Tracking Trade

The Logistics Manager at your company hands you a letter.  From the expression on the Manager’s face and the letterhead, you can tell that this is not going to be a short conversation.  The letter is from U. S. Customs and Border Protection (imports), or the Bureau of Industry and Security (exports).  In rather cryptic terms it states that your firm has been selected as a candidate for a possible compliance audit.

The Logistics Manager may have brushed this off saying the company has received the same letter in the past but nothing happen, no audit occurred.  In fact, this is the “X” year in a row that the company has received a letter.  Your predecessor may have rolled the dice and ignored the warning, but you want to make sure that if it happens on your watch, you are ready.  But where should you start?

Welcome to the world of Trade Compliance.  Since Congress passed the Modernization or MOD Act in 1994 the U.S. government has been converting a manual process of inspecting each container of merchandise to a computerized monitoring and auditing system.  The government now has the ability to audit every step in the shipment process to prove “admissibility”.

The possible end result of this audit might be fines, penalties, loss of trading privileges, and perhaps even jail time.  Here are two examples:

1. Your company exports (allows a foreign company to download your software, data, or technology from your website) without an export license.  The potential penalty starts at $250,000 per download!
2. Your company imports from an overseas manufacturer but without declaring all the foreign components that were purchased and incorporated into the finished product.  Customs will look back 5 years at all entries and demand back duties, interest on back duties, fines and penalties.  If they suspect fraud (intentionally reduced import value) jail time may also be included.  Remember that you are liable, not your broker or freight forwarder for everything Read the rest of this entry »

Most companies are accustomed to wondering if their international sales are going to materialize in troubled times, but they are not used to worrying about whether their bankers are going to survive.  Here are some simple ideas to help you deal with lender issues (and keep your cash flowing):

LENDER ASSISTANCE

1. Check the fine print on your loan agreement for clauses covering market disruption.   Market disruption can include lack of lender liquidity.  This can result in having to switch out of low rate libor or commerical paper into prime rate.  A change in bank ownership may mean that your lender now has the right to sell your loan or declare a “material adverse change” in your loan agreement.  Any changes (and the implied costs of covenant tightening) are passed directly to commercial borrowers whenever a change occurs.
2. Find out if your lender is eligible for U.S. government lending programs.  This is important for three reasons:  (i) less risk capital is required for your bank to hold a government guaranteed loan; (ii) the guarantee covers 50-80% of the loan value against default which should reduce the risk premium on your loan, and (iii) the Federal Reserve’s Discount Window can be used to fund your loan allowing the lender hold your loan to maturity.  Even if your company is not making money or has negative equity for a wide variety of reasons, these government agencies may still be willing to guarantee loans if you have been in business for a number of years.  Current bad times will not necessarily preclude their support.  SBA (Small Business Administration) is the most recognized agency, but did you know that they have an export finance program that will cover some, if no all, of your international receivables, pre-export working capital, bid and performance bond requirements and even military sales?  Best of all they can set up a facility that can last for more than one year – up to 5 years in some cases.  You may still only get short term “funding” from your lender, but setting up a longer-term facility can help funding with longer-term contracts and projects. If your lender is not SBA eligible, find one that is.  Most regional and community banks are, they are just not as familiar with the export financing part of the program – which can be be in addition to, not in place of, other SBA facilities.
3. If your need is greater than SBA can provide – over $2 million, there is another export finance program with the Export-Import Bank of the United States (Ex-Im Bank).  Program limits are larger, but facilities are usually no more than 1-3 years at a time.  They are easier to renew than SBA, but the big drawback is that they only cover product that is 51% US Content.  Technology, hardware and software designers and integrators as well as service industries are eligible so investigate this opportunity. It is not just for tangible goods!
4. OPIC (Overseas Private Investment Company) is a third US government agency that will help small business owners work with overseas partnerships in all sorts of longer term funding faciliies perhaps up to 10 years.  Think of this as a solution for difficult countries with no capital markets and the ability to handle even micro-loans of $250,000 to $10 million.

