BSM581_0813056_NAnderson[1]

/

ABERDEEN BUSINESS SCHOOL

Copyright Declaration Form

Name Mr Nicholas Anderson

Email/contact tel no.: [email protected] / 07527 971 506

Course: MSc Degree in Purchasing & Supply Chain Management

Module: BSM581

Dissertation Title: An examination into the impact that investment in trade compliancehas upon a firm's competitive advantaqe

SupervisorlTutor: Mr Bryan McNay

Before submitting confirm:

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Signed ~.~ ..f\.~.~~ Date ~./.~.I.i.1. .

THEROBERTGORDONUNIVERSITY

ABERDEEN

FACULTYOF MANAGEMENTAberdeen Business School

Title: An examination into the impact that investment in trade compliancehas upon a firm's competitive advantage

Name: Mr Nicholas Anderson

Matriculation Number: 0813056

Submission Date: 9th May 2011

Supervisor: Mr Bryan McNay

Aim: An examination into the impact that investment in trade compliancehas upon a firm's competitive advantage.

Objectives:

1. The Author will examine the effects of globalisation on today's oil andgas industry with hope that findings will assist in solidifying theincreased role that trade compliance can and should play.

2. The various Regulatory Bodies with acts governing numerousinternational markets will be assessed in relation to the ever increasingand complex role of the trade compliance function.

3. A study of the most recent import and export compliance topics willfurther outline the complex nature of today's global market place.

4. A review of published historic violations and their settlements withcorresponding share price movements will provide sufficient supportfor/against an increased investment in trade compliance.

5. As a project which will run in conjunction with the dissertation, theauthor will conduct a harmonised tariff classification analysis. Thefindings of which should support an 'argument that trade compliancecan offer competitive advantage.

6. The latest information systems and technology available offeringsupport to the trade compliance function will be reviewed.

Signed:

Total word count (excluding acknowledgements ,diagrams, references,bibliography and appendices) - 18,402 words.

A Dissertation submitted in partial fulfilment of the requirements for the MScDegree in Purchasing & Supply Chain Management.

I ABSTRACT

The purpose of this study aimed to uncover whether an investment in an

organisations trade compliance group would have impact on competitive

advantage.

The author has examined, in detail, whether greater focus and investment in

trade compliance can lead to competitive advantage. On the flip side, the

author also examined the cost of non-compliance and its damaging effects on

performance, in particular, share price performance.

There is evidence to suggest that trade compliance can, coupled with other

market specific tools, offer itself as a unique selling point to the customer.

Evidence was found which suggested that compliance alone manifested itself

as competitive advantage through enhanced corporate image and customer

assurance of product delivery.

Advancements in information technology capabilities have afforded an

opportunity to excel in the field of trade compliance. Assuming investment is

forthcoming, evidence existed confirming the role of compliance in

contributing to competitive gain.

Through a mixture of primary and secondary research and qualitative and

quantitative data, the author set out capture the following objectives;

• The Author will examine the effects of globalisation on today's oil and

gas industry with hope that findings will assist in solidifying the

increased role that trade compliance can and should play.

• The various Regulatory Bodies with acts governing numerous

international markets will be assessed in relation to the ever increasing

and complex role of the trade compliance function.

• A study of the most recent import and export compliance topics will

further outline the complex nature of today's global market place.

• A review of published historic violations and their settlements with

corresponding share price movements will provide sufficient support

for/against an increased investment in trade compliance.

• As a project which will run in conjunction with the dissertation, the

author will conduct a harmonised tariff classification analysis. The

findings of which should support an argument that trade compliance

can offer competitive advantage.

• The latest information systems and technology available offering

support to the trade compliance function will be reviewed.

Accordingly, three hypotheses, surrounding the aim and objectives, were

designed and satisfied.

The author concludes with recommendations.

ii

I ACKNOWLEDGEMENTS~------------------------------------------------------------~

The author wishes to thank those who have assisted and advised during the

project, with particular mention to:-

• Employer, Company A, for continued support and guidance

throughout.

• The Robert Gordon University for their professional guidance and

facilities at hand.

• To all persons who kindly participated in the research undertaken for

the purpose of this study.

• To all my friends and family for their continued help and support

during my studies.

iii

I CONFIDENTIALITY REQUEST lThe dissertation is strictly confidential and is only available for assessment

purposes with all copies to be returned to the author after the assessment

board has agreed the grade.

iv

I TABLE OF CONTENTSL _ I-------

Abstract

Acknowledgements

Confidentiality Request

Table of Contents

List of Tables

1.01.1

1.21.31.4

CHAPTER 1 INTRODUCTION

Aim

Objectives

Company A

Confidentiality Statement

II

2.02.12.22.32.42.52.62.72.82.92.10

CHAPTER 2 LITERATURE REVIEW

International Trade - The Global Marketplace

HTC/ECCN Classification

ECCNViolation Case

Denied Parties

International Trade - Summary

Regulatory Bodies

Import/Export Compliance Programs

Information Systems and Technologies

Third Party Service Providers

Violations/Settlements

II

3.03.1

CHAPTER 3 RESEARCH METHODOLOGY

Prospective Techniques of Investigation

PageNo

iii

iv

v

vii

1

3

3

45

6

6

1015181920233134

36

4444

v

3.1.1 Secondary Research 44

3.1.2 Primary Research 46

3.1.2.1 Quantitative v Qualitative Research Methods 46

3.2 Rationale for Choice of Research Method 47

3.2.1 Probing 48

3.2.2 Steering 49

3.2.3 Close-ended Questions 49

3.2.4 Open-ended Questions 50

3.3 Interviews 50

3.4 Limitations of Research 51

3.5 Hypotheses 52

1Ill

4.0 CHAPER 4 -DATA ANALYSIS 53

4.1 Company A - Overview 53

4.2 Classification Analysis 57

4.2.1 Kazakhstan Analysis 66

4.2.2 Australia Analysis 67

4.3 Technology Review 68

II

5.0 CHAPTER 5 - CONCLUSIONS & RECOMMENDATIONS 73

5.1 Conclusions and Recommendations 73

5.2 Summary 79

III

Referencesl Bibliography

Appendix A

Appendix B

81

vi

I LIST OF TABLESi

PageNo

Table 1Market-Adjusted Price Reactions to FCPA-RelatedNews and Announcements 42

vii

INTRODUCTION CHAPTER 1

1.0 CHAPTER 1 - INTRODUCTION

Complying with national and international trade laws and regulations is a

priority for organisations operating globally.

Research has confirmed that compliance can be challenging and costly due to

regulations ever changing. However, the cost of non-compliance is soaring.

Expanding markets have increased the need for robust compliance

structures, systems and processes. In order for such structures, systems

and processes to be effective, compliance, the function, must have strong

leadership from top down.

The author has examined, in detail, whether greater focus and investment in

trade compliance can lead to competitive advantage. On the flip side, the

author also examines the cost of non-compliance and its detrimental effects

on performance, in particular, share price performance.

There is evidence to suggest that trade compliance can, coupled with other

market specific tools, offer itself as a unique selling point to the customer.

But firstly, compliance as a tool offering competitive advantage must be sold

successfully to the board room.

Advancements in information technology capabilities have afforded an

opportunity to excel in the field of trade compliance. Again, if this can be

sold to the board room, evidence suggests that compliance will offer an

organisation competitive advantage.

Specifically in the US, the oil and gas sector has been descended on by

government agencies - Customs, the Office of Export Control (commerce)

and the Department of Justice. The fines for violations are high. For

perspective,

An examination into the impact that investment in trade compliance has upon a firm's competitive 1advantage


EXPORTADMINISTRATION REGULATIONS (EAR) (per violation)

Civil

• up to $250,000 or 2 times the value of the export

• Corporate Criminal - up to $1 million or 5 times value of export

• Individual Criminal - up to $1 million and/or 20 years imprisonment

United Kingdom

• Civil - Greater of 3 times the value of the goods or £1,000

• Criminal - 7 years in prison and unlimited fines

China

• 50,000 and 250,000 yuan where the value of the transaction is less

than 50,000 yuan, but between 100% and 500% of the transaction

value for higher-value transactions

Antiboycott

• Civil - up to $250,000 or 2 times the value of the transaction

• Criminal - up to $1,000,000 and/or up to 20 years imprisonment

• Denial of foreign tax credits

(Company A, Presentation)

In the most serious of cases, a denial of export and import privileges could

be sought and clearly, this would have a devastating impact on an

organisation operating on the international stage.

In recent years, Cameron, FMC, Weatherford, NOV, Baker Hughes, NALCO

and BJ Services amongst many others have had published export violations,

each will be looked at in more detail during the literature review. Evidently,

published violations will have a detrimental impact on an organisations share

price. Again, during the literature review, the author will look at the

An examination into the impact that investment in trade compliancehas upon a firm's competitive 2advantage


correlation between non-compliance with trade regulations resulting in

penalties and negative publicity and share price movements. With huge

efforts and focus on supply chain effectiveness, the importance of a smooth,

unproblematic and reliable supply chain and the role compliance can play in

assuring this should not be understated.

I 1.1 _-_A_-i_m . _ JAn examination into what impact investment in trade compliance has upon a

firm's competitive advantage.

r 1.2 Objectives~----------------------------------------------------------------~

With reference to the Oil and Gas service industry, as global markets

increase in size (Namibia, Falkland Islands) and in certain cases (Libya, Ivory

Coast) decrease in size, the laws and regulations governing international

trade become more complex. With the cost of non-compliance soaring,

coupled with the damaging impact non-compliance has on future business

operations and opportunities, the author examines whether greater

investment in trade compliance can lead to competitive advantage.

With the central aim of the dissertation focusing on whether trade

compliance can offer competitive advantage in today's global market, it is

necessary for the author to examine certain factors that influence global

operations;








and complex role of the trade compliance function.












The objectives outlined above will be achieved by examining the most recent

academic literature coupled with focussed primary research targeting the key

personnel and available data within company A.

E CompanyA

Company A has over 13,000 employees in more than 75 countries around

the world. The organisation is a key part of the world's hydrocarbon



exploration and production industry. The organisation has over 400 service

locations and, therefore, operates on a global scale.

11.4 Confidentiality Statement1 _

In order to examine truly the impact that investment in trade compliance can

have on a firm's competitive advantage the author has chosen to base the

bulk of research, primary and secondary, qualitative and quantitative, on his

current employer. For confidentiality reasons, the author will refer

throughout the dissertation to company A, the employer.


LITERATURE REVIEW CHAPTER 2

I 2.0 CHAPTER 2 - LITERATURE REVIEWI

This chapter will focus on literature gathered in relation to the aim and

objectives of the thesis topic, in order to help provide evaluation and

understanding around compliance functions and whether they can provide

competitive advantage. Literature has been taken from Company A in-house

presentations, academic journals, textbooks and websites.

r 2.1 International Trade - The Global Marketplace!

In conjunction with the aim of this thesis and with reference to the Oil and

Gas service sector, it could be argued that global markets are fluid. Most

recently, the drilling fluids industry has seen expansion in areas such as

Namibia and the Falkland Islands with increased investment and focus on oil

and gas exploration. In certain countries such as Libya and the Ivory Coast,

due to political troubles, markets have closed as a result of government

enforced sanctions. Clearly, with new markets comes new regulations and

with closed markets also comes new regulations. Therefore, the laws and

regulations governing international trade are also fluid adding complexity to

the trade compliance task. With the cost of non-compliance soaring, coupled

with the detrimental impact non-compliance has on future business

operations and opportunities, the author examines whether greater

investment in trade compliance can lead to competitive advantage.

It could be argued that the term globalisation, which still seems to be an

everyday term, is something of the past. It would be more appropriate, in

the world we have today, to view the term globalisation as an historic event.

Everything we now have, the global market, was a result of globalisation.

There is now one global market and, as earlier stated, the market has

several doors which open and close at regular intervals. As each door opens,

another door closes, and with each swing comes new laws and regulations


~ ~ ~~-------------------


which must be digested prior to stepping in. The trade compliance

department within an organisation operating globally has a duty to ensure

compliance with each law and regulation.

