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Jan 2008
By Frank Debets, Partner, Nancy Zhao, Trade Compliance Advisory Services Director and Leader, and Graham Turner
You think Singapore's trade controls have nothing to do with you? Think again! On 1 January 2008, Singapore Customs expanded their 'Strategic Goods Control List' from 600 to 1,600 items. The enhanced trade controls will affect both tangible goods and intangible technology. Given Singapore's status as a leading transhipment hub and the preferred home of over 4,000 regional headquarters of foreign MNCs, they will have a significant impact on trade compliance for the business community in Singapore.
The Control List identifies goods and technologies that are deemed strategically 'sensitive'. However, generic items such as aluminium alloys, ball bearings, valves and testing machinery will now also be included in the list, as they can often be used for both civilian and military applications.
Equally if not more important is the fact that the intangible transfer of certain technology by email, fax or the Internet could also be subject to export control. This means that companies that traditionally have associated exports only with the movement of physical products out of Singapore now need to consider whether or not they are exporters themselves. If so, will the expanded export controls apply to them?
For any company looking to acquire or divest a business, it cannot automatically be assumed that existing trade licenses will remain valid after the sale or acquisition. Any deal should therefore be cognizant of, if not conditional on, the impact of any disruption to such licenses.
And if all of that is not enough, potential breaches of the rules are not confined to the usual trade related functions such as logistics or import / export officers, but can easily and unknowingly be instigated by anyone, including human resource clerks, sales and marketing personnel, researchers or even senior management.
Providing the legal basis to Singapore's Strategic goods control system is the Strategic Goods (Control) Act. This was implemented in 2003 and Singapore Customs is the national authority responsible for its administration. This is a challenging role since it must balance the crucial issues of 'national security' and 'trade facilitation'. Efforts to date have seen prompt revisions to the national legislation to take account of international developments impacting Singapore traders. Trade facilitation measures such as the recently upgraded 'Strategic Trade Scheme' have been implemented. The purpose of such measures - good trade compliance results in greater facilitation benefits.
Singapore is not alone in proactively addressing the subject of export controls. Many countries within the Asia-Pacific region, such as China (including Hong Kong), Japan and Korea have established export control systems. As a consequence, there has been a significant rise in the number of multinational companies struggling to introduce new or modified internal trade control processes and procedures which can meet the different compliance requirements faced in different countries.
An ever increasing number of cross border transactions involve the movement of tangible and intangible goods or technologies with a 'strategic' element. Although there are some international agreements and conventions defining what 'strategic' means, the interpretation and implementation of trade controls enforcing trade restrictions remains variable. On occasion, exports from Singapore may even be subject to both controls imposed by Singapore and those imposed by other governments. This is particularly so with US-origin technology where Singapore subsidiaries of US multinationals find themselves subject to both sets of rules.
The combination of enhanced regulation and increased trade complexity brings with it a need to devote more resources and attention to the function of trade compliance. Without proper trade compliance management, companies run the risk of disruption to their operations through potential prohibition of some, if not all, their business activities. In addition, damage done to their reputation can be just as debilitating albeit more difficult to measure. And let us not forget financial penalties: to date, published penalties in the field of export control violations have been as high as US$100 million.
Trade compliance for export controls can be broken down into a number of dedicated elements within any organisation. Each of these elements requires close attention (see Box 1).
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Box 1: Elements requiring close trade compliance attention
- Employment and staffing - screening and monitoring
- IT and physical security
- Deemed export and technology transfer
- Training
- Marketing and sales processes
- Classification of products for export control purposes
- Distribution channel, transhipment and re-export processes
- Order fulfillment and customer service
- E-commerce
- Free sample programs
- Freight forwarder / 3PL management
- License condition management
- Records retention
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The trade compliance function is typically in the hands of a small group of subject matter experts. These experts often are not at a senior grade within their company. Consequently, they tend to find themselves in a reactive, problem-solving role, rather than a proactive, strategic and tactical planning role. However, best practice in the trade compliance area demands that responsibility for it is shared throughout a company. In order for this to happen, a strong compliance culture and an effective trade compliance operational management system are required. This in turn necessitates the person in charge of trade compliance, let's say the Chief Compliance Officer, to have a seat at the strategic and tactical planning table of the company.
Having a clear and high level trade compliance leader will help ensure that every employee within a company takes trade compliance seriously for each and every business transaction. It will allow the development of effective policies and procedures. It will also facilitate an effective trade compliance training and communications programme, another tool to establish the required culture. Most importantly for trade compliance officers, all such measures serve as enablers for sustainable business development. For example, they can support sales teams tapping new markets without running into export control roadblocks. Using trade compliance as a business development tool is in sharp contrast to the usual view of trade compliance as a roadblock to achieving business goals.
Developing an Export Management System (EMS) or an Internal Compliance Plan (ICP) for Singapore's Strategic Trade Scheme is also essential. Although a number of off-the-shelf management systems are available that include a trade compliance management component, by necessity these may be too generic to fit the specific business needs of an organisation or the legal requirements of Singapore. Senior management's commitment is therefore required to devote sufficient resources to tailor in-house capabilities or obtain the input from suitably qualified specialists.
Not only companies which are totally new to export controls are affected by this. Companies that already have an existing EMS based on, say, the export control requirements of the US may have the misconception that this EMS will automatically satisfy Singapore requirements. In actual fact, Singapore Customs will expect the EMS to be adapted and 'localised' according to their requirements, a process that can be far from straightforward.
In light of the expanded scope of the export controls, companies conducting business in Singapore will do well to re-examine the trade control procedures associated with their operations. Such companies would include those that may not necessarily import, export or tranship physical goods, but simply use Singapore as a regional headquarters, or base their research and development activities here.
Trade compliance requires significant effort, whether it be for classification of regulated items, submission of license applications, management of license conditions, records retention, monitoring regulatory changes, assessment of on-going compliance, or disclosure of violations. All these trade compliance aspects are as fundamental to business continuity as any other management function. Therefore, a good compliance program needs to be proactive as part of the business planning and decision making, effective in supporting the daily operation and productive in enhancing overall business competitive strength.
This article was contributed and first published in The Business Times on 4 January 2008.
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