pre-determined classifications?

4)         Include researching the on-line CBP ruling database (CROSS),  and also court cases when appropriate, to identify prior rulings and court determinations dealing with your product and any similar ones;

5)         Consider requesting a classification ruling from CBP any time how to classify your product is not clear;

6)         Provide written instructions or a classification database to your customs broker and update it in a timely manner when changes are made to existing products and/or new items are added to your product line;

7)         Regularly review transactions to identify errors and if any are discovered, take immediate corrective action; decide if the error must be disclosed to the government and, in  doing so, seek legal advice before making a final decision.

If you have a topic on which you are interested in receiving tips, please let us know.

It’s All About Compliance – Part 1 – Value

Posted in Corporate Counsel, Cross-border trade, Customs Law, Legal Developments, Trade Agreeements, valuation

This Alert is one in an occasional series of articles providing tips about various topics which arise routinely with import and export transactions.  These tips are published with the intention to aid international traders in their on-going efforts to get their declarations right the first time, and are based on situations we commonly see occurring. Whether it is reasonable care on the import side or not self-blinding on the export side, compliance is a key for many different reasons, including protecting your bottom line.

Given the ever increasing attention being paid by the U.S. government to compliance by companies of all sizes, and especially in light of the recent informed compliance letter sent out by CBP’s Regulatory Audit in Houston, TX, now is the time to review how to value goods correctly.

The same basic value code is used throughout the world, at least among all the World Customs Organization member countries, although most assess duty on the C.I.F. value of the imported goods, whereas the U.S. assesses duty on the F.O.B. cost of goods. While admittedly each country has its own interpretation and they vary a tad, the basics are:

1) transaction value;

2) transaction value of identical or similar merchandise;

3) deductive value;

4) computed value; and

5) other values.

These are applied in order. For ease of calculation and documentation alone, everybody prefers transaction value.  Transaction value simply means the price paid or payable for the merchandise when sold for export to the U.S., plus packing costs, the selling commission, the value of any assist, any royalty or license fee, and the proceeds of any subsequent resale, disposal or use of the merchandise that accrues, directly or indirectly, to the seller, if not already included.

The bottom line is all of the value elements must apply to reach an F.O.B. cost of goods. If the F.O.B. price cannot be established, you go through each other option in order until one is satisfied.

What is the price paid or payable for the goods?

Typically, it is exactly what the definition implies – the F.O.B. cost of the shipment. The amount must be revised if the importer is given a credit on the current shipment to offset a shortage or quality problem on an earlier shipment, whereas the reasonable cost for constructing, erecting, assembling, maintaining, or providing technical assistance after importation, transport of goods post-importation and the duties, user fees and other federal taxes paid by the importer may be deducted, if previously added to the invoice price. Just don’t jump the gun and start deducting any of these costs unless you have actual invoices.  Similarly, where there are restrictions on the use of the goods; the value cannot be determined, proceeds accrue to the seller,  an adjustment cannot be made or the relationship between the parties influences the price, there are challenges to establishing a proper transaction value.

Assists are a topic unto themselves, but basically cover anything provided to the seller to make the goods which was provided free of charge or at a reduced cost. The one broad exclusion is for engineering, development, artwork, design work, and plans and sketches that are undertaken in the United States. Additional challenges arise when you must apportion the cost as the design work is created in the U.S. and at least one other country or all the units produced are not exported to the U.S.  Also worth keeping in mind is the impact if that design work is subject to an export license under the deemed export rules.

Royalties and license fees can be another serious challenge. Any company that owns a trademark, copyright or other form of intellectual property wants to protect it, but trying to determine whether the amount paid is or is not dutiable can be a major headache and often turns on exactly what is provided in the royalty agreement and the actual relationship between the parties – arms’ length or related.

Transaction value of identical or similar merchandise can be a challenge to an importer because you typically do not have access to the acquisition cost of your competitors, assuming your products are identical or similar, and how is that similarity to be defined? Computed value is typically used for related party transactions and deductive value generally applies to consigned goods such as produce. Since this article is intended as a refresher, we will avoid the complexity of these categories of value!

Value Tips For Compliance:

1)         Verify the INCOterm of sale of the deal match your invoices and periodically verify how your value is structured;

2)         Conduct knowledgeable reviews of your import and export transactions.

3)         Provide regular reminders to employees to double-check value issues apparent on documents, such as a term of sale which conflicts with how freight is charged (e.g., an F.O.B. invoice with prepaid freight or C.I.F. invoice with collect freight);

4)         Provide training to refresh knowledge and address any issues spotted during previous document reviews;

5)         Always vet business partners carefully. Establish the right to make entry or routed transaction is properly documented.

6)         Periodically verify that value determinations are correct and current, and reflect actual terms and conditions, and, if any errors are discovered, take immediate corrective action; decide if the error must be disclosed to the government and, in so doing, seek legal advice before making a final decision.

8)         Purely on the export side –

  1. a) the value reported is the selling price by the U.S. Principal Party in Interest to the foreign buyer or cost if not sold;
  2. b) plus the cost of inland freight, insurance, and other charges incurred in moving the goods from their U.S. point of origin to the U.S. port of exportation;
  3. c) but the import price is whatever else the buyer’s country requires to be added to reach transaction value.