As outlined by Jeffery (2002) in an article published in the UK Guardian

newspaper, 'What is Globalisation?' the dictionary definition would tend to

agree with the authors previous assessment regarding the term

'globalisation; ,

"Globalisation (n) is the process enabling financial and investment markets to

operate internationally, largely as a result of deregulation and improved

communications" (Collins) or - from the US - to "make worldwide in scope or

application" (Webster)"

(www.guardian.co.uk)

Evidently, financial and investment markets operate internationally with 'at

the touch of a button' communications. If we take the Webster definition,

'make worldwide in scope of application' again, we can argue that

globalisation is now an historic event.

As new markets open, for example, if the American administration lifts its

embargo on Cuba, it will open up new opportunities for American business.

Whether we still class these new opportunities as globalisation is up for

argument. The author would argue no, this is not globalisation.

Globalisation is a past event.

Referring back to immediate communications, it was this type of

technological advancements that evolved our old world, encouraging and

enabling globalisation. In our present day/state, the technology available

now can also encourage and enable the evolvement in the way organisations

manage their trade compliance function. The author will discuss this


UTERATURE REVIEW CHAPTER 2

argument in more detail during the information technology review during a

later section.

As a clear example of what globalisation created, Company A, which will be

studied during this report, now has over 13,000 employees in more than 75

countries around the world. Without the technological advancements this

growth would not have occurred.

Due to Company A's vast global operations, it must abide by the national and

local trade laws, the import and export rules in place, and the regional trade

laws governing each business unit. This also will be discussed further, in

more detail, during the report.

Company A is a Multinational organisation, which put simply, is a company

which has subsidiaries in various countries. The headquarters of Company A

is in Houston, USA. As a U.S. organisation, the company is subject to U.S.

trade laws. Resulting from a global market and operations in 75 countries,

the U.S. trade laws governing the business conducted by Company A are

complex.

Unique to the U.S., the American administration has re-export laws which

mean that U.S. origin materials are not only controlled for export, but also

controlled for re-export. As an example, if a UK company purchased U.S.

origin equipment from the U.S., it would not be free to forward the

equipment to Nigeria, without abiding by the U.S. re-export control laws. An

export is not always tangible; information such as technological drawings

sent via email from the U.S. to the UK is also classed as an export and would

also be subject to re-export laws.

The U.S. Bureau of Industry and Security (BIS) define export as;

''An export is a shipment or transmission of items out of the United States"



And a re-export as;

"A re-export is a shipment or transmission of items subject to the EAR from

one foreign country to another"

And, finally, a deemed exportjre-export;

"Release of technology or source code to foreign national in the U.S. or

abroad"

(http://www.bis.doc.gov/complianceandenforcement/dontletthishappentoyou

2007 sm.pdf)

According to the U.S. business of industry and security;

"Most people think of an export as the shipment of a commodity from inside

the United States to a foreign country, but that is only one type of export.

Under the EAR, the release of technology or source code to a foreign

national, even if the foreign national is in the United States, is also "deemed"

to be an export to the home country or countries of the foreign national and

may require a license under the EAR. Technology can be released through

visual inspection, oral exchanges of information, or the application to

situations abroad of personal knowledge or technical experience acquired in

the United States. For example, if a graduate student who is an alien with a

valid visa reviews controlled technology pursuant to a grant from a private

company that will not publicly release the study, an export license or license

exception may be required because the review could be considered a

'deemed export'. "


2007 sm.pdf)



I 2.2 HTC I ECCNClassificationI

In order to export, import, or re-export, material must be classified. There

are two types of classification. Harmonized Tariff Classification (HTC) and

Export Control Classification Number (ECCN).

HTC classification is the process used for describing items being exported /

imported.

"When trading internationally, you will need to find the correct commodity

code for your goods so you can fill out customs paperwork accurately. The

code is an eight-digit number for exports outside the EU or goods moving

within the EU, but is a ten-digit number for imports from outside the EU.

Once you know the commodity code, you can look up other important

information such as duty rates and any import or export restrictions. "

(http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1078053656&t

ype=RESOURCES)

The reasons for HTC classification are very simple, duty rates are set by

country of origin and commodity code so it is essential that goods are

correctly classified. Local customs authorities can back date under paid

duties for incorrectly classified goods going back 3-5 years dependent on the

local authority. Clearly, while dealing with high value, high dutiable

products, it makes sense to make sure that the classification is correct. The

first 6 digits of the HTC code are universally aligned. Digits 7-10 can be

added by the importing country which, as above along with the country of

origin, sets the duty rate. As part of the overall aim to determine whether

additional investment in trade compliance can result in competitive

advantage, the author will conduct a detailed classification analysis with hope

that savings can be achieved allowing competitive advantage through a

reduced total landed cost. Total landed cost, put simply, is the total, all in



cost, to move a product from one country to another. The all in cost would

include the cost of material, freight costs, duty and tax, handling, import

broker fees etc. The author will conduct a classification analysis with focus

on Kazakhstan and Australia during the primary research stage of this report.

The UK government states that;

"Classifying your goods correctly will help ensure that you:

• pay the right duty and VAT

• know whether an import or export licence is needed

You are legally responsible for the correct classification of your goods, even if

you use an agent. Incorrect classification can lead to your goods being

delayed or seized and you will have to pay any duty and tax owed, plus

possible financial penalties."

(http://www .businesslink.gov .uk/bdotg/action/detail?itemId = l078053832&t

ype=RESOURCES)

ECCN classification is the process of describing items being exported by their

use, which is either dual-use or (single) civilian use.

With regards to ECCN classification, in the U.S., it is described simply as

"ECCN classification". In the UK, it is the "Product Rating classification" and

in EU member states, the "Control Number classification".

• United States = ECCN(Export Control Classification Number)

• United Kingdom = Product Rating

• EU-Member Countries = Control Number



The U.S. Regime governing exports is the Export Administration Regulations

(EAR). The EAR hosts a list of controlled commodities, software, and

technology known as the Commerce Control List (CCl) which sets out:

• The technical parameters of each controlled item;

• The reason for control; and

• The circumstances under which the item can be exported.

"Consulting the CCL and properly determining the applicable ECCN is the first

and most important step in determining whether an export license is required

under the EAR to export a U.S.-origin item"

(Director of Trade Compliance, Company A)

ECCN classification is slightly more complex than HTC classification and

distinguishes between commercial materials with no military use and dual

use materials which have civilian uses but also military uses. Materials and

products which have dual use, such as Teflon coated diaphragm pumps, as

described in the Wilden case below, can be used in the manufacture of

chemical and biological weapons. Dual use materials require an export

licence prior to export.

Materials which have no dual use have no ECCN number / Product Rating

number / Control number. Every day, civilian goods only, are classified in

the US as EAR99 and in the UK as NlR (No Licence Required).

"The Department of Commerce's Bureau of Industry and Security (BIS) is

responsible for implementing and enforcing the Export Administration

Regulations (EAR), which regulate the export and reexport of most

commercial items. We often refer to the items that BIS regulates as "dual-

use" - items that have both commercial and military or proliferation



applications - but purely commercial items without an obvious military use

are also subject to the EAR"

(http://www.bis.doc.gov/licensing!exportingbasics.htm)

The Bureau of industry and security distinguish between ECCN and EAR 99 as

follows;

"ECCN, stands for Export Control Classification Number. An ECCN is an

alpha-numeric classification used in the Commerce Control List to identify

items for export control purposes. An ECCN is different from a Schedule 8

number, which is used by the 8ureau of Census to collect trade statistics. It

is also different from the Harmonized Tariff System Nomenclature, which is

used to determine import duties.

All ECCNs will have 5 characters, for example, 1A001, 48994, or 8DOO1.

There are 10 categories on the Commerce Control List. The first number of

the ECCN identifies the category to which it belongs, for example, 1 =

Nuclear Materials Facilities and Equipment, 4 = Computers, 9 = Propulsion

Systems, Space Vehicles and Related Equipment.

However, EAR99 is a different type of classification. It serves as a "basket"

designation for items that are covered by the EAR, but are not specified on

the Commerce Control List. EAR99 items can be shipped without a license to

most destinations under most circumstances. There are limitations on the

use of EAR99. However, the majority of the commercial exports from the

United States fall into this category"

(http://www.bis.doc.gov/licensing/doneedaneccn.html)

Importantly, as advised on the us BIS website;



"To minimize the potential diversion or misuse of licensed exports, BIS adds

conditions to nearly all export licenses. License conditions may, among other

things, restrict the wayan item is used after export, or it may require certain

reports to be made by the exporter. The conditions are created through an

interagency process that includes BIS and agencies at the Departments of

State and Defense, among others. The use of license conditions allows the

Government to approve license applications that might otherwise be denied.

Oncea license is issued, BIS seeks to ensure compliance with the conditions.


2007 sm.pdf)

"Violations of the EAR are subject to both criminal and administrative

penalties. In some cases, where there has been a willful violation of the EAR,

violators may be subject to both criminal fines and administrative penalties.

However, for most administrative violations, there is no intent requirement,

which means that administrative cases can be brought in a much wider

variety of circumstances than criminal cases. Fines for export violations can

reach up to $1 million per violation in criminal cases, $50,000 per violation in

administrative cases on or after March 9, 2006 (there have been no such

cases that have reached a final order yet), and $120,000 per violation in

certain administrative cases involving national security issues.1 In addition,

criminal violators may be sentenced to prison time and administrative

penalties may include the denial of export privileges. A denial of export

privileges basically prohibits a person from participating in any way in any

transaction subject to the EAR. Furthermore, it is a violation of the EARfor

anyone to participate in an export transaction subject to the EAR with a

denied person.

It should be noted that in most cases, BIS reaches negotiated settlements in

its administrative cases prior to a formal administrative hearing. Those

negotiated settlements are often reached as a result of voluntary



se/fdisclosures (VSDs) of violations by companies and individuals. BIS

considers VSDs to be a significant mitigating factor when negotiating

settlements of administrative cases. VSDs reflect a company's or individual's

acceptance of responsibility for EAR violations. To encourage VSDs, in

appropriate cases, fines and other administrative penalties may be

significantly reduced as a result of the fact that BIS became aware of the

violations as a result of a VSD. Guidance regarding administrative penalties is

provided in Supplement No. 1 of Part 766 of the EAR and in chapter five of

this publication. In that guidance, some factors, including VSDs, are given

"great weight" and are viewed as significantly mitigating violations. In the

following cases, VSD credit is noted where it was given.

As a standard provtston of BIS settlement agreements, the respondent

involved neither admits nor denies the charges made against it. Therefore,

the violations referenced in many of the summaries in this booklet have

neither been proven in court nor been admitted to by the company or

individual. Please also be aware that this letter and booklet are not intended

to create, nor do they create, any right or benefit, procedural or substantive,

enforceable by law against the Department of Commerce or any other part of

the U.S. Government. Nor should the cases in this booklet be interpreted as

precedent in any future actions involving the U.S. Government".


2007 sm.pdf)

II 2.3 ECCNViolation case

It is appropriate, at this stage of the dissertation, to study the below export

violation case as it provides a valuable insight into the risks involved with

export compliance. Further cases will be studied during later chapters.



"California Company Settles Charges of Unauthorized Exports to

Iran, Israel, People's Republic of China, Syria, and the United Arab Emirates.

The U.S. Department of Commerce today announced that Wilden Pump and

Engineering Co., LLC (Wilden), a company based in Grand Terrace,

California, will pay a $700,000 civil penalty to settle administrative charges

that it violated the Export Administration Regulations (EAR) in connection

with unauthorized exports of diaphragm pumps from the United States to the

Iran, Israel, People's Republic of China, Syria, and the United Arab Emirates

without the required Department of Commerce export licenses.

The Commerce Department's Bureau of Industry and Security (BIS) charged

that, between 2000 and 2003, Wilden committed 71 violations of the EAR.

Specifically, BIS found that Wilden committed 26 violations by exporting

diaphragm pumps without the required licenses. In connection with 22 of the

exports, Wilden violated the EAR by transferring diaphragm pumps with

knowledge that violations of the EAR would occur. BIS also charged that

Wilden committed 23 violations of the EAR by making false statements on

export control documents.

The size of the penalty assessed to Wilden is due to the significant number of

violations, many of them with knowledge that the shipments were destined

to an embargoed country. The diaphragm pumps exported by Wilden are

subject to Department of Commerce's Export Administration Regulations and

the Department of the Treasury's Iranian Transaction Regulations. The

majority of the pumps that were exported are controlled for export and re-

export due to concerns that they could be used in chemical and biological

weapons proliferation.