FACILITY MANAGEMENT

1. Make sure that any vendor’s contract, PO or order that is paid for via a letter of credit (LC) includes a cash discount for prompt payment.  LCs are a cash-in-advance system for most overseas vendors so take advantage of it. Remember an LC is a separate contract from a PO or vendor contract so make sure payment terms are clearly spelled out.  Also make sure the Incoterms 2000 match in all agreements.
2. If your bank funds your business on a monthly borrowing base certificate rather than individual invoices, look at how to pre-pay a part of the loan from any cash you do not need.  This is especially important if bank balances are not insured beyond $250,000.  Keeping high bank balances may not be the best solution for you in these trying economic times. Most lenders do not have pre-payment penalties on receivables funding facilities.  So when you get cash, repay your receivables even when it is in the middle of the month rather than a normal monthly or bi-monthly borrowing cycle.
3. Ask your vendors if you can pay them on terms that are longer than your normal net 10-30 days from shipment date (usually B/L date). Even an extra 5-10 days may put that payment into another monthly borrowing cycle.   It might be only a one-time benefit but it can help when going into a selling cycle like Christmas.
4. If you buy from a vendor every month like clockwork and want to eliminate commercial letters of credit, think about using stand-by LCs to guarantee payment.  It may provide the pre-export support your vendor needs at much less cost.  Structuring a stand-by LC payment mechanism will take education and financial set-up/management but the overall savings can be well worth the effort.

ALTERNATIVE LENDING OPTIONS

As a small business, you may have business operations overseas.  There may be a small-business financing program in the local market that your supplier can tap.  Remember your payable is their receivable!  Here are three possiblities:

1. Export financing programs funded or backed by local government agencies (even China has one now) – Ask your overseas vendors if they can tap into a local program for their receivables which are your payables.
2. Local trade credit insurance providers may also discount the receivables that they insure.  Any country with a robust insurance industry probably has local funding programs, or
3. International factoring companies that really do think the world is flat and will finance sales “from anywhere to anywhere.”

However, if you use any of these alternative lending options, make sure your US-based lender knows you are selling an asset or borrowing from abroad.  In either case, this may require a special waiver from your U.S.-based lender and/or their trade credit insurance policy provider.  You do not want to unintentionally violate a loan debt covenant with your US-based lender or the trade credit insurance provider.

As you can see there are all sorts of ways to obtain financing and work with lenders in these difficult times.   The important thing to remember is that lenders want to work with their clients and they want to be fair.   They may not have a choice as to pricing due to current risk spreads, but they want to help even if it costs more than it did a year ago. 

If you (or your lender) wants to learn more about the best ways to tap into import and export financing alternatives, contact Christine Topoulos at 404-307-2091 or ctopoulos@tradepros.net.

FROM: The Journal of Commerce Online
DATE: July 27th, 2009
BY: R.G. Edmonson

“Shippers would pay ad valorem fee for infrastructure improvements”

Shippers would pay an ad valorem fee on imports and exports if Congress passes a bill supported by Rep. Ken Calvert, R-Calif., and Rep. Jesse Jackson, Jr., D-Ill.

The ON TIME Act of 2009 (Our Nation’s Trade, Infrastructure, Mobility, and Efficiency) would designate “national gateway corridors” that would radiate inland from any port of entry, whether by ocean, land or air, Calvert told a House Ways and Means subcommittee on Thursday.
Calvert said shippers would pay 0.075 percent of the value of their goods, to a maximum of $500. Revenue would be deposited in a gateway fund to be used for transportation and intermodal infrastructure improvements.

Grants from the fund would be disbursed by the Department of Transportation in amounts equal to the money collected by each gateway corridor, Calvert said. For example, revenue collected by the port of Charleston would be used for infrastructure projects in the Charleston corridor.

Calvert’s bill does not specify if the new fee would be in addition to or deducted from the existing Harbor Maintenance Tax (currently 0.125 percent with no maximum or minimum value). Customs and Border Protection assesses the tax at 0.125 percent of cargo value. In 1998 the U.S. Supreme Court ruled that the HMT on exports was unconstitutional.

Another proposal to use a substantially higher HMT to pay for infrastructure has been filed by Rep. Laura Richardson, D-Calif. Unlike Calvert’s bill the Richardson bill does not cap the amount a shipper would pay on goods.

”Bill Would Create Port Fund from Harbor Tax”
May 25, 2009, Journal of Commerce

Harbor Maintenance Tax to create a fund for state highway, rail and port projects. The National Goods Movement Fund also would aim to mitigate environmental damage from freight transportation and improve cargo inspections and port security.

