Project: Corporate Counsel - Law Firms Have You Reviewed Your Foreign Trade Compliance Programs?

Wednesday, June 1, 2005 - 01:00

Editor: Tell us a bit about your background?

Silverman: I have an undergraduate degree in accounting and a law degree. When I graduated from law school, I took a position as a trial attorney in the Justice Department in the Customs Section defending Customs' decisions in what was then the Customs Court (now the Court of International Trade), the Court of Appeals for the Federal Circuit and in some district courts as well. I then moved into private practice where I have been for almost thirty years. My whole legal career has been devoted to customs and trade matters.

Editor: In what areas can your firm help a company comply with the laws regulating foreign trade.

Silverman: Today, we live in a highly regulated foreign trade environment. The U.S., for example, over the past two hundred years, has created a complex maze of customs and trade laws which requires considerable expertise to understand and apply to specific fact situations. Navigating this maze is a specialty of our firm.

Our firm's practice is divided into three disciplines. They include the customs area, which involves the importation of merchandise into the U.S. or any other country; trade practices, which involves unfair business practices and penalties assessed under countervailing, antidumping and retaliatory duties; and export control issues, which include export authorization issues, such as those related to licensing and restrictions on exports.

Editor: How has Sarbanes-Oxley affected the need for compliance programs?

Silverman: Before Sarbanes-Oxley, many of the more sophisticated companies involved in foreign trade had adopted formal trade compliance programs relating to their foreign trade activities. They recognized that the adoption of such programs could mitigate penalties under the Federal Organizational Sentencing Guidelines adopted in 1991 and the Customs Modernization Act enacted in 1993. Under Sarbanes-Oxley, compliance programs are required and companies that fail to implement such programs are exposed to significant penalties. Such programs can also be used positively to achieve significant savings. The discipline imposed by such programs should encourage companies to look for potential duty benefits that might never have come to light. For example, there may be duty benefits resulting from shifting the country of origin, changing the way a product is made, using a different approach to buying goods, or taking advantage of free trade agreements. The same effort that is used to create compliance programs should be used to explore potential benefits available under customs and trade programs.

Editor: How can your firm help business people in their compliance efforts?

Silverman: Large companies tend to have business people who handle the day-to-day paperwork required to move goods in foreign trade. They are in charge of moving the freight, preparing the documents and purchasing the goods. They may have difficulty coping with some of the highly technical issues that arise and in ferreting out opportunities for savings. In many cases, corporate counsel feel comfortable in having us interface directly with their business people. We give lectures to the business people on the issues they face. We look at their compliance procedures and help them refine them. We not only help them to reduce their compliance procedures to writing, but also test them both in the United States and overseas to assure that the programs they have in place work and are being followed. There is nothing worse than having a written program that is not followed.

Editor: Your firm has a number of offices. Is this advantageous to the companies you serve?

Silverman: We have offices in the U.S. in Boston, New York, Los Angeles and Washington. We have affiliated offices in Shanghai and Beijing, where we work with Chinese law firms mostly on trade cases. We have a national and international practice. Often we will work with local law firms in different countries to provide the client with the right mix of the international concepts and the local rules. For example, the valuation code is the same with most of our trading partners as is the tariff classification code, but the interpretation changes from country to country. Therefore we work with local counsel in various countries to make sure that the client gets the best representation in each country.

Editor: Do clients ask your firm to also work with their trading partners?

Silverman: Yes. Many times we have represented both the manufacturers who are the sellers and the importers who buy their products. That is especially true in dumping cases because the rates are calculated based on the person selling into the market. Many times the import client will refer us to the manufacturers to make sure that they are able to obtain the lowest possible dumping margin when they move things into the U.S. In customs matters, there is a "first sale" rule that can be applied where a manufacturer sells goods to a middleman who in turn sells those goods to an importer. If it is properly structured, the merchandise can be valued at the factory price, which is lower than the price paid by the middleman. Trading company clients have referred us to importers of their goods so that the benefits of using the lower first sale price for duty purposes can be passed on to their customers in the U.S.

Editor: How do you interface with corporate counsel?

Silverman: It depends on the individual corporation. Some in-house counsel want to be the point person, so we work through them. Others will let us deal directly with their business people as long as we keep them informed. It depends on the management style of the individual in-house counsel.

Editor: Do you report significant failures of compliance to corporate counsel?

Silverman: Where we see such failures, we would go directly to corporate counsel and explain the risks, liabilities and options. We recognize that they need to know about problems or potential problems. They understand the risks much better than the business people and are in a position to see that prompt corrective action is taken - and prompt action is frequently imperative. For example, U.S Customs has a prior disclosure program that enables a company to voluntarily bring a problem to its attention. If the company is not under investigation, it can significantly reduce its civil penalty exposure. In this way, penalties resulting from violations which could range from criminal exposure to substantial civil penalties can be reduced in most cases to only duty plus interest.

Editor: Can you also help structure transactions in ways that can result in savings?

Silverman: We make every effort to understand our clients' businesses so that we can suggest ways for them to effect savings. From a Sarbanes-Oxley perspective, it is incumbent on companies to make every effort to avoid unnecessary costs. This too is part of an effective compliance program. There may be a benefit to keeping merchandise in a foreign trade zone in order to minimize the number of entries filed or to obtain a cash flow benefit. Companies can get the benefits of a free trade agreement by shifting manufacturing operations from one country to another or making changes in production or material sourcing in the producing country. Prices can be unbundled to identify nondutiable elements and transactions can be restructured to lower duty value.

In some cases, a company's tax advisers will make suggestions that can create a disaster in the customs side. If you look at both the tax and customs aspects together, you can maximize your company's benefits. We have tax experts at our firm who are knowledgeable about trade issues, and we also work with our client's tax counsel.

Editor: Does the increase in the number of free trade agreements have an impact on international trade?

Silverman: From a compliance perspective, free trade agreements can be treacherous for a company. Some companies do not have the proper compliance programs in place and rely on the local vendor to provide the requisite certificates. These are areas that are enforcement hot spots for U.S. Customs. They are currently focused on security rather than commercial fraud, but one of the areas that they carefully review is the use of free trade agreements. They have announced that in the near future they will investigate those importers claiming benefits under free trade programs.

Editor: Are there specific requirements that would not be obvious unless you are an expert in the applicable free trade agreement?

Silverman: Yes. The rules under free trade agreements vary significantly. Sometimes you have to import materials and manufacture them into a different tariff item in the beneficiary country. Other times only certain processes in a country enable the goods to receive the benefit of a free trade program. Sometimes it may not appear at first glance that the goods are eligible. However, the goods may qualify under one of the exceptions or a small change in operations may yield a duty free success.

Editor: Are U.S. customs rules similar to those applicable to importations into other countries?

Silverman: The laws are similar but are interpreted differently by each country. For example, in the EU the first sale value rule is applicable, but in Canada it is not. Even where the first sale rule is available, you need to work with local counsel to make sure it is implemented properly.

Editor: Does Sarbanes-Oxley impose a unique burden on companies engaged in international trade?

Silverman: Yes, in the sense that they must have compliance programs in place that prevent violations of foreign as well as U.S. law. That would require them to understand the applicable laws of the markets into which they sell or from which they buy. Companies must be aware not only of the applicable provisions of domestic and foreign law relating to foreign trade, but also of the Foreign Corrupt Practices Act, Trading With The Enemy Act, money laundering statutes and other laws that have extraterritorial reach.

Please email the author at rsilverman@gdlsk.com with questions concerning this interview.