"This investigation demonstrates the Commerce Department's commitment

to vigorously pursue those who knowingly violate U.S. export control law,"

said Wendy L. Wysong, Acting Assistant Secretary for Export Enforcement.



Wilden also agreed to be subject to a three-year denial of export privileges

for items on the Department's Commerce Control List. The denial will be

suspended for two years provided that Wilden does not commit any

violations of the EARduring the suspension period.

Acting Assistant Secretary Wysong commended the Special Agents of BIS's

Office of Export Enforcement, Los Angeles Field Office, for their work on this

investigation. "

(http://www.bis.doc.qov/news/2005/winden.htm)

This case visibly illustrates the importance of classifying exported material

correctly. It is important to distinguish between whether material is

controlled or falls into the EAR 99 / NLR bucket. Quite clearly, an

organisation suffering a $700,000 civil penalty is going to be hurt but,

dependent on the revenues in question, a recovery is likely to be possible.

However, as was almost the case, export privileges could have been lost,

which would have had a catastrophic affect on future business. The global

market which is now in place undoubtedly offers more buyers than a local

market. In this case, going forward post the violation, there will be increased

government scrutiny which is never welcome. Also, published violations, as

it was with this case, (all information taken from the U.S. Bureau of industry

and security website) will have a negative impact on the organisations share

price, as will be proven during a later study. Furthermore, violations are

published in the Wall Street Journal. Share price movement in conjunction

with violations will be studied in more detail at a later stage but, quite

clearly, as the share price is the number one driver of a publicly traded

company, it will impact current and future investment. In an industry which

is now filled with joint ventures and strategic partnerships, the negative

publicity which surrounds an export violation further emphasises that export

violations should be avoided at all costs.



Whether investment in the trade compliance function could have prevented

the case of Wilden is obviously disputable, "Wilden violated the EAR by

transferring diaphragm pumps with knowledge that violations of the EAR

would occur". However, it does go without saying that organisations

operating in the new world, the post 9/11 world with ever increasing trade

security measures, who are heavily reliant on exports, should invest in trade

compliance as a protective preventive measure. Nonetheless, the

dissertation hopes to determine whether trade compliance can, rather than

simple basic protective prevention, offer more in terms of competitive

advantage. Although, perhaps, it could be argued that prevention in itself

does create competitive advantage. As an example, before entering a joint

venture, it is likely that a compliant organisation would seek assurance of

compliance within the proposed partner, thus creating competitive advantage

over a peer with poor compliance history and commitment.

I 2.4 DeniedParties l~I ------------ 1

Also falling into the category of export controls, as was mentioned in the

Wilden case, is Embargoed countries.

The International Emergency Economic Powers Act (IEEPA) is the primary

legal authority for most sanctions programs (Iran, Syria, Sudan,

Burma/Myanmar etc.) The sanctions apply to American citizens/companies

and permanent resident aliens anywhere in the world and an

individual/company, regardless of citizenship, when in the U.S.

The Trading with the Enemy Act (TWEA) is the primary legal authority for

Cuba and North Korea. The application is much like IEEPA, but also applies

to foreign organised subsidiaries of U.S. companies.



The EU, with regards to other sanctions and embargoes on other countries,

generally follow the U.N. General Assembly Lead. EU sanctions generally

apply to Member State nationals, wherever located, along with ships and

airplanes flagged under member state.

The U.S. and various other governments impose trade sanctions and export

controls that prohibit Company A from transacting business with various

countries (e.g., Cuba, Iran), organisations (e.g., AI Qaeda or named narcotic-

traffickers), and persons (e.g., the late Osama Bin Laden). The Bureau of

Industry and Security (BIS) will stop items subject to the EAR, including

items not on the Commerce Control List, from being exported, re-exported or

transferred (in-country) when there is an unacceptable risk that such items

will be used in, or diverted to, any of the following proliferation activities -

nuclear end-uses, certain rocket systems and un-manned air vehicle end-

uses, certain chemical and biological weapons end-uses.

12.5 International Trade - Summary

Without a doubt, the Global market presents numerous prospects for an

organisation such as Company A which holds the resources to capitalise on

opportunities. However, as identified by reviewing the most basic of export

regulations, controlling the operations required to succeed within the global

market are made complex by the simple export and re-export trade laws

governing them. It is the aim of the report to review in further detail the

regulations governing international trade and whether investment in trade

compliance can lead to improved operations - whereby improved operations

offer competitive advantage. In order to satisfy this argument the author

must examine and review a number of factors. But firstly, the regulatory

bodies with their acts which govern the global market where Company A

operates must be reviewed.



l2.6 Regulatory Bodies

In order to understand the complexity surrounding international trade as a

direct result of the laws set out governing international trade, it is important

that the author acknowledges the many acts, regimes, laws and treaties

having influence over trade.

Firstly, the export regimes of almost every country are based upon the

dictates of several different treaties.

The treaties which dictate the laws set out by the numerous export regimes

are noted below;

• Wassenaar Arrangement (dual-use items, conventional

arms/munitions) .

• Australia Group (chemicals and biological agents).

• Nuclear Suppliers Group and Zangger (nuclear material).

• Missile Technology Control Regime (missiles, Unmanned Aerial

Vehicles (UAVs), and related technology).

• Export Administration Regulations (EAR) - Bureau of Industry and

Security (BIS), Department of Commerce - regulates the export and

re-export of dual-use goods, software, and technology.

• International Traffic in Arms Regulations (ITAR) - Directorate of

Defense Trade Controls (DDTC), Department of State - regulates the

export and re-export of defense articles, defense services, and related

technologies.



• Country-Specific Economic & Trade Sanctions - administered by the

Office of Foreign Assets Control (OFAC), Department of the Treasury -

restrict trade, investment, and financial transactions by U.S. citizens,

U.S. companies, non-U.S. branches of U.S. companies, and, in some

instances, U.S. -owned or controlled subsidiaries with certain countries,

entities, and individuals.

• Antiboycott Laws - both the Treasury and Commerce Departments

administer antiboycott laws. These laws apply directly to U.S. -owned

or controlled subsidiaries and are designed primarily to counter Arab

country boycotts of Israel and Israeli goods.

(Internal, Company A presentation)

Other U.S. agencies involved in export transactions are:

• Census Bureau's Office of Foreign Trade Statistics - charged with

collecting export trade statistics from Electronic Export Information

(EEl).

• U.S. Bureau of Customs and Border Patrol - review exports and assist

with enforcement of U.S. export control laws.

• Environmental Protection Agency (EPA) - charged with ensuring

exportations provide proper notification of certain chemical agents.

• Nuclear Regulatory Commission (NRC) - issues export and import

licenses for radioactive materials.

• Non-U.S. Export Regimes - many countries, such as the U.K., EU-

member countries, Japan, China, Canada, Australia, among others,

have export regimes similar to the United States.



• Import Transactions - U.S. Customs and Border Protection (CBP) is an

agency of the U.S. Department of Homeland Security charged with the

management, control, and protection of U.S. borders, collection of

import duties, and enforcement of regulations related to international

trade, drugs, immigration, and supply chain security.

• Non-U.S. Import Regimes - Almost every country has regulations

intended to control imports and addressing the collection of import

duties.

(Internal, Company A presentation)

The BIS states;

"A number of executive branch agencies have responsibilities for regulating

exports from the United States. The Department of Commerce is responsible

for controlling goods and technology, which are capable of being used for

commercial purposes but which also present foreign policy or national

security concerns. BIS implements export controls for the Department of

Commerce through the Export Administration Regulations (EAR). Other

federal agencies with a role in export controls include the State Department,

which controls arms exports and re-exports, the Department of Energy,

which controls exports and re-exports of technology related to the production

of special nuclear materials and the Department of Treasury, which

administers certain embargoes"


2007 sm.pdf)

It is worth noting, with regards to company A and the u.s. EAR, that the

export control regime of the United States is one of the most complex in the



world and is regulated under several different statutes;

• The Export Administration Act

• The Arms Export Control Act

• The Emergency Economic Powers Act

• The Trading with the Enemy Act

(Journal of Institute of Management and Administration, Managing Imports

and Exports, 2006)

Pupkin, as cited by Hansen (2004), states that;

"Given the complexity of the US regulatory regime, it is important that U.S.

exporters take seriously the enforcement of export control laws. "

(Export Regulations and Compliance, Hansen 2004)

Considering this statement further, it is clear that, as Company A is a U.S.

exporter, the enforcement of export laws should be taking seriously. Due to

the complex nature of the very simple U.S. export laws as discussed earlier,

the role compliance must play in assuring full compliance is difficult, but

essential. In order for the author to further understand the complexity of the

compliance processes, import and export compliance laws must be studied in

further detail.

r;------------------ -----------------------I 2.7 Import / Export Compliance Programs

Exports and imports fall under some form of export/import control. Robert

Imbriani (2008) acknowledged that export controls can be very general, such

as not dealing with denied parties or embargoed countries, or very specific,



such as requirement for an export license for a specific product or

destination.

Of interest, The Aberdeen Group presented research during 2007 which

found that enhancing trade compliance and global supply chain visibility were

two of the key themes dedicated to improving global trade management.

The study found that companies had veered away from viewing import and

export compliance as merely a way to reduce penalties, but as a tool that

could reduce total landed costs by maximising the use of various free trade

zones and preferential trade agreements. The study found that improving

total landed cost was ranked as the number one initiative around trade

compliance (Aberdeen Group, 2005).

Total landed cost was discussed earlier and, with the help of the planned

classification analysis to be conducted during the primary research stage of

the dissertation, the author hopes to be able to reduce the total landed cost

of a number of imported products through duty minimisation. If successful,

firm evidence will exist confirming the role compliance can play in reducing

total landed cost, through duty minimisation enabling competitive advantage.

Clearly, in order to conduct a classification analysis, investment must be

forth coming. With the primary aim of the thesis striving to examine the link

between the impact of investment in the trade compliance function and

competitive advantage, it should be proved, assuming saving through

reduced total landed cost can be achieved, that investment in trade

compliance will lead to competitive advantage.

In line with this theory and the aim of the thesis, the key findings from the

latest research into export compliance programmes, conducted by MK

Technology (2009), found that;

• "Compliance programmes are now being viewed as a contributor to profit

as well as a legal obligation.



• An effectively managed export compliance process can improve a

company's competitive position. Conversely, a badly designed and

implemented process can lead to lost sales, disappointed customers and

damage of a company's reputation as a reliable supplier and in many

cases carry heavy fines and other penalties.

• Participating companies concluded that export compliance programmes

contribute to profitability and enhance the corporate profile.

• Many companies closely guard their internal compliance procedures as

"Proprietary" with the conviction that they provide a competitive

advantage in the global marketplace. "

(Thales MK Technology ECBP Report)

Brown (2006) described a compliance programme as a programme

concerned with prevention, detection, collaboration and enforcement but

failed to mention, as uncovered by the MK Technology research, that

compliance programmes could be a contributor to profit, competitive position

and an enhancement of corporate image, which together, viewed as

proprietary, enables competitive advantage.

Brown (2006) stated that;

"It is a system of policies and procedures developed to assure compliance

with and conformity to all applicable federal and state laws governing the

organisation"

(Journal of Health Care Compliance, 2006. Brown)

Research undertaken by the Aberdeen Group (2005) found that inside small,

medium and large companies, within two thirds of the companies surveyed,



improving global trade management was among their top three corporate

initiatives. If the reasons for improving global trade management within the

companies surveyed by the Aberdeen Group are in line with the findings

uncovered by MK Technologies, (compliance can contribute to profit,

competitive position and enhancement of corporate image) there is good

reason to improve global trade management.

In order to improve global trade management, from a compliance stand

point, there should be a number of internal programs contributing to the

function.

Mckenzie (2006) identified nine key elements that belong in any effective

internal export compliance program;

• "Statement of corporate compliance commitment from the highest

levels of corporation

• Identification of resources (internal and external) for export

compliance advise and resolving

• Questions and disputes about export controls

• Product/technology/country classification matrix

• Order entry procedures that include export control analysis

• Transactions export license analysis against the classification matrix

• Destination/end use/end use/diversion risk screening

• Shipping hold until all problems/issues identified and resolved

• Recordkeeping procedures

• Procedures for investigating, correcting, and reporting (if applicable)

export compliance problems and violations. "

(Mckenzie 2006, Managing Imports and Exports)

Gleason (2006) outlined the following five-point customs compliance best

practises programme;



1. Take control of your related parties - audit, implement internal

controls, and train.

