Internal Compliance Program Elements and Key Compliance Issues for Thai Firms

1
Internal Compliance Program ElementsandKey
Compliance Issues for Thai Firms
Industry-Government Seminar on Export Controls
for Dual-Use Goods InterContinental Hotel,
Bangkok, Thailand 21 October 2009
2
Presentation Overview

• Emerging Agreement International Forums and
  Countries that Have Addressed the ICP Question
• Why Is the Development of Nonproliferation
  Internal Compliance Programs (ICPs) Important in
  Thailand?
  
• What Are the Components of a Comprehensive and
  Effective ICP?
• Closing Remarks

3
Emerging International Standard Industry
Compliance to Combat WMD Proliferation

• Examples of International Forums that Have
  Addressed the ICP Question
• International Export Control Conferences
  (2000-2009)
• Asian Export Control Seminars, Tokyo (since 1993)
• World Customs Organization, SAFE Framework and
  Authorized Economic Operator (AEO) concept (since
  2005)
• Global Transshipment and Enforcement Seminar,
  Bangkok (2006)
• ASEAN Regional Forum (since 2004)
• Wassenaar Arrangement Best Practice Licensing
  Guidelines (2006)
• United Nations Security Council Resolution
  1540/1810 (since 2004)

4
Regional Example ARF and ICPs

• CO-CHAIRS SUMMARY OF ASEAN REGIONAL FORUM ARF)
• EXPORT LICENSING EXPERTS MEETING
• Singapore, 17-18 November 2005

• AGENDA ITEM 6 HOW TO FACILITATE LEGITIMATE TRADE
  IN EXPORT CONTROLS
•  
• Under this agenda item, Singapore presented a
  system (Approved Company Scheme) which recognizes
  companies and organizations with an effective
  internal compliance program. Participants
  discussed the benefits and challenges of an
  Internal Compliance Program and the means to
  effectively develop such a program. In this
  context, participants also discussed the use of
  internal company watch lists in their licence
  processing and other issues related to penalties
  on non-compliance. Participants also discussed
  the benefits of bulk permits in the facilitation
  of legitimate trade and underlined the importance
  of carefully balancing trade and security
  interests.

5
Importance of ICPs in Thailand

• Rapidly Changing International and National Trade
  and Security Landscape i.e., Globalization
• Increasing of emphasis on Thai tech input into
  global supply chain rather than serving as
  production center
• (High-) Technology-embedded nature of Thai
  industry and RD
• Competitiveness and technology safeguards
  strategic trade controls as emerging commercial
  practice

6
Thailand Major Trade Indices
Logistics Performance Index (LPI) 2009
Source World Bank
Trade Enabling Index (LPI) 2009
Source World Economic Forum
7
Thailand Major Trade Indices (cont.)
Knowledge Economy Index (KEI) 2008
 High-technology exports ( of manufactured
exports) 2001-2007
Source World Bank
8
High Technology Production Engine of Thai
Economic Growth

• Reallocation of resources from lower
  productivity to higher productivity sectors has
  largely contributed to total factor productivity
  growth in Thailand in the past decade.
• The top three exports in the past five years
  have been more high-tech products computers and
  parts, automobiles and parts, and integrated
  circuits (IC). They account for over 50 of the
  total value of the top 10 exports.
• In high-income East Asian economies like Taiwan,
  Singapore, Hong Kong, and Korea, knowledgeas
  opposed to labor and capital accumulationincreasi
  ngly becomes the main engine of growth.

Source Thailand Investment Climate Assessment
Update 2008, World Bank http//web.worldbank.org/
WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACIFICEXT/0,,co
ntentMDK22272367menuPK2246553pagePK2865106pi
PK2865128theSitePK226301,00.html
9
What is an export control internal compliance
program?