If you have a topic on which you are interested in receiving tips, please let us know.

What Are The Steps Canada Follows To Ratify And Implement A Treaty?

Posted in Canada's Federal Government, Constitutional Law, Cross-border deals, Cross-border trade, Legal Developments, Trade Agreeements

CETAOn October 30, 2016, Canada participated in a signing ceremony for the Canada-EU Comprehensive and Trade Agreement (“CETA”).  What steps must Canada take to implement a free trade agreement (or any treaty) in Canadian law?

Step 1: Signing Order (Instrument of Full Powers): This step should be taken befor the signing ceremony. A signing order (that is, an Instrument of Full Powers) will designate one or more persons who have the authority to sign the treaty on behalf of Canada.

Step 2: Tabling the Treaty in the Parliament: The signed treaty is tabled in the House of Commons for discussion (not for a vote).  Before 2008, treaties were not brought to all members of Parliament.  In January 2008, Prime Minister Harper changed the procedures of ratifying treaties and added this step in order to improve transparency and the democratic process.  Global Affairs Canada has the 2008 Policy on its website. However, there is no vote on the treaty. There may be a full discussion about the treaty, but no opportunity to vote, undo the signature or change the text of the negotiated treaty.

The Clerk of the House of Commons distributes to all MPs (Members of Parliament) the full text of the treaty along with an Explanatory Memorandum about the treaty (often prepared by the negotiating team with input from the Minister responsible for the treaty).  The Explanatory Memorandum covers the following points:

  • Subject Matter: a description of the treaty;
  • Main Obligations: a description of the main obligations that will be imposed upon Canada by the treaty, should it be brought into force;
  • National Interest Summary: a description of the reasons why Canada should become a party;
  • Ministerial Responsibility: a listing of Ministers whose spheres of responsibility are implicated by the contents of the treaty;
  • Policy Considerations: an analyse as how the obligations contained in the treaty, as well as how the treaty’s implementation by Government departments are or will be consistent with the Government’s policies;
  • Federal-Provincial-Territorial implications: a determination of whether the obligations in the treaty relate in whole or in part to matters under provincial constitutional jurisdiction;
  • Time Considerations: details of any upcoming dates or events that make the ratification a matter of priority;
  • Implementation: a brief description of how the treaty will be implemented in Canadian law, including a description of the legislative or other authority under which it will fall (which will have already been determined by the Department of Justice);
  • Associated Instruments: information on any international instruments of any kind that are related to this treaty;
  • Reservations and Declarations: a description of any reservations or declarations;
  • Withdrawal or denunciation: a description of how the treaty could be terminated; and
  • Consultations: a description of the consultations undertaken with the House of Commons, self-governing Aboriginal Governments, other government departments and non-governmental organisations prior to the conclusion of the treaty, as appropriate.

The House of Commons then has 21 sitting days to consider the treaty before the Executive may take necessary steps to ratify the treaty (Step 4). The MPs often debate the treaty.

Step 3: Motion in House of Commons: When there is a majority government or sufficient support in the House of Commons, a motion will be tabled to recommend action, including ratification of the treaty.  The vote is not required.  The vote does not have legal effect.  If the vote fails, the government cannot be toppled.

Step 4: Order-in-Council (Instrument of Ratification): After the treaty has been in the House of Commons for 21 sitting days, the ratification of the treaty may occur.  The ratification process is controlled by Cabinet.  There is no requirement to pass legislation in the Parliament to ratify a signed treaty. The Governor-in-Council (Cabinet) prepares an Order-in-Council authorizing the Minister of Foreign Affairs to sign an Instrument of Ratification or Accession.

Step 5: Federal Implementing Legislation: Treaties must be implemented in Canadian law in order to have legal effect.  An implementing bill is tabled in the House of Commons.  The implementing bill contains the changes required to Canadian law at the national level to implement the provisions of the treaty.  The MPs debate the implementing bill and may suggest changes to the implementing laws.  The MPs cannot require changes to the substance of the treaty.  However, the MPs may ask questions of the Government and the questions must be answered.

After the implementing bill passes in the House of Commons, the implementing bill is sent to the Canadian Senate.  The implementing bill is debated in the Senate.  It is possible that the Senate will not pass the implementing bill.  This happened in 1988 when the Senate would not pass the Canada-United States Free Trade Agreement Implementation Act.  This triggered a federal election.

Step 6: Provincial/Territorial Implementing Legislation: It may be possible that implementing legislation is also required at the provincial level.

Step 7: Regulatory Changes: Often new regulations and/or changes to existing regulations are required to implement treaty provisions. The passing/changing of regulations is controlled by Cabinet.

Step 8: Taking Effect: The date that a treaty comes into force, or the terms and conditions necessary for the treaty to come into force, are established in the treaty itself.  CETA will be different than typical treaties in terms of when it will take effect.  We have not yet seen the official English version of the Belgian Declaration.  We will comment on how the CETA will take effect after reviewing the text.

Step 9: Other Changes to Policies, Guides, Procedures of Government: Government departments will make necessary changes to government policies, guides, procedures, etc.  These changes take place over time and are not completed at the time the treaty takes effect.

For more information about Canada’s free trade agreements and international law, please call Cyndee Todgham Cherniak at 416-307-4168 or email cyndee@lexsage.com.