2. Watch the documents created in the United States that are

independent triggers of liability (e.g. SED and NAFTA certificate of

origin).

3. Do not make unnecessary or inaccurate statements on other

documents sent abroad (e.g. tariff classification on invoices, valuation

inconsistencies on invoices, generic certificates or origin with no

basis).

4. Do not change tariff classifications or value just because you are

requested to by a foreign buyer (related party or not).

5. Strive for global customs consistency, but recognise when that is not

possible and act to protect yourself.

Imbriani (2006) states that;

"implementing a programme of compliances best practices protects you

against fines and penalties, it also helps you avoid delays and prevent

competitors from gaining a tool to use against you. Other benefits include

improved customer satisfaction, increased employee efficiency and job

satisfaction, and reduced transactional costs. rr

(Solomon 2006, managing Imports and Exports)

Imbriani (2006) presented an 18 step programme for developing an export

management programme (EMS);



• Determine all employees involved in export and import functions and

their roles

• Appoint a compliance administrator

• Establish training programmes and records

• Review export and import control documents and retention

• Using the regulations, formalise written procedures

• Review your companies order entry process from the point of the

shipment or importation

• Create a flow chart that visually displays the process

• Develop procedures for the screening of export clients

• Create 'hold,' 'release' and 'authority' functions

• Develop procedures for proper classification of your products under the

harmonised tariff

• Understand the ECCN classification system and determine steps to

classify products being exported

• Access to the regulations and rulings

• Determine involvement of other government agencies with your

exports and imports

• Develop procedures to determine proper valuation of your exports and

imports

• Country or origin marking requirements

• Power of attorney procedures

• Export and Import documentation requirements

• Identify types of exports, imports, and re-exports handled by your

company.

Pupkin, as cited by Hansen, believes that;

"A solid and workable export compliance programme is one that is tailored to

an individual company's procedures. For a compliance programme to work,

it must be practical. "




Pupkin states that, as a minimum, an export compliance programme should

be inclusive of the following; A person responsible for ensuring export

compliance at the company, possibly a dedicated lawyer from the company's

office or general counsel. A statement of corporate compliance signed by the

company president and distributed to the staff and, also, the presence of an

understandable export compliance manual or handbook that can be used by

employees to identify problems and provide preliminary advice concerning

compliance.


Ballantine and Clark, as cited by Hansen (2004) advised executives to review

their compliance programme for what they described as the following basis

elements;

• Policy statement issued by senior official

• Overall responsibility for the compliance programme

• Allocation of particular compliance responsibilities among company

officers and employees

• Compliance procedures and safeguards

• Compliance manual or other documentation informing employees

about compliance programme requirements

• Training, education and updating regarding legal requirements and

compliance programme requirements



• Processesfor employees to secure compliance guidance and to report

suspected violations

• Internal compliance audits/reviews


It is argued that the way in which Export Management System (EMS) goals

are accomplished can vary significantly between organisations and the

markets in which they operate. The actual commodity, technology, or

services provided by a company will affect its programme (lmbriani 2008,

Managing Imports and Exports).

Imbriani (2008) states that;

"A company's export compliance programme should be tailored to its specific

exports and structures. It would incorporate not only compliance

procedures, but also the company's best business practices for export. When

establishing an EMS, a company should aim to implement a basic control

plan as quickly as possible, covering all key compliance issues applicable to

its exports. A continual improvement process should then be put in place to

expand and improve the procedures on an ongoing basis."

(Imbriani 2008, Managing Imports and Exports)

It is worth noting that Williams (2004) states that as a compliance

programme matures, each element must be reviewed to ensure processes,

procedures, and structure have evolved appropriately (Journal of Health Care

Compliance, Williams, 2004).

The importance is highlighted during investigations into violations of

compliance whereby the existence of a functioning compliance programme



can be a mitigating factor. Export Management Systems (EMS) and Export

Compliance Procedures are common titles for such written programmes.

(Imbriani 2008, Managing Imports and Exports).

Clearly, as has been uncovered during the review of import / export

compliance programmes, there is a vast amount of literature on the topic.

Research uncovered that, within the global market, many now view

compliance as a tool offering something more than basic prevention. A

reduction in total landed costs, enhanced corporate image, increased

profitability, were all found to be linked closely to the activities of the

compliance function. The various theories on what a compliance programme

should entail have been reviewed and will now be compared, during the

primary research stage of this thesis, to the functioning programme which is

in place within Company A. However, prior to disclosing the primary

research on this topic, it is important to review the present day information

systems and technologies which are available, offering a backbone to the

compliance programme and overall function

--~l 2.8 Information Systems and Technologies

Firstly, as stated by Brynjofsson and Hitt (1998) and as cited by Vannoy and

Salam (2008) academics and practitioners have long sought to understand

the relationship between investments in information systems, co~petitive

advantage, and firm performance. Although dating from 1985, Rackoff et al

(1985) believed the principal role that information systems had performed in

the past was one of operational and management support but argued that

more recently companies were using information systems strategically to

reap significant competitive advantage (Information Systems For Competitive

Advantage: Implementation of a Planning Process, Rackoff et ai, 1985). As

stated, this theory dates from 1985 but the author feels that the statement



holds truth today as the information systems capabilities from 1985 pale in

comparison to current information systems.

Again, the aim of this report is to study whether a strong compliance

programme, through increased investment in trade compliance, can prevent

violations and offer a competitive lead. As a direct result of what Porter

(1985) described as the information revolution, the author will examine

whether advancements in information technologies, if utilised proactively,

can lead to competitive advantage.

The Aberdeen Group (2005) argued that a $1 billion company could free $10

million to $40 million in cash by improving basic trade processes as a direct

result of improvement in information systems. Without doubt, a saving such

as this offers a competitive gain.

The research found that the number one pressure compelling firms to

improve global trade processes was the avoidance of customs and other

regulatory fines and penalties (Aberdeen Group, The CFO'sAgenda for Global

Trade Benchmark Report, 2005).

Porter (1985) believed that the information revolution has affectedcompetition in three vital ways;

• It changes industry structure and, in so doing, alters the rules of

competition;

• It creates competitive advantage by giving companies new ways to

outperform their rivals;

• It spawns whole new businesses, often from within a company's

existing operations.



(How Competition Gives You Competitive Advantage, Porter and Millar, 1985)

With regards to the trade compliance function, assuming that trade

compliance can provide more than basic prevention, it could definitely be

argued that investment in trade compliance, through utilising emerging

technologies, would provide opportunity to outperform the competition.

Damianides (2005), as referenced in the Information Systems Control

Journal, states that;

"One of the main concepts incorporated into IT governance is the need to

align IT with the overall business strategy. Organisations should take

advantage of emerging technologies to drive and execute the business

strategy"

(Damianides, Information systems Management, 2005)

Advancements in the use of emerging technologies within Company A will be

discussed during the primary research section of the dissertation. According

to the research gained interviewing key employees of Company A,

particularly the Trade Compliance Manager, the Apple I phone was being

considered to host various trade compliance applications. Interestingly, the

Trade Compliance Manager, Company A, when asked about his thoughts on

emerging technologies and whether they could enhance the trade compliance

function, believed they truly could and as an example of his forward thinking,

suggested that the organisations IT group work with the Apple I phone (the

organisations choice of business phone) to create a trade compliance

application which would allow denied party screening, dual-use / ECCN

classification lookup and a harmonised classification search tool. This topic

will be discussed in more detail during the primary research stage.



According to Fox and Noble (2003) and again, as cited by Damianides

(2005), building a strong internal control programme within IT can help to

gain competitive advantage through more efficient operations (Damianides,

Information systems Management, 2005).

Again, referencing the Apple I phone idea, as suggested above, it is clear

that, if possible, it would create efficiencies in the denied party screening

operation, the ECCN/ dual use look up operation and also the HTC search

operation - all of which could be conducted while travelling, out of the office,

out of hours etc, adding, as Fox and Noble (2003) argued, competitive

advantage to an organisation. These are clearly day to day operational

activities and although improved efficiencies in each would be beneficial,

collectively they will not generate the competitive advantage this thesis aims

to capture. Coupled with further advancements in technology, should an

organisation be willing to invest, there is definitely an argument for investing

in emerging technology and thus creating a competitive improvement.

L2.9 Third Party Service prOv_i_d_e_rs _ J

It is important to study the role that third party service providers have in

assuring compliance.

The BIS state that;

"Primary responsibility for compliance with the EAR generally falls on the

"principal parties in interest" in a transaction, who are usually the U.S. seller

and the foreign buyer. However, freight forwarders or other agents acting on

behalf of the principal parties are responsible for their actions, including the

representations they make by signing an export declaration or other export

control document. To help avoid liability in an export transaction, agents and

exporters must decide whether any aspect of the transaction raises red flags,



inquire about those red flags, and ensure that suspicious circumstances are

not ignored. Both the agent and the principal party are responsible for the

accuracy of each entry made on an export document. Good faith reliance on

information provided by the exporter may excuse an agent's actions in some

cases, but the careless use of pre-printed "No License Required" forms or

unsupported entries can get an agent into trouble."

(http://www.bis.doc.qov/complianceandenforcement/dontletthishappentoyou

2007 sm.pdf)

Reynolds (2009) suggests that, as a result of increased scrutiny from

regulatory agencies, combined with the numerous rules and regulatory

requirements to conduct international business transactions, globally

operating organisations should expect more from third party service

providers such as customs brokers and freight forwarders.

"Service providers should be more things to more people especially in the

area of compliance, education and training and informed compliance.

International trade participants, who are preparing service provider reviews

or selection criteria need to incorporate the concept of increased service

offerings from service providers to match the increased scrutiny that

regulatory agencies are placing on the trade community"

(Reynolds (2009), Managing Imports and Exports)

Company A argued that;

"A review of freight forwarder export procedures to ensure compliance was

essential"

(Trade Compliance Manager, Company A)



Raia (2009) states that;

"Regardless of whether it's an import or export, ensure your service provider

calls you with any question as to the shipment and does not make any entry

or export decisions on your behalf - A compliant importer/exporter chooses

compliant service providers"

(Raia 2009, Managing Imports and Exports)

With regards to customs brokers and logistics service providers, Company A

should have controls in place to monitor the work that the third parties do on

their behalf, as the acts performed by third parties concerning the

organisations goods are legally the acts of the principal.

r2.10 Violations/Settlements lAs detailed in section 2.6 of this dissertation, there are various regulatory

bodies governing trade within international markets.

In recent years, FCPA violations have increased steadily. Since 2002, there

has been over USD 1.2 billion in settlements and penalties involving more

than 30 countries (Conroy and Wong 2009).

The FCPA prohibits the bribery of foreign official and requires that a company

retain accurate books and records.

FCPA regulations are enforced by the Securities and Exchange Commission

(SEC) and the U.S. Department of Justice (DOJ).



Conroy and Wong (2009) reviewed FCPA settlement statistics from 2002

through to 2008. The 10 largest regulatory settlements ranged from USD

16m to USD 800m.

As identified by Conroy and Wong (2009) the number of settlements per year

had generally increased.

As referenced by Conroy and Wong (2009), during March, 2008, the DOJ

stated that the department had substantially increased its focus on FCPA

violations.

"Following the trend of settlements over the past five years, and considering

recent statements made by the DOJ, the total number of settlements going

forward may continue to increase"

(http://www.nera.com/extImage/Pub FCPA Settlements 0109 FinaI2.pdf)

There are a number of reasons for the increase in US export enforcements

which have resulted in increased violations and severity of the penalties.

