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Law360 (July 1, 2020, 3:43 PM EDT) --
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| Gregory Husisian |
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| Jenlain Scott |
While there were anecdotal reports that enforcement slowed temporarily at the start of the lockdowns, the announcement of over $2 billion in FCPA penalties in the first half of 2020 — and over $230 million in June penalties alone — shows that the U.S. government's enforcement of high-risk international regulations is continuing,
The risks of large penalties for international regulation violations pose outsized risks for the automotive industry, where many companies source, operate or sell internationally. Also of particular concern to automotive companies is the heightened enforcement of U.S. Customs and Border Protection requirements.
With special tariffs on steel and aluminum, as well as most goods from China, substantially raising the tariffs paid on all imports, U.S. automotive companies need to pay special attention to their Customs compliance obligations when acting as the importer of record.
Further, the replacement of the North American Free Trade Agreement with the new U.S.-Mexico-Canada Agreement also means that companies trading in the North American region need to reexamine how they manage their supply chains, as new rules will require that automotive companies maintain robust compliance measures to ensure compliance with new regional value-content requirements, and labor and wage rules.
Supply chain integrity is more important the ever in the current economic and regulatory environment.
The recent government focus on supply chain integrity is only going to be more intense as COVID-19 lockdowns continue to ease. Many automotive companies are rethinking their supply chains, given the disruptions caused by COVID-19.
At the same time, automotive companies need to consider the impact of the Trump administration's trade war, which imposes large duties under the Trade Expansion Act on many products purchased by automotive companies, including steel, aluminum (Section 232 duties) and most products from China (Section 301 duties).
The heightened duties multiply the potential penalties for Customs noncompliance. Add it up, and the potential dangers of compliance failures have never been greater on the procurement side.
These concerns are important because the U.S. government has pivoted to highlighting the importance of U.S. companies pushing compliance throughout their supply chains.
The U.S. Department of State, U.S. Department of the Treasury, and U.S. Department of Homeland Security issued an unusual three-agency briefing on the need for supply chain due diligence, while DHS has issued a summary of recommended supply chain due diligence and compliance best practices.
Customs has emphasized the importance of avoiding goods that benefit from forced labor or human trafficking, and will block goods at the border if there are indications that these requirements have been violated.
The risks of poor supply chain compliance are underscored by the January 2019 e.l.f. Cosmetics Inc. settlement with OFAC for approximately $1 million, for alleged violations of the North Korean Sanctions Regulations. The penalty was based upon poor supply chain compliance, as e.l.f. allegedly sourced fake eyelashes from a Chinese company, which in turn sourced the goods from North Korea.
Although there was no indication that the U.S. company knew the ultimate supplier of the goods, OFAC premised the penalty on the supposed lack of supply chain due diligence and supply chain compliance measures.[1]
To avoid this type of violation, the U.S. government has issued guidance stating that "[b]usinesses should closely examine their entire supply chain(s) for North Korean laborers and goods, services, or technology, and adopt appropriate due diligence best practices,"[2] including what OFAC referred to as full-spectrum due diligence on suppliers operating in high-risk environments.
Although the e.l.f. enforcement action involved the ultimate supply of goods from North Korea, the same reasoning would support potential penalties under other high-risk sanctions programs, such as those targeting Cuba, Iran, Venezuela or Russia.
Further, with OFAC premising the penalty on the sourcing by a sub-supplier, it is apparent that any company in the supply chain can pose a risk of an enforcement actions, including through sourcing from companies that may not even be known to the U.S. purchaser.
Although high-risk environments where the respect for the rule of law is lessened will always pose the greatest risks — including such common areas of automotive-industry sourcing as countries in Latin America, Africa and Asia — only full-spectrum supply chain due diligence that focuses on all suppliers will meet the current expectations of U.S. regulators.
For automotive companies, which often rely on complex supply chains, the warning from the e.l.f. settlement is clear: The U.S. government expects your company to be conducting due diligence, to be applying know-your-supplier — or even know-your-supplier's-supplier — checks, and implementing compliance measures and red flags awareness across the entire supply chain.
With the Trump administration continuing to impose significant penalties for violations of U.S. regulations governing exports and international conduct, automotive companies that procure abroad need to enhance their supply chain compliance measures and document every way in which they have vetted their supply chain, much as many companies had to do a few years ago when confronting new conflict-minerals supply chain requirements.
Some supply chain compliance best practices to accomplish these goals include:
- Entering into detailed written agreements with your manufacturers or suppliers. Maintaining written agreements and contracts is important to protect yourself, particularly when bringing on new suppliers in new countries, as is starting to occur as companies cope with the COVID-19 realities and adjust to the long-running trade war.
- Conducting due diligence-based risk assessments on your suppliers, agents and intermediaries. Again, with many automotive companies reaching out to new suppliers in the current environment, and often adding new agents and intermediaries, it is especially important not to stray away from stringent due diligence requirements in these less-than-certain times.