• Other names
• - Internal control plans (ICPs)
• - Export management systems
• - Export compliance programs
• - Global trade compliance plans
• - Code of Conduct
• An export control internal compliance program a
  set of procedures that company officials must
  satisfy before an item leaves the company to
  ensure that the company is completing legal
  transactions and obeying the export control
  regulations enacted by the government
• Such procedures include a thorough examination of
  the buyer and end-user prior to the shipment of a
  purchased item off-site.

10
Goals of an Internal Compliance System

• Internal compliance systems should address
  several specific goals
• To develop contacts and good-standing
  relationships between the company and export
  agencies
• To remain informed of updates to the government's
  export control laws and regulations
• To centralize export-related questions and
  issues
• To standardize procedures
• To provide early warning and screening of all
  inquires and orders
• To generate coherent and complete documentation
  of all sensitive export transactions and
• To train all employees engaged, either directly
  or indirectly, with exports.

11
Why Should Strategic Traders Construct an ICP?

• To Ensure Compliance with Applicable Laws and
  Regulations
• To Maintain a Favorable Public Image
• To Detect Accidental Export Control Violations
  before They Occur
• To Prevent Contributions to Proliferation of
  Sensitive Goods, Technologies, and Information
• To Detect Trends in Past Transactions and More
  Effectively Perform Due Diligence
• To Gain a Competitive Business Advantage
• Through national Trade Facilitation Programs
• By demonstrating shared secure supply chain
  values to overseas business partners and
  customers
• Lower penalties for violations and
  self-disclosures

12
What Do Companies Say?
If manufacturers want to continue selling in the
global market, they need to be able to comply
with trade regulations. They have to understand
them on a global basis, toonot just whats
required in the United States. These products are
traveling around the world and they have to meet
the standards of wherever they are going. And
its only becoming more important as suppliers
become more global.
In fact, as the scale and the scope of global
trade has increased over the past few years,
compliance violations have actually increased as
companies have struggled to adapt. Its just a
much bigger, harder job than it used to be. Too
many things are constantly changing, which means
there are more opportunities to make mistakes.
Without automation to help deliver those answers,
it can be very difficult for companies to keep
up. There are tighter security initiatives and
more stringent reporting requirements, so the
consequences for being wrong are much higher.
Louis Lisowski, Manager of Global Customs
Compliance and Policy, Hewlett-Packard
Co. Source www.industryweek.com Feb 2008
Jim Preuninger, CEO of Management Dynamics Inc.,
a provider of global trade management
solutions Source www.industryweek.com Feb 2008
13
Key Elements of Effective Internal Compliance
Programs

• Management Policy Commitment Statement
• Internal Export Control Organization and
  Personnel
• Development and Dissemination of Standard
  Operating Procedures
• Recordkeeping
• Training
• Order Screening Processes for Controlled Goods
  and Technologies, Customers, Destinations,
  End-Users, and End-Uses
• Auditing

14
Key Elements of Effective Internal Compliance
Programs (Con.)

• Management Policy Statement
• Foundation of an ICP
• Should be Issued by the Highest Levels of the
  Company and Subscribed to by All Employees
• Should Demonstrate the Companys Commitment to
  Adhering to National Export Controls Laws and
  Regulations and International Nonproliferation
  Norms
• Internal Export Control Organization and
  Personnel
• Institutional Skeleton of an ICP
• The Structure of the ICP Should be Clear and
  Communicated Throughout the Company
• Responsible Personnel Should be Clearly
  Identified and Their Responsibilities and Contact
  Information Clearly Defined

15
Key Elements of Effective Internal Compliance
Programs (Con.)

• Standard Operating Procedures
• Set of Rules Created to Address Companys Export
  Control Obligations in Any Given Circumstance
• Should be Disseminated and Clearly Communicated
  to All Relevant Employees
• Should be Regularly Updated to Reflect Changes in
  the National Export Control Regulations
• Recordkeeping
• Most Countries Require Strategic Traders to
  Maintain Records of Transactions for a Given
  Period
• Allows Companies to More Easily Cooperate with
  Government Inspections and Law Enforcement
  Investigations
• Enables Traders to Detect Accidental Violations
  and Demonstrate they are Performing Due Diligence