Jackson, Assistant Secretary For Export Enforcement (2007) states the

following;

"The attacks of September 11 were deadlier than Pearl Harbor. World events

since then demonstrate that the United States and its allies continue to face

the threat of terrorist attacks. In August 2006, a plot to use a combination of

chemicals and explosives on multiple transatlantic flights from the United

Kingdom was disrupted by U.S. and British authorities. One of the chemicals,

osmium tetroxide, has a legitimate use in scientific research, but is highly

destructive to the eyes, lungs and skin. Tragically, we are not always so

fortunate. On July 7, 2005, a series of coordinated terrorist bombings

targeted London's public transportation system, killing over 50 innocent

people and injuring over 700. It was the deadliest attack on London since



World War II. These and other events remind us that we must remain

vigilant in the ongoing war against terror. Many products exported from the

United States are classified as dual-use. They are intended to be used for

commercial purposes, but can also be used by terrorists, or in weapons ofmass destruction or conventional weaponry. The U.S. export control laws

help foster legitimate trade in dual-use items, while simultaneously keeping

our most sensitive goods and technologies away from those who seek to

cause us harm. Achieving both of these objectives is crucial. Our economy

depends on the development of high technology and legitimate trade in dual-

use items. President Bush has said that, "The role of our government is to

create an environment in which the entrepreneur can flourish, in which minds

can expand, in which technologies can reach new frontiers. " That is especially

true when it comes to doing business in the global economy, which involves

exports. To remain competitive in today's global business environment, wemust continue to open more global business markets and maintain a

business environment that encourages entrepreneurship and innovation. Yet,

in today's complex world, our innovation has become a tool that our enemies

seek to use against us. As the President has stated, "The same technology

and global openness that have transformed our lives also threaten our lives.

The same innovations that make it easier to build cars and computers make

it easier to build weapons of mass destruction." As we engage in legitimate

trade, we must not allow that to happen. Denying weapons of mass

destruction to countries of concern and their terrorist allies is a key

component of the 2006 National Security Strategy. By understanding and

complying with our U.S. dual use export control system, you playa vital role

in protecting our national security. This booklet is designed to help you do so.

Herein are examples of the serious consequences of violating our export

regulations. Each chapter contains actual closed criminal and administrative

cases representing violations of particular controls set forth in the Export

Administration Regulations (EAR). All parties involved in export transactions

have responsibilities under the EAR, including exporters, freight forwarders,

carriers and consignees. Serious sanctions are imposed on violators,



including prison terms, substantial fines, and denials of export privileges.

Such violations can also damage the reputations of companies and their

executives.

The Bureau of Industry and Security (BIS) will continue working to keep the

most sensitive goods out of the most dangerous hands. We will vigorously

pursue enforcement actions against those who violate U.S. export and

antiboycott laws. Our national security demands nothing less. But industry

compliance is the first and best line of defense in protecting our national

security. Indeed, by forging a partnership in compliance, government and

industry can protect our national security and promote prosperity. We

welcome you as our partners in that effort. "


2007 sm.pdf)

The penalties for violations of international trade laws are severe, as

demonstrated in the introduction, Chapter 1.

Referenced below is a short list of export violations and their corresponding

penalties. The list gives precedent to the severe penalties resulting from

non-compliance. A larger list of U.S. export violations can be found in

Appendix A.

2009 FMC Technologies, Inc. - $610,000 settlement related to 78 unlicensed

exports of butterfly and check valves classified under ECCN2B350 to various

countries.

2009 DHL - $9.4MMjoint settlement with BIS and OFACregarding allegations

that DHL unlawfully aided and abetted the illegal exportation of goods into

Syria, Iran, and Sudan and failed to comply with record keeping

requirements of the EARand OFACregulations.



2009 BJ Services - $800,000 civil penalty for 72 violations of the EAR -

voluntary self-disclosure regarding exports of valves classified under ECCN

2B350 to 11 countries without export licenses

2005 BJ Services - $142,450 settlement for exporting chemicals to various

destinations without the required export licenses and with knowledge that a

violation would occur; made false statements of SEDs and in AES submittals.

2003 OTS Refining Equipment settlement - exports and attempted exports of

oil-field and industrial equipment to Iran in 1997 and 1998 - 20-year denial

of export privileges; OTS President sentenced to 51 months in prison

(embargo violation)

2003 Omega Engineering settlement - exports of laboratory equipment to

Pakistan in 1997 - $500,000 in criminal and administrative fines; Vice-

President sentenced to 10 months in prison (licensing violation)

2003 Honevwell settlement - unlicensed exports of hydrogen fluoride to

Mexico from 2001 to 2002 - $36,000 fine.

2005 Parker Hannifin settlement - unlicensed exports of fluid control valves

to Taiwan and China - $185,000 fine.

(Company A, Presentation)

In many of these cases, there would be an argument that investment in

trade compliance could have prevented the violation from occurring. Without

doubt, investing in trade compliance function would have minimised the risk

of the violation occurring. A functioning internal export / import

management control program, IT systems capable of managing global trade

and education of the personnel within the organisation would have minimised



risk; however, all of this would require investment. The thesis aimed to

study whether investment in trade compliance could generate competitive

advantage. If it is argued that trade compliance, over trade non compliance,

generates competitive advantage through corporate enhancement, it can be

argued, in the simplest of terms that investment in trade compliance will lead

to competitive advantage.

Export violations, such as above, are published in the Wall Street Journal and

made aware to investors through corporate notifications to the market. An

organisations share price is immediately influenced when the market is

informed of the violation. DHL, as above, were fined $9.4M for unlawfully

exporting goods into Syria, Iran, and Sudan. In addition to the settlement,

DHL agreed to improve its compliance program, and hire an outside auditor

to mon itor com pliance (http://www.joc.com/government-regu lation/dh 1-

pays-94-million-export-violation).

The share price of DHL, on news of the violation, dropped drastically, from

15.93 USD to a low of 6.64 USD. Post settlement, the share price

recovered, which suggests the market viewed the potential severity of the

penalty for the violation as more severe than the penalty given

(http://ir2.flife.de/data/dpwn/dpwn dhl kujchart e.php?width=600&height=

415&ir charttype=LINE&ir gd1=0&ir got id bench1=0&ir got id bench2=0

&ir got id bench3=0&ir got id bench4=0&ir ind=&ir ind2=&ir tage=1095

&ir sec id= 1000253911&ir exc id=258&ir name).

The below table has been adapted from research undertaking by Conroy and

Wong (2009) and published in their article, FCPA settlements, its a small

world, The figures in the table detail the negative impact which news of a

violation can have on an organisations share price. It also details the

settlement figure.



Figure 1

Market-Adjusted Price Reactions to FCPA-Related News and

Announcements

Company Date of First Market- Market- Total

News of Adjusted Adjusted Regulatory

Potential Price Market Cap Settlement

FCPAAction Reaction 1 Impact ($M) ($M)

Syncor 6/11/02 -44.95% (343.17) 0.50

Internationa I

Corporation

Willbros Group, Inc 16/5/05 -39.04% (133.95) 32.30

Immucor, Inc 2/11/04 -19.21% (176.38) 0

Invision 30/7/04 -14.37% (121.80) 1.12

Technologies, Inc

Schnitzer Steel 1/12/04 -12.71% (145.45) 15.23

Industries, Inc

Siemens 28/10/05 0.18% 8.36 800

Aktiengesellschaft

BJ Services 10/3/04 -5.01% (350.35) 0

Baker Hughes, Inc 13/6/03 -3.90% (461.55) 44.08

Statoil, ASA 10/9/03 -2.59% (529.84) 21

Chevron 11/9/03 -0.45% (349.22) 55

Corporation

(http://www.nera.com/extlmage/Pub FCPA Settlements 0109 FinaI2.pdf)

As detailed above, the news of the potential FCPA violation severely affected

the share price of Syncor International Corporation and Willbros Group, Inc

with the share price dropping -44.95% and -39.04% respectively. Quite

clearly, as the share price is the number one driver of a publicly traded

company, it will impact current and future investment. Baker Hughes

witnessed a relatively small percentage drop but still lost $461.55M from its

market capitalisation. Interestingly, Siemens Aktiengesellschaft suffered the



highest ever FCPA settlement which totalled $800M and on the date of the

news of the potential FCPA violation, the share price remained stable, at

0.18% increase.

Conroy and Wong (2009) believed that;

"The table indicates that in some instances the implication of an alleged FCPA

violation is considered serious by the market, over and above what one

might expect given the magnitude of any disgorgements, fines, or penalties

paid. For example, when Syncor International Corporation announced to the

public that it was investigating suspicious payments in Asia that may have

violated the FCPA, its stock price plummeted almost 45% on a market-

adjusted basis, implying a loss of $343 million in market capitalization,

despite the relative small amount paid in its eventual settlement with the

SEC and the DOJ"

(http://www.nera.com/extImage/Pub FCPA Settlements 0109 FinaI2.pdf)


RESEARCH METHODOLOGY CHAPTER 3

CHAPTER 3 - RESEARCH METHODOLOGY

This chapter will focus on the subject of research methodology and aims to

discuss the research methods surrounding the aims and objectives of the

thesis. Further to this, why and how the chosen research methods were

used. Justification and rejection for the most appropriate approach of

methodology will also be discussed. Lastly, to conclude, the chapter will

assess certain limitations of the research.

r-3~i-------P~ospectiveTechniques of Investigation~

The potential research methods available will be identified within this section,

which the author feels could be used for the purpose of the thesis.

3.1.1 Secondary Research

Malhorta (1993) explains secondary research involves the gathering of data

for a purpose other than just the particular problem at hand. It allows the

expansion of opinion when reading about the subject as opposed to one

single definitive answer. As explained below secondary research is based...

"with someone else's rationale and assumptions about what is important.

That is, if they carry the possible risk of constraining your freedom to

interpret findings becauseof the authors emphasis or selectivity. "

(Jankowicz 2005, p.60)

Secondary research is valuable and reliable when used in certain perspective

to support and confirm an argument, links theoretical assumptions to specific

circumstances and adds critical assessments to one's work (Cameron 1999).



With secondary research being easily accessible, relatively quick to collect

and inexpensive it makes this type of research very beneficial to any

researcher. Malhorta (1993) states it further helps to recognise a problem,

enhance definition of a problem, build a method to solving the problem,

formulate an suitable research design, answer specific questions and

examine, understand and evaluate primary data to then prove objectives

more insightfully.

The main types of secondary information used by the author within this

thesis came from resources available in the Georgina Scott Sutherland library

at The Robert Gordon University. The journals obtained were from the

internet from research companies including Aberdeen Group and MK

Technology. Further to this journals were obtained from the The Robert

Gordon University's Athens database which comprises; Mintel Reports, FT

Intelligence, Keynote, Business Source Premier and Emerald. The author

was also lucky enough to take advantage of the internal presentations

submitted within Company A on the subject of compliance.

Although the author understands that while journals provide up-to-date

opinions of business leaders and journalists, the support of textbooks will

provide the thesis with academic backbone. However, early data gathering

would imply that detailed secondary research in the form of academic

textbooks, directly linked to the aims and objectives of this report, will be

limited and therefore the need for detailed primary research is essential.

Careful investigation was allowed with the huge collection of secondary

information, however time was needed to ensure only relevant data was

selected on the subject of the thesis. The author was then able to develop

on academic theory to provide a basis for evaluation and discussion,

supported by each kind of secondary research gathered.



When satisfied with concluding the search of secondary research, the author

was then readily prepared to build a basis for the start of primary research.

"Examination of available secondary data is a prerequisite to the collection of

primary data. "

(Malhorta 1993, p.118)

3.1.2 Primary Research

A simple definition of primary research is given below;

"primary data comprise information collected or generated by the researcher

for the purpose of the project immediately at hand. "

(Weiers 1988, p.64)

Ultimately collection of new data has been gathered for the topic of this

thesis. This type of research can be time consuming in comparison to

secondary research, proving more challenging. The primary research

gathered coupled with the key findings within the literature review will

provide discussion for the data analysis chapter.

Primary research falls into two categories; Quantitative and Qualitative

techniques.

3.1.2.1 Quantitative vs. Qualitative Research Methods

Quantitative is typically expressed in numerical form incorporating facts and

figures that can be counted and measured.



"A research methodology which seeks to quantify the data and, typically,

applies some form of statistical analysis. "

(Malhorta 1993)

Qualitative research is, as described by Dibb et al (1997), research that deals

with information believed to be too complex to quantify, for example opinions

and value verdicts. As opposed to quantitative research, qualitative focuses

on understanding rather than measurement.