Sponsored by Rep. Laura Richardson, D- Calif., the” Making Opportunities Via Efficient and More Effective National Transportation Act of 2009 “the MOVEMENT Act” calls for an increase in the HMT, an ad valorem tax, from 0.125 percent to 0.4375 percent of the value of cargo arriving at a port. Goods originating in Mexico or Canada would not be taxed, although cargo moving through the country would be assessed at 0.315 percent of value. Richardson proposed a similar bill last year that would have funded infrastructure projects with a $50-per-container fee. Richardson estimated the bill would raise $2.7 billion a year, 90 percent of which would go to infrastructure. It also would remove bureaucratic barriers to accessing harbor maintenance fees, a problem that has \ long frustrated harbor authorities.

BY Christine Topoulos and Lee Hardeman

In January 2008, US Customs and Border Protection (CBP) published a Notice of Proposed Rule Making (NPRM)[1] that will increase the information currently required for shipments bound for the US. Since 9/11, CBP has required the vessel to report 24 hours prior to loading cargo in the foreign port. This report is required under what has become known as the “24-hour rule” and includes basic information such as shipper, consignee, port of discharge, and commodity. The NPRM calls for an Importer Security Filing (ISF) that will require even more information: 10 data elements from the importer and 2 from the carrier (hence, it is also referred to as “10+2”). If the ISF becomes a requirement as promulgated, it will dramatically change the import process. Understandably, there is much controversy over the ISF that has been generally well covered in the comments submitted, and we urge you to review them[2]. Curiously, few comments addressed the potential financial implications of the ISF, which we are covering here.

As proposed, the ISF will initially only apply to ocean shipments – air, truck and rail shipments will be added over time. CBP believes this will improve our homeland security, but at what cost to the importing community? In addition to the massive data transfer from importers to CBP, there is the issue of penalties for failure to file or late filing of the ISF. Since vessels may inadvertently load cargo without knowing if the ISF has been filed (carriers will not be penalized for importer errors), the cost of most penalties rests squarely on the importer. Inaccurate as well as late filings will be penalized if the NPRM goes forward as it is proposed.

As the physical supply chain (companies, brokers, shippers and logistics providers) scrambles to get ready for the ISF data filing, the financial supply chain (company CFOs, lenders, and sureties) should also be considering the potential financial impact. This is not just the one or two days of incremental inventory carrying cost that CBP noted in the NPRM. The bond requirements to support this ruling could have a serious negative impact on the capability of financial markets to support importer surety bond requirements.

This negative impact starts with the wording of this section of the proposed ruling:

“VI. Amendments to Bond Conditions In order to provide a clear enforcement mechanism…the proposed regulations would add a new condition to those provisions in 19 CFR 113.62 required to be included in a basic importation and entry bond.”[3]

This means that the import bond that covers the ISF will have the added liability of a timely and accurate ISF filing, otherwise a penalty can result in the form of liquidated damages equal to 100% of the value of the shipment. CBP has made it clear that this penalty will be levied against the importer’s bond:
“CBP is proposing to amend 19 CFR 113.62 to include a condition whereby the principal agrees to comply with the proposed Importer Security Filing requirements. If the principal fails to comply with the proposed ISF requirements, the principal and the surety (jointly and severally) would pay liquidated damages equal to the value of the merchandise involved in the default.” 3
Here are four questions importers, sureties, and lenders should be thinking about when trying to figure out the impact on their surety bond requirements:

1. What bond value will CBP require? Currently, a continuous import bond is calculated as 10% of the anticipated duties and taxes that will be incurred over a one year period based on the previous year’s imports (or the minimum plus ½% of the total value of shipments where little or no duties are paid). Higher amounts are required for special product groups, but as more and more items come into the country duty free, the financial cost to importers has not risen significantly. If the import bond will soon cover 100% of liquidated damages under an ISF, how will the amount of the bond be determined – the full shipment value or some percentage thereof?
2. If the ISF is included under the import bond, how long will the bond have to be outstanding? Most sureties assume that they are taking risk on no more than 1-2 years of duties and taxes based on the entry liquidation process (generally 314 days from date of entry)[4]. Since we do not know if CBP is thinking of this as part of an entry filing or a separate risk with its own liquidation timetable, it is hard to determine the impact.
3. If the ISF bond value has to be 100% of the shipment value, will the sureties be able to cover it? Again this depends on the time the ISF portion of the bond is outstanding and its value. Many sureties are part of larger insurance and reinsurance underwriters, but there is a limit to their capability which is already being strained by turmoil in the global financial markets. Capital needed to underwrite this new risk may add to the strain. Further, sureties also have capital adequacy requirements to qualify with CBP that can be affected.
4. Will sureties ask the importer to secure part of this incremental risk? Occasionally importers are asked to secure their surety bonds with cash or letters of credit from their bank if the risk or value of the bond will be greater than the value the surety can reasonably underwrite. Either of these could be a strain on the importer’s capital structure. The importer may not have enough availability under a line of credit or cash on hand that can be placed in a blocked account to cover issuance of the required LC. A letter of credit is just like drawing down a loan or line of credit. The lender considers it a loan and charges for the risk and line utilization accordingly.
   This problem could affect businesses large or small due to their total exposure in the “global” credit insurance markets. Because many of the sureties are part of these larger insurance companies, they might have overall client risk limits making it difficult to underwrite incremental corporate risk on any given importer. Insurance companies underwrite trade risk in many different forms including trade credit insurance on receivables and payables. If they are already taking substantial trade credit insurance risk on importers as buyers, additional ISF risk coverage could be both costly and difficult to obtain.
   To put this in tangible terms, here is an example of a small business importer. The company imports roughly $1 million of product per month ($12 million per annum). They pay limited duties and taxes so their continuous bond requirement is roughly $60,000 or ½% of total annual shipments of $12 million[5].