16
Key Elements of Effective Internal Compliance
Programs (Con.)

• Training
• Ensures Employees are Aware of Export Control
  Obligations
• Minimizes Risk of Accidental Violations
• Training Techniques and Curriculum Should be
  Tailored
• Order Screening Processes
• The Key to a Strategic Traders ICP
• Should Include Screening Mechanisms to Check All
  Critical Processes (e.g, Customer, End-Use,
  End-User, Product, Destination Country)
• Should Include a Mechanism to Suspend Sensitive
  Transactions and Stop Prohibited Transactions
• System may be Manual, Electronic or a Combination
  of Both

17
Example Order Screening Process
Source Oerlikon's Internal Compliance System
18
Screening the Customer

• Is the identity of the customer or end-user
  requesting the item transparent?
• Is there any intermediary agent involved?
• Is the customer or its address similar or the
  same to that found on the governmental denied
  persons list or on a governmental or company
  database of known front companies?
• Is the customer or purchasing agent hesitant to
  provide information regarding the end-use of the
  item in question, or the future research and
  development or the industrial production of the
  item in question?
• Does the product's capabilities coincide with the
  buyer's line of business?
• Is the item in question incompatible with the
  technical level of the country?
• Is the customer willing to pay in cash for an
  expensive item that normally requires financing?
  Or are there unusual favorable payment terms,
  prices or other conditions offered or accepted by
  the customer?
• Does the customer have little or no business
  background?
• Is the customer unfamiliar with the item and its
  capabilities but still wishes to purchase it?
• Is the customer related to military business or
  under the control of the defense ministry or
  armed forces?

19
Screening the End-user

• Is the buyer evasive and unclear about whether
  the product is intended for domestic use, for
  export or for re-export when questioned?
• Have the nonproliferation credentials of the
  recipient country been thoroughly screened?
• Has particular attention been paid to whether or
  not the product or service is intended for
  military use or subject to licensing?

20
Screening the Final Destination

• Is the destination under UN Embargo?
• Does the destination pose a risk of diversion?
• Is the requested order suitable to improve
  existing equipment or plants for military use?
• Are there excessive safety or security measures
  in light of the nature of the equipment?
• Is equipment to be installed in an area under
  strict security control or adjacent to
  military-related facilities?

21
Japan Foreign User List
The End User List is a list of foreign entities
that are considered to have relations with the
development, production, manufacturing or storage
of WMD. Exporters are required to file export
license applications when they wish to export
goods subject to WMD Catch-all control to
entities on the End User List, unless it is
apparent that said exports will not be used for
WMD purpose. It is important to note that this
list is not an embargo list.
????????????????
Sample Entry
http//www.meti.go.jp/policy/anpo/kanri/user-list/
list.htm
22
Screening of Shipping Procedures and Sales
Contracts

• Careful screening of shipping procedures
• Are delivery dates vague or are deliveries
  planned for out of the way destinations or is a
  freight-forwarding firm listed as the product's
  final destination?
• Is the shipping route abnormal for the product
  and destination?
• Is the packaging inconsistent with the shipping
  mode or destination?
• Are there unusual requests concerning labeling or
  shipment of goods?
• Careful screening of terms of sale
• Are there any requests for normally unnecessary
  devices or no request for usually necessary
  devices and lack of a convincing explanation for
  the request or non-request?
• Was there no request for performance guarantee,
  warranty or normal service?
• Are routine installation, training or maintenance
  services declined by the customer?
• Does the customer request completion of a partly
  finished product?