"Research which blends with quantitative measures by providing a more

detailed understanding of customer demand. Qualitative techniques involve

open-ended questioning and probing. The data is rich, human, subtle, and

often very revealing. rr

(McDaniel Marketing Research Essentials, 1995)

Individual advantages and disadvantages can be drawn from each type of

primary research type. For example, quantitative research generalises

results from a large sample to the population of interest, it is structured,

statistical and the outcome easily recommends a final course of action.

Whereas qualitative comes from a smaller sample of unrepresentative cases,

it is unstructured, non-statistical and the outcome helps develop an

understanding. Therefore the author must best employ each method

appropriately for the types of answers required to prove the thesis

objectives.

____IRationale for Choice of Research Method

As the author is an employee of Company A, a vast amount of data, both

qualitative and quantitative is readily available. When using quantitative



data, the author collected numerical information mainly being HTC

classification data which in turn allowed the author to reference the levels of

duty attached to each classification which then allowed review into the

volume and cost of products, ultimately looking for savings. This information

is helpful and easy to conclude answers on the thesis topic, as the data is

structured and statistical.

Further to this key personnel within Company A will be interviewed with the

aim of generating rich amounts of qualitative data which will include the

employees of the following departments; compliance, legal counsel, research

and development (technicians), country specific managers, agents and

brokers. From the entire collection of research, a best practice can then be

recommended to the countries being affected by classification variances, and

with help of information technologies available to Company A, ideas will be

put forward for the implementation of a globally reaching classification

system.

Several techniques can be used when conducting interviews, which will now

be discussed.

3.2.1 Probing

To help acquire significant answers and concealed issues, probing is a

technique which allows the author to push for opinions that are specifically

required on the thesis subject.

"A motivational technique used when asking questions to induce the

respondents to enlarge on, clarity, or explain their answers. "

(Malhorta and Birks, 2000)



For example, questions such as, "Can you explain why you say this?" "Is

there a specific reason why this is the case?" "Would you like to add anything

to your answer?"

Whilst the interviewer must achieve responses on the matters important to

their aims, the respondent must be given the opportunity to answer the

questions in full, allowing them to say all that they have to say on each

question. The interviewer, using the 'probing' technique, must use it in a

way of seeing the potential in a respondents answer, giving a more

illustrative reply.

3.2.2 Steering

Steering can ultimately dictate the direction of conversation, providing a

guide through the question asked and comments made by the respondents

(Jankowizc 2005).

In order for the respondent to answer in the correct context, steering is an

intelligent skill to prompt and direct answers wanted.

"The exact way which you phrase your question can have a significant effect

on the answers you are given by the interviewee. H

(Cameron 1999, p.265).

3.2.3 Close-ended Questions

Quantitative research mainly uses the technique of close-ended questions

giving short and to the point answers, in the manner of 'yes' or 'no.' There

are instances were qualitative research can also utilise close-ended

questions. However, for the subject of this thesis, the author did not feel this



technique was appropriate in trying to achieve the aim and objectives,

therefore were avoided where possible.

Malhorta and Birks (2000, p.326);

"Questions that pre-specify the set of response alternatives and the response

format. "

3.2.4 Open-ended Questions

Open-ended questions leave respondents open to express replies in their own

words, as stated by Kent (1993). They facilitate in respondents being able to

convey their own casual attitude and beliefs towards the questions being

asked. The researcher benefits richer insights as Malhorta and Birks (2000)

suggests a lot less influence is given to the type of response given by the

respondent, with non-biased questions allowing for a non-structured answer,

that close-ended questions give.

13.3 Interviews

There are two characteristics of interviews, as described by Tull and Hawkins

(1990), which are structured and unstructured. For the purpose of meeting

the central aim of the thesis, unstructured interviews were appropriate.

However, during investigation into interview techniques the author

discovered that Smith (1972) referenced semi-structured interviews. Smith

(1972) stated;

"an interview guide is usually provided in order that information about the

same topics can be obtained from all respondents but the order in which the

information is elicited and the extent of the probing and exploration depends

on the interviewer. If



(Smith 1972, p.120).

Taking the view of Smith (1972) into account it could be argued that the

interviews undertaken with the key personnel within Company A were semi-

structured.

i 3.4 Limitations of Research!

• Compliance is viewed as proprietary

With regards to primary data, as compliance operations are viewed as

proprietary, it was near impossible for the author, taking account of the aim

of the thesis, to gather the data necessary to achieve the aim. As a result,

the primary data available was limited to Company A. Secondary literature

was also limited as trade compliance is a relatively new subject with few

studies focussed on investment and competitive advantage. It would have

been beneficial to compare Company A with a peer but, due to the sensitive

nature of the topic, this was not possible.

• Time Restraints

Each area covered during the literature review could have been studied in

greater detail had there been more time. Essentially, as the subject of trade

compliance is fluid, each of the topics studied during this project could have

potentially had their own in-depth study and analysis. With regards to the

classification analysis, the author only managed to analyse the data covering

two countries due to the time and effort taken to retrieve the available data.

With more time, the author would have achieved greater depth to the

results.



• Location Restraint

As the Author was based in Aberdeen and the Company A's compliance group

were based in the US, face to face interviews were not possible. However,

telephone interviews sufficed. The data gathering for the classification

analysis would have been made simpler had the author direct access to the

Australian and Kazakhstan facilities but, with the help of email

communications and shared systems, it was possible to conduct the analysis.

• Cost Restraints

Linked with location constraints, cost constraints prohibited direct access to

the locations under review. Costs restraints also made face to face

interviews impossible.

13.5 Hypotheses

The author designed the hypotheses as follows;

Hi Increased investment in the field of compliance will lead to

competitive advantage.

H2 Information systems can facilitate an internal globally reaching

classification programme.

H3 In certain cases, a products total landed cost will be reduced as a

result of greater efforts in classification.


DATA ANALYSIS CHAPTER 4

1 CHAPTER 4 - DATA ANALYSIS

Within this chapter the author will take key findings from secondary research

from the literature review and linked with the primary research (both

quantitative and qualitative) will provide discussion for the reason of proving

related objectives and hypotheses. Important outcomes and analysis will

enable the author to then provide suitable conclusions.

14.1 Company A - Overview

During interviews with the key personnel, Company A, it was important to

gather their personal thoughts on what they believed the trade compliance

function could offer Company A.

The main points are noted below;

• Avoidance of penalties and seizures

• Customer's assurance of product delivery

• Customer assurance of compliance

It is clear from these responses that Company A believe trade compliance

can offer competitive advantage. Avoidance of penalties and seizures,

customers' assurance of product delivery and customers' assurance of

compliance definitely generate a competitive edge.

Company A argued that there was a potential for severe penalties, even if

government only suspects a violation has occurred or might occur (fines

and/or imprisonment);



"There would be disruption to business during investigation, loss of

reputation, loss of government contracts, loss of export privileges and most

importantly, an impact on stock value based on corporate governance. "


Again, as discovered and discussed during the secondary research, non

compliance and a negative share price movement are entwined. It is a

positive that Company A are aware of this fact. Also, the study conducted

by MK Technologies found that efforts in compliance could enhance corporate

image, so, when the Trade Compliance Manager speaks of a loss of

reputation, it is in-line with the MK Technology study. As reputation is

something which many market leaders rely on, a compliance program

offering protection should be a sought after as an internal tool. In line with

this thought, the Trade Compliance Manager stated the following;

"Our customers are assured of product delivery through our commitment to

compliance."


This statement provided further evidence that the work of the compliance

department within Company A assures the customer of product delivery

through a commitment to compliance. As touched on during the introduction

to the thesis - with huge efforts and focus on supply chain effectiveness, the

importance of a smooth, unproblematic and reliable supply chain and the role

compliance can play in assuring this should not be understated. First hand,

primary evidence now exists supporting the role of compliance in assuring an

effective supply chain, and, clearly, an effective supply chain offers




During the literature review, the author discovered that the most basic US

export regulations were extremely complex and there were numerous

regimes governing global trade. The Trade Compliance Manager, Company

A, stated;

"Creation of Company A's trade compliance group with responsibility for

overseeing the Company's trade compliance program was to insure business

unit compliance with the export regimes of all countries in which Company A

operates or with which the company has business interaction. This trade

compliance program includes training and site assessment methodology for

Company A business units"


In order to be fully compliant with the various and varying trade laws, from a

purely protective preventative stand point, (which, however, contributes to

competitive advantage, through, as previously stated by the Compliance

Manager, customer assurance of product delivery) the investment Company

A makes in its compliance program does contribute to competitive

advantage.

With regards to controlled, dual-use technologies, as discussed earlier,

products with either a US ECCNClassification number, a UK Product Rating

number or an EU Control Number, the compliance manager within Company

A believed;

"There is a competitive strength in answering our customers concerns

affirmatively, that we will not contaminate their supply chain with controlled

goods. I am curious how our peers approach this. Our strategy is to keep

controlled goods out of the Company A inventory list. For example, our

centrifuges on the ES side are not controlled at this time, and we are doing



our best to keep them this way. In the chemistry, we deliberately use "DEA"

instead of TEAsimply to keep our goods clear of controls"

(Compliance Manager, Company A)

From this response, it is clear that Company A are qivmq the trade

compliance role some calculated thought and clearly view the function with

respect. The decision to exclude controlled technologies from their supply

chain assures the customer of a commitment to compliance, which not only

generates the competitive advantage touched on above but also, as

researched during the violations section of the literature review, completely

minimises the risk of potential export violations through export / import of

controlled technologies.

Although excluding controlled technologies from the supply chain minimises

the risk of non-compliance with the regimes governing controlled

technologies, the Trade Compliance Manager, Company A, argued that the

following new changes highlighted that the export compliance risks were still

high;

• "Dramatic increases in number and magnitude of administrative cases

by the 815 and DOTe. (focus on freight forwarders).

• Increasingly aggressive criminal enforcement/theories of prosecution.

• New regulations on exports to China which control previously

uncontrolled items if they are destined for a military end use.

• Lifting of U.S. sanctions on Libya in 2004 and removal of AT

designation on August 31, 2006. New sanctions against Libya 2011.



• Significant new sanctions imposed on Syria (May 2004).

Accountability Act. rr

Syria


It is clear that investment in trade compliance minimises the risk of non

compliance and compliance creates competitive advantage through

customer's assurance of product delivery and customer's assurance of

compliance, which was highlighted within both the primary and secondary

research. Within Company A, to the extent of generating a compliance

program, it is evident that investment to do so had taken place, which, as

stated by the Compliance Manager, gives Company A a competitive edge.

However, it is difficult to quantify a competitive advantage through customer

satisfaction as a result of compliance. Company A have had no export

violations which could be quantified as a competitive advantage over their

peers. However, the author decided, in order to quantify competitive

advantage within Company A for the purposes of this examination, it was

important to conduct a classification analysis which would hope to find

reduction in total landed cost through duty minimisation.

14.2 Classification analysisL

i

.JClassification and country of orrqm sets the rate of duty. Incorrect

classification affects duty rates, value added tax rates, origin, labelling,

permit requirements, license requirements, and export controls (Customs,

Kerr 2009).

In order to understand the importance of classification compliance, it should

be recognised that where goods have been incorrectly classified, it can be



possible to reclaim duties going back three years. On the same hand, it is

possible for customs authorities to also claim back duties.

Holly (2004) states that;

"Many organisations are unaware that the classification of their imported

goods can be so important. They leave the classification to freight agents,

acting on their behalf, who may not be fully aware of what the imported

goods are. It is important to bear in mind that the importer is legally

responsible for the correct tariff classification of their goods, and not the

freight agent. In a worse case situation, customs can severely penalise

companies underpaying duties"

(Store Manager: Import Duty, Holly 2004)

Compliance in this area is of vital importance as U.S. customs and border

protection's office do conduct yearly 'focussed assessments'. A focus

assessment (FA) is the largest audit conducted by customs and will involve a

review of customs tariff codes. FA's can and often do result in large revenue

recoveries for customs (The journal of Commerce, Pisani).

Although reducing total landed costs and increasing competitive advantage is

a common theme covered by various researchers, academics and

organisations, this section of the report will investigate the use of

Harmonised Tariff codes (HTS) within Company A as a means of reducing

total landed cost through duty minimisation.

As previously stated Company A has locations in more than 75 countries and

employs approximately 13,000 persons in over 400 service locations around

the world. The trade compliance function must ensure compliance in each of

the 400 service locations.