- Using strong representations and warranties, including with measures allowing termination of the relationship if there are any violations of export controls, economic sanctions, or anti-corruption laws.
- Negotiating provisions that would allow transparency into the books and records of partners.
- Benchmarking your supply chain arrangements against industry best practices and prices commonly paid, to be alert for potential bribery situations.
- Following up on new supplier arrangements with ongoing monitoring of the relationship, including through audits and other checks on the supplier and sub-suppliers.
- Pushing out compliance requirements to all companies in your supply chain for all high-risk areas, including anticorruption, economic sanctions and export controls, and Customs requirements regarding human trafficking and forced labor.
- Educating personnel who are engaged with the supply chain as to potential red flags and establishing methods to easily report these concerns to compliance personnel.
Especially with new suppliers, it is important to be actively monitoring for red flags. While the U.S. government may be a bit less focused on enforcement right now, this situation will change very quickly, leaving companies that are paying little attention to supply chain compliance exposed to potentially costly investigations and penalties.
New USMCA compliance requirements and ongoing Customs enforcement multiply compliance concerns for the automotive industry.
Also on the horizon are new USMCA compliance responsibilities, both for the regional content and the labor costs rules.[3] Although the publication of the new Uniform Regulations and USMCA Customs guidance offer some much-needed help in how key USMCA requirements will be implemented, it is apparent that most automotive companies face a herculean task to adapt to the new and often quite complicated USMCA regulations.
This is particulary an issue in the areas of determining the level of regional content and complying with the new labor value rules. Complicating adaptation is that compliance requires close cooperation across the entire automotive supply chain. In some cases, compliance can require that companies share sensitive cost information, which naturally leads to tensions in the commercial relationship, where such information often is a carefully guarded secret.
Qualifying for lowered tariffs will require close coordination across supply chains, requiring that companies carefully work with their suppliers to ensure accuracy in reported regional content, while still navigating these concerns about sharing confidential information.
The new wage requirements also will require close supply chain cooperation. Under the new rules, 40% to 45% of automobiles will need to be made by laborers who are receiving hourly wages of $16 or higher. There also are special rules for so-called core components, for the use of steel and aluminum, and a variety of other specialized restrictions that require special tracking, accounting and, once again, close coordination across the entire supply chain.
Because failure to follow the rules can lead both to the loss of favorable tariffs as well as potential penalties for Customs fraud, full understanding of the rules, the new Uniform Regulations, and ongoing Customs rulings impacting USMCA compliance is critical. The stakes will only rise as the level of required regional content rises over time under the phased-in USMCA approach.
The stakes also are higher because the USMCA is being implemented at the same time that the Section 301 tariffs on most goods from China, Section 232 duties on steel and aluminum, remain in place.
Customs is closely scrutinizing imports from Mexico, in particular, to ensure that goods that are claiming a North American origin are not in fact conduits to bring in goods that otherwise would be subjected to these special duties. Failure to determine the correct country of origin, or to misclassify goods under erroneous harmonized tariff system numbers, can result in the underpayment of Customs duties.
Customs already has been carefully monitoring the proper declaration of free trade preferences, and the full payment of Section 232 and 301 duties, as well as antidumping and countervailing duties. Thus, the implementation of new USMCA rules comes at the intersection of all the areas where Customs is focusing its enforcement attention, which is of particular concern to the automotive industry, as participants often use goods that fall under these duties in their Canadian, Mexican and U.S. operations.
To deal with these issues, any automotive company that acts as the importer of record needs to have a strong compliance program in place, to ensure that it is discharging the responsible-care expectations of Customs. A robust compliance program should include a detailed Customs manual, standard operating procedures and consistently followed measures designed to check the accuracy of information given to the company from its suppliers.
The coronavirus pandemic is already causing massive disruptions in supply and sales patterns. As companies are forced to venture out with new business partners, it is important to maintain strong due diligence checks, rigorous know-your-partner procedures and effective international compliance programs.
Any automotive company that has not conducted a risk assessment and recently reviewed its international regulatory compliance polices in the areas of anti-corruption, export controls, economic sanctions and Customs should undertake a comprehensive risk-assessment and compliance review to ensure that it is meeting the current expectations of U.S. regulators.
Gregory Husisian is a partner and chair of the international trade and national security practice at Foley & Lardner LLP.
Jenlain A.C. Scott is an associate at the firm.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] OFAC, "e.l.f. Cosmetics, Inc. Settles Potential Civil Liability for Apparent Violations of the North Korea Sanctions Regulations," https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20190131_elf.pdf.
[2] Dep't of Treasury, Dep't of State, and Dep't of Homeland Security, "North Korea Sanctions & Enforcement Actions Advisory" (July 23, 2018), https://www.treasury.gov/resource-center/sanctions/Programs/Documents/dprk_supplychain_advisory_07232018.pdf.
[3] Office of the U.S. Trade Rep., United States-Mexico-Canada Trade Fact Sheet: Rebalancing Trade to Support Manufacturing (Jan. 29, 2020), https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/fact-sheets/rebalancing.
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