Originally published by the Journal of Commerce in April 2015
One thing is for sure if you have been involved with international trade in recent times. Things are getting ever more complicated and the risk management and compliance challenges are consistently getting harder to anticipate and manage. At the TPM in early March, we discussed the cybersecurity challenges facing the trading community. For example, there is the steamship line which in 2011 had all the data on the ship and in its offices wiped. What do you do with a shipload of containers and no idea what is in any of them! Imagine what the bad guys could do with that opportunity?
What about the terminal that got hacked by drug smugglers? The containers arrived in Antwerp, Belgium and the smugglers wanted to get their drugs before they were discovered. Their solution was to delete information about their containers from the terminal’s system, retrieve those containers and take off with them. Obviously, they didn’t do all that great a job, since their activities were discovered.
If those stories don’t hit close enough to home for you – how about the customs broker who had its system hacked with the result that information about the intended destination for a specific container was changed. The container was delivered to the new/wrong address. The situation came to light shortly thereafter when the actual buyer demanded his goods. The customs broker was hit with a claim for misdelivery, and found there was no insurance coverage! These events were deemed not covered by the E&O policy!
A few days ago, news broker the unclassified computer system in the White House was hacked by Russians. A few days earlier, on April 1, 2015, President Obama issued Executive Order 13694. It may the one of the few, if not, the only Executive Order issued which does not name names! It permits the Secretary of the Treasury and Attorney General to block the property of any person found to have engaged in activities which are “reasonably likely to result in, or have materially contributed to, a significant threat to the national security, foreign policy, or [the] economic health or financial stability” of the U.S. with the purpose of harming, compromising or causing significant disruption to computers or computer networks, significantly compromising the services of critical infrastructure, or the significant misappropriation of “funds or economic resources, trade secrets, personal identifiers, or financial information for commercial or competitive advantage or private financial gain.” These restrictions apply to both direct actors and those who aid and abet their malfeasance.
The international trade community has become used to incorporating the changes which arise from the current export reform efforts, from the actions of the Food and Drug Administration regarding food safety, and even from what seems to be the imminent fruition by Customs and Border Protection of the Automated Commercial Environment. There are the complications of dealing with conflict minerals and the labyrinth of Securities and Exchange Commission reporting requirements, plus what to do about cloud computing and its potential export restrictions impact. The list goes on as noted, but then we periodically have another major headache rear its ugly head, seemingly out of the blue.
One example of such an unexpected event is trade-based money laundering. If you are an American company selling to or buying from other parts of the world, you may get caught in this web, most often when dealing through third parties. What typically happens is the third party is thought by parts of the U.S. government to engage in money laundering or other illegal activity, your funds get tied up when the related bank account(s) get seized, and then you are stuck. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a list of red flags that in many ways contains relatively obvious examples when dealing with bad guys. The most common is the black market peso exchange where the products moving between countries are sold are seriously inflated prices. Some portion of the funds paid pays for the actual goods shipped, but the rest is laundered by a variety of means. Beside misrepresenting the price, the quantity or quality of the goods could also be altered. These seems rather obvious indicia, and so are not terribly helpful to honest business people.
What FinCEN did publish that is worth keeping in mind is if you are dealing with high dollar merchandise, such as electronics, auto parts, or precious minerals or gems, be cautious if there is a third party paying for the goods or services (e.g., if you have a distributor who takes your goods on consignment and then arranges for the ultimate buyer to pay you directly), letters of credit which get amended for reasons that make no sense; the inability of one of the parties to produce routine commercial documents; and significant discrepancies between the documents, especially when the data is related to the description, value, etc. of the goods.
FinCEN pointed out some other red flags, including negotiable instruments presented in round denominations for domestic transactions or deposited with foreign financial institutions. Negotiable instruments that are sequentially numbered or purchased at multiple locations and lack payee information or contain visible broker markings or symbols.
If you accept international wire transfers to pay for the goods you are selling, check where the transaction originates (some locations have been publicly identified as high risk (e.g., Mexico, Guatemala, Argentina, Brazil, Paraguay, Uruguay and Venezuela)). One should also be wary about payment destinations related to duty free zones, especially in the U.S., Hong Kong, China, South Korea, Taiwan, Spain, Panama and Curacao. Naturally, if there is no apparent business relationship between the originator and the beneficiary, that is suspicious, as is any customer who cannot provide basic deal information, including simple banking/payment information, plus if there are frequent transactions involving whole dollar amounts. There are a number of additional red flags FinCEN identified. While published original in 2010, FIN2010-A001 remains valid guidance if you have suspicions about the party with whom you are dealing. A copy can be found at: http://www.fincen.gov/statutes_regs/guidance/pdf/fin-2010-a001.pdf.
Immigration and Customs Enforcement has weighed in on this topic as well. That agency’s list of red flags includes: payments to a vendor by unrelated third parties; false reporting, such as commodity misclassification, commodity over- or under-valuation; repeated importation and exportation of the same high-value commodity, known as carousel transactions; commodities being traded that do not match the business involved; unusual shipping routes or transshipment points; packaging inconsistent with the commodity or shipping method; and the always popular double-invoicing.
On the export side, the most common headache about value comes in one of two ways. Either the buyer boldly insists the invoice which accompany the shipment be significantly less than the actual cost of the goods (often by as much as 50%), or the exporter simply does not understand the value requirements for an export. We’ve seen this lack of understanding lead to serious issues with the Secret Service in the recent round of seeking to criminalize the export of automobiles. It is generally understood the Secret Service gained interest in these transactions because the values stated on the export documents were wrong. Yes, there was the new vs. used issue, but at the outset, discussions with the agents routinely included questions about the value. The correct value at time of export is the price at which the goods are sold to the foreign buyer. It is not the MSRP on the window tag. It is also not the net price, meaning if you received a deposit, you do not state the balance due on your invoice, but the full cost of the good as sold.
If this partial list of major headaches is not enough to give you a serious migraine, perhaps you prefer we address corruption/bribery issues or maybe you prefer human smuggling complications?