As discussed, a big part of trade compliance is ensuring HTC harmonisation.



In order to tackle global HTC harmonisation, investment must be made.

In an operational reality, as a result of lower oil and gas prices, many of the

world's largest oil and gas producers are cutting costs and actively searching

for cost reductions. Service companies such as Company A have found

2009/2010 to be significantly more challenging than previous years with

revenues and profits down. Many operators are now reviewing existing

contracts and re-tendering expired deals. As the industry remains

competitive, aggressive tendering has become common practice. In times

such as these it has never been as important to have ways and means of

gaining competitive advantage.

Harmonised tariff codes or commodity codes as they are also referred to,

drive duty rates and make up a substantial part of the products landed cost

wherever the material is imported. Although the codes are labelled

"harmonized," there are, as the author has uncovered, wide ranging

differences from country to country.

The negative impacts associated with inaccurate trade documentation are

increased duty payments, inaccurate declarations, discrepant letters of credit

charges, and expediting costs due to customs clearance delays.

From a U.S. stand point, the author has gathered the codes Company A have

been using throughout Kazakhstan and Australia. The codes have been

gathered for products which are important to the organisation by dollar and

by volume and they will then be compared to those used for U.S. imports.

The codes used for U.S. imports have been verified by the company's trained

scientists and chemists.

The quantitative data will be carefully analysed with the hope that variances

in codes can be identified and opportunities to argue for better codes at

destination, based on the codes already in use within the U.S., implemented.



Where high dollar savings possibilities are found, the changes will be

discussed with the significant stakeholders. As a direct result of the

qualitative data gathered, the information systems available to the company

will be examined, and plausible strategies will be recommended to

management with the hope that the systems can incorporate a fully

functional, globally reaching classification programme.

The codes which Company A have used for U.S. imports have been analysed

with the companies specialist scientists, and there is a consensus that the

codes being used are correct and also to advantage. Importantly, the codes

are accepted by U.S. customs. It is apparent, within Company A, that there

is a need for global control concerning classification. As an employee of

Company A, based in the U.K. and responsible for exporting materials to a

vast amount of countries, the author can confirm that no such controls

currently exist.

Interestingly, Imbriani, along with Mckenzie and Gleson (2008), suggest

that developing procedures for the proper classification of products be part of

an export management programme. Qualitative research will attempt to

uncover whether there are procedures in place to correctly classify the

exported materials. It should be highlighted at this point that Company A

and its employees are not classifying, for example, woollen jumpers and

cotton shirts, they are, in fact, classifying complex manufactured drilling

solutions containing many components. To illustrate the ambiguity

commonly faced with customs tariffs, Holly (2004) provides an excellent

example of a case whereby 10% of the total landed costs were saved

through a reduction in duty charges.

It involved an organisation operating within the furniture industry. The code

for (cushions - parts of furniture) attracts a 2.7% duty rate whereas the tariff

code for (cut and sewn fabric cushion) attracts a 12% duty rate. It is clear

that while operating within a global market, taking into consideration

An examination into the impact that investment in trade compliance has upon a firm's competitive 60advantage I


language and cultural differences; it would be easy to use either of the

classifications. In this case, the organisation in question was able to argue

successfully with customs that the cushions should be classified as parts of

furniture and charged a 2.7% duty rate (Store manager, Import duty, Holly,

2004).

The central aim of this thesis, if successful, will provide the reader with

unquestionable evidence that links information management with

compliance, resulting in notable competitive advantage, assuming

investment is forthcoming.

Although, as the author found during the classification review, outside

consultants are pushing to take control of an organisations classification

analysis programme, most of which request a 15% cut on the savings found,

dating back 3-4 years, this exercise was conducted in-house and not with the

use of an outside consultant. It could be argued, successfully, that a 5%

saving on a high volume / high cost product would be beneficial in the

current market, if the analysis is conducted in-house. 5% diluted with

consultant fees may not be cost effective. This was not a hugely time

consuming project as the HS codes were already in place.

Also, it is important that globally, the organisation is operating correctly with

regards to classification. This project also offers an opportunity to self audit

the various import/export business units - until a time comes where it is

possible to harmonise (at least the first 6 digits) globally within the

organisation, this will always be a worthwhile compliance project. Savings

opportunities are obviously an added bonus. Again, rather than simple

prevention, evidence exists supporting competitive advantage through costs

savings.

By conducting the exercise in the manner set out above, the chances of

disclosing confidential/proprietary information was zero. The author would



be handling HS codes and although confidential in the sense that Company A

would not want their competitors to gain access to a list of utilised HS codes,

it was conducted in-house. The disclosure of proprietary information was a

worry for Company A which links well with the research conducted by MK

Technology. The compliance programme, as a whole, is now viewed as

proprietary.

During the interview, when asked about a potential classification analysis

project, aimed at proving the latest research by the Aberdeen Group and MK

Technologies correct, in that compliance can in fact reduce total landed costs

creating competitive advantage, the Trade Compliance Manager, Company A,

stated;

"1 think the issue is optimising landed cost by duty minimisation, which can

only be accomplished by serious efforts at classification, in the destination

country. However, it isn't practical to expect all import points to have the

resources to classify (chemists, engineers, customs geeks) so an effort

emanating out from excellence centers (or HQ, regional or otherwise) can

bring serious savings to the field offices.

1 think there is also a way to enjoin classification efforts with supply chain

security initiatives. The harmonised codes are now being used by

governments for visibility into ocean containers (preventing WMD,monitoring

Haz Mat, etc)."


As stated earlier, the disclosure of proprietary information was a worry for

Company A. During an interview with the Intellectual Property Counsel,

Company A, the following was noted;



"Many of our flagship products have proprietary formulations. The ownership

of the intellectual property associated with a specific formulation may vary

depending upon the circumstances surrounding the development of the

product. Thus, each product will have to be looked at individually to

determine what (if any) legal obligation may encumber the disclosure of that

formulation.

I would recommend that this process of evaluation for cost savings begin

with the preparation of a prioritised list of products. We can then engage in

a systematic determination as to the legal obligations that may preclude

disclosure.

I fully support the initiative and drive to reduce costs associated with our

products. However we must engage in this process in a way that manages

the legal and business risks in an appropriate manner. Or perhaps put in

plainer terms, it does not make good business sense to save $50,000 in tax

tariffs only to incur $250,000 in legal expenses because in our efforts to save

money we breached a confidentiality obligation."

(Intellectual Property Counsel, Company A)

When pressed further on whether the analysis would be possible without the

disclosure of the chemical compositions, the Intellectual Property Counsel

responded;

"This type of detailed chemical composition is normally not disclosed, as very

often it is the property of the chemical manufacturer - not of CompanyA.

Where there is a legal requirement we can obtain permission to disclose the

composition from the manufacturers but this can be a lengthy process in

some cases.



Do you have a comprehensive list of what materials we are talking about

here?

We do have a trade compliance group in Houston who (using a trained PhD

Chemist) initially evaluate the detailed chemistry of each of our products and

based on this assign the correct tariff codes that are used for import/export. "

(Legal Counsel, Company A)

In order to move forward, within the legal scope desired by the Intellectual

Property Counsel, it was important to discuss and outline a plan with the

Trade Compliance Manager.

The following was decided;

"The purpose of the exercise is twofold - depending on who you are, you can

rearrange the priority of these: A) Look for savings B) Compliance (which

now includes cargo security).

You are right that our systems are synchronised, and yes, they carry the US

codes. This, coupled with feedback from the destination countries, is enough

to begin a comparison. Then, looking at differences, especially on products

with high volume, high cost, can really make a savings impact (and foster

compliance).

Singapore I believe has GSTat 7% - that is kind of like your VAT.

There are countries this project won't help - if a country says everything is

'free,' there is nothing to save (however they may need 'compliance' help).

One of the efforts Company A has advocated is to compare in country

Harmonised Customs Classification use with what we know to be the



American codes - not saying codes in Australia, for example, are wrong, but

there could be differences and we should take a look. Since we have access

to the chemists and mechanical engineers here in the Houston HQ, we are

able to generate confident classifications, but due to lack of one unified

transportation system, our lists of codes may not be in sync. Worldwide, the

codes tend to be harmonised out to 6 digits - which is a very good place to

begin the comparison. An example of reviewing codes during a tender, a

Statoil tender in Brazil a couple of years back, my assistant and I looked at

the high value / high volume items involved, at the codes our Rio office was

applying, the comparative the US codes we are confident in, and mapped our

US code to its equivalent in Brazil, to see if we could find savings. In the

example of Conqor 404, we identified a 12% savings opportunity, among

others. And Conqor 404 is a very expensive product.

So the approach for this project would be to assemble the list of items you

import, sorted by high value / high volume, and the harmonised classification

codes applied by your broker to each item. (Your broker can likely run this

report, easily).

We will then compare to the US choices, looking for differences. Where we

find differences, we will report back, noting the duty rate (savings - or

possibly increase) It will be up to your office in Australia to decide to apply

which code; it is always up to the importer of record.

An importer has discretion to choose its codes. If customs issues a challenge,

then information on composition can (with permission from legal) be

disclosed to the authority as confidential (I am sure AU customs would treat

it as such) and/or a lab sample can be taken. Two things that will help us

avoid going down this road are our involvement of PhD chemists in our own

labs & not going back and chasing any refund money - we just fix the code

going forward, is my suggestion. Don't anger Customs by chasing money we

paid in error.



So where changes are found, we will support you with reasoning that justifies

choice of harmonised code. Internally, our scientists know the confidential

makeup, and they give us the code. Most often they can describe why a code

is picked without disclosing composition.

The end game here is what I've underlined. Don't give out the makeup of the

goods. We tackle the project in the manner above - which is what I've been

suggesting to x.

Keep in mind, the metric everyone is eager for is to show savings. So the

ensuing measures will be "how much of each item @ what price is coming

in", what is forecast" and this will be multiplied by old & new duty rate to

show (and claim) dollars saved.

It is a good project - let's just do it the smart way. Also, the reason AU

would be focused on first, is because like the US, UK, Canada, there are very

automated systems brokers use with Customs and reports are easy to run. rr


4.2.1 Kazakhstan Analysis

Savings Opportunity - $328305

There are savings to be made if Company A in Kazakhstan implement the

codes used in the US, however, there are instances where Company A in

Kazakhstan have been saving on duty payments as the codes they have been

using do not match those used in the US. For the purpose of this exercise,

the author will exclude the codes used in Kazakhstan which differed from the

US codes which attracted a higher duty date. If Kazakhstan were to begin



utilising the codes used in the US which differ from the codes in place which

attract a lesser duty, the Company could save $64.661 / year. As this can be

dated back 3-5 years, there is a substantial saving opportunity.

32 products were selected for review due to their high value and high

volume. Of the 32 products selected, there were 8 variances found totalling

25% of the sample. A 25% variance in codes between country to country,

the US and Kazakhstan, proves the worth of this project from a purely

protective preventative compliance perspective. The savings are an added

bonus. Throughout this report it must be remembered that compliance in

itself allows for competitive advantage through preventative action which

manifests itself in customer assurance.

4.2.2 Australia Analysis

Savings Opportunity - $425,000

The data gathered in Australia differed from that gathered in Kazakhstan as

the codes in use for the high value high volume products were in line, 100%,

with the codes utilised in the US. However, within Australia, there are many

free trade agreements in place and what is known as Tariff concessions. The

Tariff concession system is described below;

How the Tariff Concession System Works

A Tariff Concession Order (TCO) will be granted on imported goods if

substitutable goods are not produced in Australia. Substitutable goods are

Australian-made goods which have a use corresponding to a use of the

imported goods. It is important to note that, in determining whether

substitutable goods are available, the assessment does not consider whether

the Australian goods compete with the imported goods in any market. A local



manufacturer may object to the making of a Tca and can request an existing

TCa be revoked, as described later in this document

(http://www.customs.gov.au/webdata/resources/files/commerOl.pdf) .

During the classification analysis for Australia, although the codes in place

were harmonised with those in the US, it was found that for one particular

product an applicable TCa was not being utilized. This resulted in a potential

for $85,000 per year which has a potential to date back 5 years, totaling

$425,000. Company A has submitted an application to the Australian

customs authority for a refund.