23
Examples of Red Flag Indicators in national
policies and procedures

• Export Control Organization guidance on the WMD
  end use control, April 2009 http//www.berr.gov.u
  k/files/file50850.pdf
• Annex A Suspicious Enquiries
• Examples of possible suspicious enquiries
  include
• The customer is reluctant to offer information
  about the end-use of the items
• The customer asks that the goods be transferred
  to a forwarding address in the UK
• The customer is reluctant to provide clear
  answers to commercial or technical questions
  which are normal in routine negotiations
• An unconvincing explanation is given as to why
  the items are required, in view of the customers
  normal business or the technical sophistication
  of the items
• Routine installation, training or maintenance
  services are declined
• Unusually favorable payment terms such as higher
  price and/or lump-sum cash payment are offered
• Unusual shipping, packaging or labeling
  arrangements are requested
• The customer is new to you and your knowledge
  about him/her is incomplete
• The installation site is an area under strict
  security control or is an area to which access is
  severely restricted, or is unusual in view of the
  type of equipment being installed
• There are unusual requirements for excessive
  confidentiality about final destinations, or
  customers, or specifications of items
• There are requests for excessive spare parts or
  lack of interest in any spare parts
• The dealer you are selling to is new to you, or
  has been evasive about customers
• The customer or end user is a military or
  government research body
• The order itself is unusual in any way, e.g. the
  quantity or performance capabilities of the goods
  ordered significantly exceed, without
  satisfactory explanation, the amount or
  performance normally required for the stated end
  use.

24
The Wassenaar Arrangements list of end-use
assurances

• Items on this list include
• Making sure to provide a detailed description of
  goods, which discloses their true identity
• Describe the specific end-use of the goods
• Provide assurances that the goods will not be
  used other than for the stated purposes and/or
  provide an undertaking that the goods will be
  used for civil end-uses
• Provide certification that the goods will be
  installed at the premises of the end-user or will
  only be used by the end-user
• The final consignee/end-user's undertaking not to
  transship or re-export the goods covered by the
  End-use Certificate/Statement
• The final consignee/end-user's undertaking not to
  divert the goods covered by the End-use
  Certificate/Statement to another destination or
  location in the importing country
• Provide a commitment by the final consignee to
  provide the exporter or the exporting government
  with proof of importation, upon request (e.g.,
  provide a Delivery Verification Certificate) and
• Obtaining signature and end-use certification by
  the final consignee's/end-user's government or
  other authority as to the authenticity of the
  primary details provided in the document.

25
Key Elements of Effective Internal Compliance
Programs (Con.)

• Auditing
• Enables a Company to Identify System Strengths
  and Weaknesses and Continually Improve and
  Upgrade its Compliance Efforts
• Company Should Conduct Periodic and Random Audits
  of its ICP for Effectiveness
• Audits Should be Conducted by Internal Personnel
  and an Independent Outside Auditor
• Audit Findings Should be Made Available and Any
  Recommended Policy Changes Should be Promptly
  Implemented.

26
Voluntary or mandatory? Dual-use

• U.S. dual-use practice requires a
  Commerce-approved internal compliance program
  only under the special comprehensive license
  program
• No internal compliance program required for
  individual validated licenses
• No pre-registration of dual-use brokers
• ICP may be required as condition of approval on
  an individual license (parts control plan,
  technical control plan)

27
Voluntary or mandatory? Munitions

• Various (contracts) agreements required with the
  written approval of State/Directorate of Defense
  Trade Controls with required covenants
• - Manufacturing license agreements,
• - Technical assistance agreements,
• - Distribution agreements,
• - Off-shore procurement agreements
• Guidelines provided at both the BIS and DDTC
  websites
• Mandatory ICPs for defense exporters are common
  worldwide

28
Resources for ICP development

• Many nations encourage their strategic exporters
  to establish internal compliance systems
• Guidelines for ICP establishment are published on
  websites of export control authorities
• Some states accredit or certify their strategic
  exporters ICPs as a condition for bulk license
  application
• Fewer states have established criteria for export
  compliance systems for freight forwarders,
  brokers, or independent warehouse operators