This problem could affect businesses large or small due to their total exposure in the “global” credit insurance markets. Because many of the sureties are part of these larger insurance companies, they might have overall client risk limits making it difficult to underwrite incremental corporate risk on any given importer. Insurance companies underwrite trade risk in many different forms including trade credit insurance on receivables and payables. If they are already taking substantial trade credit insurance risk on importers as buyers, additional ISF risk coverage could be both costly and difficult to obtain.
To put this in tangible terms, here is an example of a small business importer. The company imports roughly $1 million of product per month ($12 million per annum). They pay limited duties and taxes so their continuous bond requirement is roughly $60,000 or ½% of total annual shipments of $12 million[5].

By comparison, what will the ISF bond requirement be – 100% of $12 million? Even if the ISF bond is only 10% of the shipment value, the continuous bond would still have to increase by $1.2 million to cover the ISF versus the current $60,000. If the time period of the ISF is less than one year (the statutory period for entry liquidation), perhaps this could be reduced even further. However at this point in time, there is no way of knowing what CBP is thinking.

With this new requirement, the surety has to take a different look at the credit risk it is taking on the importer. Prior to ISF, the surety’s credit risk assessment was on $60,000. Now the risk is 20 times the original value at $1.2 million+. The surety may need to get credit approval from its underwriters or reinsurers. If the underwriter (this is the equivalent of a bank credit officer) decides that it can only take 50% of this new ISF risk, they must ask the importer to put up cash or a stand-by letter of credit (LC) to cover the shortfall – in our example $600,000. If the importer does not have the cash, the importer’s bank will be the next stop in an effort to meet this requirement.

The bank is going to look at what collateral the company has to cover this stand-by LC. The bank may also ask for cash to collateralize the LC. Chances are the importer does not have the ready cash and may not even have receivables, inventory or fixed assets to pledge for this new bond value. They probably already have most of their assets pledged to run the business.

In addition to this liquidity crunch, the importer has to deal with the incremental costs of the higher surety bond fees, the bank LC fees and perhaps even the loss of use of cash that has to be devoted to this new bond requirement. There is no way to tell what the cost could be in terms of lender and surety fees, but it will be one more cost that the importer now has to pass on to the American consumer.

One of the unintended consequences of this bond could be more companies cutting back on ocean vessel imports or routing through Mexico and Canada until this proposed ruling is applied to land border entries. An 8-12 month delay in enforcing these regulations plus a shift to Canada and Mexico could give the importer as well as these countries an their producers an opportunity to cash in on an untested import requirement and regulatory change. Producing in a NAFTA country may again become attractive.

The reality is that solving one problem – Homeland Security – can lead to unintended consequences such as increased financial burdens. The timing could not be worse for the economy. Adding this new financial cost to the physical supply chain costs of ISF will no doubt squeeze profit margins even further, thus risking the financial welbeing of many companies. We can only hope that CBP will establish resonable bonding requirements for the ISF.

Originally Published July 2008 National Customs Brokers and Freight Forwarders Association of America Website

The current trade compliance “soup du jour” is Free Trade Agreements (FTA). The trade compliance world is a buzz with ways to save money by using FTAs. As this concept gets attention, companies will try to implement FTA procurement strategies around the globe. But is that a good use of corporate resources?

