BIS wants to clearly define responsibilities for these transactions.
Navigating U.S. export control regulations has always been a tricky task and it’s not uncommon for exporters and their freight forwarders to get tripped up over regulatory language alone.
One of those trouble spots, which the U.S. Commerce Department’s Bureau of Industry and Security hopes to smooth out this year, involves developing a clearer definition of responsibilities for “routed export transactions.”
An export transaction typically involves a U.S. seller, known in the Export Administration Regulations (EAR) as the U.S. principal party in interest (USPPI), and an overseas buyer, or foreign principal party in interest (FPPI). In these cases, the USPPI ships an item from the United States and is responsible for obtaining the necessary export clearances, including applying for any federal export licenses.
In a routed export transaction, the FPPI agrees to sales terms with the USPPI in which it takes delivery of the items inside the United States for delivery overseas. Since the FPPI is not technically the U.S. exporter, which is required by the EAR, it hires a U.S.-based agent, such as a freight forwarder, to manage these exports on its behalf.
However, the USPPI is still obligated to ensure routed transactions are compliant with the country’s export control regulations by receiving written authorization from the FPPI and its U.S. agent that they are taking charge of the export and any compliance obligations. Without this documentation, the USPPI remains the responsible party in terms of export compliance.
In addition, the USPPI must provide the FPPI in a routed transaction any information that can effect a U.S. licensing determination or export product classification.
One of the key changes in the proposed regulation, which BIS has referred to as the “foreign principal party controlled export transaction,” is the requirement of the FPPI to provide the USPPI written acknowledgement of its intent to assume export compliance obligations and identify its agent which will act as the exporter.
The FPPI must then provide a written power of attorney to authorize this U.S. agent, again in most cases a forwarder, to act on its behalf and submit a copy of that documentation to the USPPI before assuming export control responsibility.
“Through this new rule, there would be no questioning the role of the parties to the transaction,” said Paul DiVecchio, president of Boston-based consultancy DiVecchio & Associates. “This should give the agent a clear understanding of what its role is in a routed transaction.”
“It eliminates a lot of the fuzziness that was there,” said Michael Ford, vice president of regulatory compliance and quality at forwarder BDP International in Philadelphia. “It will force more record keeping. [The U.S. agent] will have to have a good trail of documentation.”
Under the proposed rule, the USPPI, if requested by the FPPI or its agent, must provide the correct export control classification number (ECCN) or sufficient technical information to determine classification. The USPPI must also pass along any information to the FPPI or its agent that might affect the licensing determination by the FPPI and its agent. Upon request, the FPPI’s agent must provide the USPPI information such as the date and port of export, country of ultimate destination and destination port, method of transport and specific carrier identification, and export authorization details.
The requirement of a power of attorney for agents already exists in the Census Bureau’s Foreign Trade Regulations and assists that agency with collecting accurate trade statistics from electronic export information filings in the Automated Export System. However, it has not been applied as a condition for compliance with routed transactions covered by the EAR.
Many forwarders are concerned about their potential accountability to EAR compliance under BIS’s proposed changes to the routed export definition. BIS penalties for non-compliance can start at $250,000 per violation.
The National Customs Brokers and Forwarders Association of America raised its concerns to the Commerce Department’s Regulations and Procedures Technical Advisory Committee on June 11, shortly after BIS issued a notice of inquiry for the proposed rule. In its comments, the Washington-based group warned that FPPIs generally lack sufficient EAR understanding and often choose to keep their U.S. agents, namely forwarders, in the dark on the full extent of their routed export transaction agreements with USPPIs. The NCBFAA has recommended BIS include in its proposed rule a requirement that the FPPI’s U.S. agents confirm in writing their understanding and acceptance of the responsibilities related to the USPPI’s delegation. This language was not included in BIS’s Feb. 6 Federal Register notice. However, the association is expected to press the issue in comments to the agency’s proposed rule by the April 7 deadline.
Due to the trickiness of routed transactions, some forwarders simply won’t handle them.
“As a freight forwarder, we would never assume responsibility for export classification or license determinations,” said Scott Barney, export compliance manager with multinational forwarder Panalpina, regarding the company’s current policy. “It’s too much responsibility and the risk is really high.”
Barney, who is also a member of the NCBFAA’s export compliance subcommittee, said BIS’s proposed new routed transaction definition is on the “right path,” but he hopes the agency will seriously consider the industry’s comments in formulating its final rule.
“I think it’s a noble effort by the frontline agency to refine the rules and bring responsible change to the market place, but there’s the potential of unintended consequences, like for the forwarders,” said Ashley W. Craig, an attorney and co-chair of Venable LLP’s international trade group in Washington.
He warned if forwarders push too hard on the point of lacking visibility into the routed transaction custody chain, BIS may impose this requirement in a heightened way upon the industry in its final rule.
DiVecchio said either way the final rule will require forwarders to have a better understanding of their compliance obligations for routed exports and on how to maintain this business in the future. “For those forwarders that have their act together regarding export compliance, the clarified routed transaction definition can be a good marketing sell,” he said.