29
Resources for ICP development -- Denmark
Source http//www.deaca.dk/internalexportcontrolc
omplianceprogram
30
Resources for ICP development -- Japan

• METI notice regarding Establishment or revision
  of internal compliance programs to ensure
  compliance with export control laws and
  regulations corresponding to export controls
  aimed at non-proliferation (24 June 1994/No.604)
  recommends voluntary establishment of ICPs and
  registration with METI
• METI notice regarding Detouring exports of items
  related to weapons of mass destruction (26 May
  2003) also asks export-related companies to
  strengthen internal export control compliance
  taking actions such as
• (a) strengthening internal export control systems
  by carefully checking end-users and end-uses,
  bearing detouring of exports in mind, and
• (b) implementing internal reviews equivalent to
  those conducted under the self-governing
  export-control system when it is clear that even
  though items are sold in Japan, they will be
  subsequently exported.
• In this context, METI hopes to promote effective
  export controls in each company by publicizing
  the names of companies that have established
  ICPs.

Source http//www.meti.go.jp/policy/anpo/index.ht
ml
31
Resources for ICP development United Kingdom

• UK export control organization, Department of
  Business, Industry and Skills (BIS) has adopted a
  novel approach to providing more timely resources
  for its exporting community
• YouTube videos!

Source http//www.berr.gov.uk/whatwedo/europeandt
rade/strategic-export-control/responsible-exports/
index.html
32
ICP requirement in the EU

• Germany, Poland, Latvia and Hungary regulations
  require that an ICP or the designation of a
  person responsible for export controls in
  companies exporting, importing, or transshipping
  strategic goods.
• France, Germany and Sweden have adopted an ICP
  requirement and the exporters system is audited
  before the issue of global authorization to
  ensure that it is fit for use.
• Austria, Denmark and Finland have conditions that
  allow them to consider whether an ICP should be
  implemented on a case by case basis.
• UK, Greece and Czech Republic expect to see
  something akin to an ICP on compliance visits.
• A number of Member States are endorsing adoption
  of ICP concepts by their industry on a voluntary
  basis.

33
Competitive Advantages for Compliant Exporters

• US ? PSI and CTPAT
• European Union ? Authorized Economic Operator
  program
• Poland ? Requires ISO900 Certification for ICPs
• Sweden ? StairSec program
• Canada ? Partners in Protection program
• Russia ? Mandatory ICP implementation for defence
  exporters. Requires accreditation of ICPs by
  federal licensing authorities
• Australia ? Frontline and Accredited Client
  Program
• Singapore ? Strategic Trade Scheme (STS)
• Japan ? Ministry of Economics, Trade Industry
  (METI) helped establish CISTEC (NGO)
• China ? CACDA (NGO) provides Outreach Seminars to
  industry
• Malaysia ? MITI conducts occasional meetings with
  the Federation of Malaysian Manufacturers (FMM)
  and Chemical Industries Council of Malaysia
  (CICM) in order to inform and discuss the
  obligations of their members under the relevant
  laws

• These programs are designed to ensure
• Faster customs clearance times
• Higher inspection rates of uncertified cargo
• Mitigating factor in administrative offenses
• Increased incentives for industry to join

Source http//www.defence.gov.au/strategy/DECO/co
mpliance.htm
34
Compliance Singapore Example Strategic Trade
Scheme (STS)

• From the STS Handbook
• 2.2 How will the STS benefit my company?
• 2.2.1 As an incentive, a company with a good
  Internal (Export Control) Compliance Program, can
  enjoy more facilitative declaration procedures
  involving transactions of strategic goods and
  strategic goods technology for non-WMD-related
  end-use and qualify to apply for Tier 2 Permit or
  Tier 3 Permit with respect to these transactions.
  (p.9)

http//www.customs.gov.sg/stgc/leftNav/per/
35
Summary

• An ICP is essential for ensuring compliance with
  applicable laws and regulations and protecting
  business against the harmful effects of
  proliferation and ensuring continued economic
  growth