There is no question that importing from a country with lower duties can mean real savings. It is just a question of how much. Here are some points to consider before you start:

1. Is your current supplier a trusted partner? What will you lose if they are gone?
2. Is this trusted partner in C-TPAT and would changing add a new risk component?
3. Will the country of export or origin be difficult for your logisitics people to work with? And what is the added cost of this change?
4. Does the supplier have a proven track record of reliability?
5. Will there be quality issues?
6. Will there be country issues? And/or country of origin qualification issues?
7. What if material or component shortages arise for your new vendor?
8. Do you have to fund the new vendor’s pre-export production? Is a letter of credit (LC) required and what will it cost?
9. Can your company (not just the exporting vendor) afford these added financial costs?
10. What about “assists” that may be needed for your new vendor to meet FTA requirements?
11. How easy will country of origin certificates be to verify?
12. Will your current buying agent be able to help in the new FTA countries or do you lose your eyes and ears into the marketplace?
13. Will regional value content and tariff shifts add a new layer of complexity (and cost) to the products?

In addition to these questions, internal company politics can play a major role in working out an FTA procurement strategy. Most purchasing agents have a “stake” in the vendors that they use. This may be a decades long relationship that has proven value in good times and bad. It may also be based on shared technology or building to precise specifications. Asking a purchasing agent (or a purchasing department) to change its buying patterns could be a real challenge. Don’t forget that country shifts may also require learning a new language, geography and even finding a new buying agent.

Less than a year ago, finance would not have been a consideration when developing an FTA strategy. The economic meltdown in the financial sector has altered this situation. New suppliers in FTA countries may not have the financial wherewithal to produce product locally. Even some of the Asian Tigers have had to develop special government-to-government trade finance programs to deal with its financial crisis.

Buyers, sellers, and lenders are all struggling to find the financial resources they need. Securitization of trade receivables in the financial supply chain are vitually gone. Letters of credit, once expected to go extinct by the end of this decade, are on the rise. In addition, the cost of an LC is no longer a mere fraction of the overall cost of goods sold. Today the LC cost could easily dwarf the savings under an FTA.

Big corporations may have vendors from all over the world knocking on their door. For them, choosing an FTA vendor may be easy. However most companies have to be careful that this advantage does not turn into a disadvantage very quickly.

An FTA procurement strategy is worth exploring, but remember that it may not be as free as its name implies.

M&A_Issues_Checklist

DATE: June 2009

Your company has done its due diligence, all the papers are signed and now you own a new subsidiary or division. It looks like a great match, but suddenly you find out that the old company was importing products without declaring all of the components from third-country procurement contracts. Or the company has been exporting to a distributor overseas that then sold to restricted parties and/or countries in the Middle East.

Although internal corporate papers indicate that the company unknowingly violated U.S. law, your company is now liable for these activities and the government can look back 5 years to determine fines, penalties and corrective action. Although the likelihood of jail time for senior executives is highly unlikely since there was no fraudulent intent, there is still the financial cost. One export violation could have a penalty of up to $250,000. With multiple shipments the penalty could be substantially higher, and don’t forget the potential legal cost.

Can your company afford the risk? Trade compliance is no longer a concept it is a necessity. Auditing a going concern for trade compliance prior to acquisition is a critical component of the assessment process. A going concern is different than the acquisition of assets (inventory, receivables, plant and equipment, patent rights etc.). It does not have the same trade compliance risks as acquiring a “going concern”. Customs and most other US government agencies presume that the “continuing concern” is still liable and the only thing that has changed is the name.

Before a merger, not after, due diligence should encompass trade compliance:

Phase I: checklist (see attached) – this is a way to think about the merger or acquisition from a trade compliance perspective.

Phase II: Examine trade compliance activities of the three entities – buyer, seller, and acquisition target. This has to include imports, exports, foreign trade zones (FTZs) and intra-company sales. Customs wants imported goods valued at the highest rate possible for maximum duty collection. However the IRS wants the lowest import value possible to generate taxes from the highest possible profits. The resulting issues can be simple or complex.

Phase III: Determining any financial cost that should be addressed before the transaction is consummated (duties, fines, penalties, and interest). Any potential compliance liability should be factored into the acquisition price. Conversely any customs rulings, import permits or export licenses etc. that exist under the old company’s name have to be transferred to the new entity …if they can be. If a portion of the company (subsidiary or line of business) is spun off, deciding what the “continuing concern” is could get tricky. There may be more than one company that wants to own rulings, licenses, or permits.

Phase IV: Documenting new or revised compliance policies and procedures to be implemented at or before deal closing.