The classification project, both for Australia and Kazakhstan, has proved

worthy, and has provided excellent, first hand evidence, backing the theory

that investment in trade compliance will lead to competitive advantage.

r4.3 Technology Review

With regards to technology, and whether Company A were aware of any in

which could contribute to their compliance task, the Compliance Manager

suggested the following;

"Would it be a crazy idea to ask your iphone/ped App developers to consider

helping us make a simple TCC app. It would be an easy to use portable

compliance tool that would do the following things:

• Denied Parties Search

• Dual Use/ ECCNclassification lookup



• Harmonized Classification Search Tool (US Census Schedule B version

for reference)

Since it relies on paid access to two of the three sites, it would be for internal

employee use only.

And since we are just making neat looking hyperlinks, I doubt we'd be

getting a patent, but I always like to CC a lawyer with crazy ideas"

As discussed during the literature review, according to Fox and Noble (2003)

and, as cited by Damianides (2005), building a strong internal control

programme within IT can help to gain competitive advantage through more

efficient operations (Damianides, Information systems Management, 2005).



operation, the ECCN / dual Use look up operation and also the HTC search



advantage to an organisation.

There are providers of global trade management software with SAP and

Oracle commanding the majority of the market. As the author is a member

of the International Trade Compliance Professionals Association (ICPA), it

was possible to reach out to the membership for their views on global trade

management software possibilities. Unfortunately, for one particular reason

- the software capabilities are extremely new, the responses were sparse.

A summary of the responses are noted below;

"While SAP developed their GTM module 6-7 years ago, Oracle just

introduced their first module (export) last year. It took Oracle 2-3 years to



develop the functionality. Sun Microsystems who they eventually acquired

was a beta site for the past year. "

"The single biggest issue with the ERPGTM modules is that they are data

shells and all the regulatory rules need to be configured by the business

team. For example on the licensing side, you have to set-up the licensing

matrix with the country of origin/destination and export control (rules) for

their system to work. Our system intuitively does the licensing determination

and license management for you. This involves additional headcount

considering compliance management and keeping abreast of the regulations

is now your responsibility. "

"Oracle took 2-3 years to develop their export module, they do not have a

import and Trade Agreements module. How long would it take them to add

import and trade agreements. Imagine SAPhas been at export for 6-7 years

and still does not have Import or TradeAgreements."

"Trade management is not their core competency compared to vendors such

as us. In the past, management has deviated resources to other projects

considered to be of higher priority. "

"Oracle like SAP does not offer integrated regulatory content. That is a key

issue considering Stryker has no choice but work with their 3rd party vendors

to integrate content. If there are issues, Oracle will look to point fingers at

the content vendor and vice versa. Also, they work with several different

content vendors depending on the regulations and that only adds to the

complexity. "

"Oracle only offers behind the firewall solutions. It is not a good fit for It

teams that do not have the resources to support the application in-house. It

is further complicated by working with 3rd party content vendors and dealingI



with content updates. Unless they have a push system, Stryker would need

to assign resources to pull the content at designated time intervals. rr

"Oracle uses 3rd party integrators to configure and implement the solutions.

Between Oracle, the content vendor and integrator there are several 3rd

parties involved With Obama proposing to rewrite the laws to create a single

unified licensing agency for both commerce and state shipments, how long

would it take companies like Oracle to recode the rules in their system.

Don't depend on them for their flexibility and nimbleness. Trade is not a

priority like it is the 'only' priority to us."

"Considering they use 3rd parties to configure and integrate the software,

Oracle's implementations are extremely expensive and take a long time as

compared to best of breed vendors such as us. From a comparison

standpoint their implementations are 2-3 times our costs and end up always

being a + 2 year project. rr

"We have been building trade solutions for 20 years. Oracle has been at it for

the last 2-3. Imagine the depth and breadth of our functionality versus what

they offer. No Comparison. Other Oracle users are speaking to them but they

are not considered a serious contender at least in the near future. That's not

to say they will not be but not in the short term. You will need to engage

their partner eco-system for setting-up the trade configs, system integrator

for integration and then multiple partners for content integration. "

(ICPA Membership)



Hypotheses

The author designed the hypotheses as follows;

HI Increased investment in the field of compliance will lead to


H2 Information systems can facilitate an internal globally reaching

classification programme.

H3 In certain cases, a products total landed cost will be reduced as a

resuIt of greater efforts in classification.

With regards to hypotheses 1, 2 and 3 the author believes that they were

proved to be correct.


CONCLUSIONS AND RECOMMENDATIONS CHAPTER 5

15.0 CHAPTER 5 - CONCLUSION AND RECOMMENDATIONSi

The underlying principle of this chapter is to conclude on previous chapters

and provide appropriate recommendations from the specific findings from the

literature review and primary research for the purpose of proving the aim of

the thesis; 'An examination into the impact that investment in trade

compliance has upon a firm's competitive advantage.'

I 5.1 Conclusion and Recommendationsi JWithout a doubt, the Global market presents numerous prospects for an

organisation such as Company A which holds the resources to capitalise on

opportunities. However, as identified by reviewing the most basic of export

regulations, controlling the operations required to succeed within the global

market are made complex by the simple export and re-export trade laws

governing them.

It was the aim of the report to review in further detail the regulations

governing international trade and whether investment in trade compliance

could lead to improved operations. In order to satisfy this argument the

author examined and reviewed a number of factors. Firstly, the regulatory

bodies with their acts which govern the global market where Company A

operates. The number of bodies, regimes and acts governing international

trade was immense. The number of laws a multinational organisation must

adhere to was also staggering. Investment in trade compliance should be of

primary importance within Company A.

It is a competitive advantage to be compliant. Global organisations seek

compliant partners. Therefore, evidently, from the vast amount of research

undertaken, a functioning compliance program will allow an opportunity for

competitive advantage, through basic preventative actions.



The primary aim of compliance should be preventive, protective action.

However, rather than simple preventative tasks, with further emphasis

placed on the capabilities of the compliance role coupled with further

investment, the function can, and should, do more to create a competitive

edge. In order to accomplish competitive advantage and further the scope of

their compliance group, the author would recommend that the structure of

the department within Company A be broken into reactive and proactive

groups.

The proactive group should focus on policies, standards, guidelines,

responsibilities, procedures, and finalise a review of all existing

policies/guidelines. The group should develop materials to communicate the

compliance role in customs matters to area management. The reactive

group should formalise a process for rolling-out compliance changes and

updates and develop a recognition program for compliance as a business

enabler.

The reactive group should establish a process to capture compliance costs

(shipment delays, fine/penalties) and savings (penalty reduction, risk

aversion) they should also advance the global classification projects

regarding ECCNand HTC. Company A should dedicate a resource to address

compliance work with IT to modify systems and software to reflect

compliance controls. They must develop a process for handling Denied Party

Screening for those business units with activities in embargoed destinations.



operation, the ECCN/ dual use look up operation and also the HTC search





advantage to an organisation. There is definitely an argument for investing

in emerging technology and thus creating competitive advantage.

The Global HTC Classification Project will result in reduced duty payment,

improved customs processing, reduced entry errors, and improved broker

relationship. HTC classification should be conducted in conjunction with a

global duty recovery effort which will:

Identify overpayment of duties and seek refunds (where

applicable)

Determine where TCOs can be used to reduce or

eliminate duties

Confirm country of origin and eligibility for trade

preference programs

Significantly eliminate Company A's import exposure

Within Company A, new products tend to evolve from older versions. There

is, therefore, a possibility to retrospectively clean up classifications on legacy

items - as needed. A review for mismatches and significant duty savings

opportunities should be conducted, globally.

The correct codes & justification support should be offered to importing

countries; outside counselor in country customs experts available to support

change with local customs should be called upon.

The business case for a global classification effort, which would involve

investment, which would in turn create competitive advantage, is

straightforward;

A Harmonised Tariff Code HTC is required for every product that is imported

or exported from a country. The HTC is used by customs agencies to

determine the product being imported and the applicable rate of duty.



Use of incorrect HTCs can result in the overpayment of duties (and possible

underpayment). Failure to identify the correct country of origin can result in

an inability to take advantage of various duty reduction programs.

All customs agencies require the HTC and the COO be correctly identified on

all applicable import/export documents. Submitting incorrect import/export

documents to customs agencies is a violation of the law and can result in civil

fines/penalties and, in certain cases, criminal penalties.

Imports or exports that incorrectly identify controlled materials or sensitive

items (e.g., explosives, certain chemicals, etc.) are viewed as a national

security risk. Penalties/fines for incorrect HTC and/or COO are very high

(e.g., in the U.S. the penalty can be up to three times the entered value of

the goods plus additional fines).

The business need is also clear;

Global HTC classification will allow Company A to take advantage of all

available duty savings opportunities and implement a process which

significantly reduces import compliance risk and exposure.

Opportunity exists to significantly increase import compliance and identify

global duty savings however, problems exist with:

• Company A's ability to take advantage of various duty savings

programs;

• Company A's ability to comply with customs agencies requirements for

import/export;

• Company A's ability to reduce overall compliance risk related to

imports; and



• Company A's ability to populate the HTC and COO in all existing

systems to ensure compliance.

There should be accurate HTC classifications that are populated in all

systems as necessary to ensure import compliance. A full optimisation of

duty savings through correct HTC classification and utilisation of preference

programs, foreign-trade zones, temporary imports, and duty drawback, as

applicable, should also be implemented. As a result, there should be a

reduction in customs' detention of imports/exports due to classification or

origin issues (including detention for failure to provide sufficient product

descriptions on the import documentation).

Currently HTC and country of origin are populated within the local U.S.

systems but efforts must be focussed on expanding the scope and education

surrounding the global effort. At the moment, from the sample data

gathered during the literature review, the classifications are inconsistent, not

verified, and often times incorrect. As a result, Company A is, in certain

instances, paying more duties than would be ordinarily owed if classified

under the correct HTC. Further, without the correct HTC and COO, Company

A is unable to take advantage of various duty savings programs. Company

A's inability to correctly provide the HTC and COO results in the filing of

import/export documents that are incorrect. Incorrect HTC and COO

information results in significant compliance exposure.

This is a global issue that has only been addressed on a country-by-country

basis until now.

Company A have an ongoing effort to identify the export control classification

number (ECCN) for all their made and sourced products. The HTC project is

an essential compliment to the ECCN project in order to ensure full

compliance on both import and export side of their transactions. Company A

must address this issue now because customs agencies are focusing on the



oil and gas industry and the exposure is too high. Note, in the U.S., for

example, if Company A continue to use incorrect HTC'safter they were aware

of the mistake then they are subject to heightened penalties and/or jail time

for making knowing fraudulent filings with the government.

This effort should be implemented globally. As the codes are verified within

the U.S., the first stage should begin in America and then be replicated

globally. The trade compliance team and key personnel within the supply

chain should be the responsible parties for the global project.

Company A has a number of strengths, but also weaknesses threats and

opportunities;

Strengths:

• Senior management commitment

• Experience within the trade compliance department

• Function support from legal, R&D, Supply chain

Weaknesses:

• Requirements for trade compliance are not embedded in culture

Opportunities:

• Integrate with functions

• Demonstrate value of trade compliance to operations (Compliance is a

business enabler)

• Compliance can be sold to the customer.

Threats:

• Changing regulations

• Government enforcements

• Emerging markets

• Higher scrutiny



• Business growth

• Misperception that 'it won't happen to us'

II 5.2 SummaryI

During the introduction, the author set out the following objectives;




The author reviewed the term 'globalisation' and its influencing effect on

global trade. It is clear that the trade compliance function is strategic to

effective supply chain management.



and complex role the of the trade compliance function.

Evidently, as a result of the vast amount of bodies, treaties, acts and

regimes governing international trade, the role of the trade compliance

function is complex and, again, must be given respect in that it can assure

supply chain effectiveness resulting in customer assurance and competitive

advantage.



The author is satisfied, through a comprehensive study of the literature

focussed on import/export compliance, that efforts focussed on trade

compliance will provide a competitive edge.






The serious nature of a violation, in terms of loss of reputation and

importantly share price reaction provide sufficient support for investment in

trade compliance.





This project proved its worth as savings were achieved. It is clear that, if

conducted on a global scale, the project alone can offer competitive

advantage.



Secondary and primary research proved that investment in technology can

lead to competitive advantage.


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Criminal and Administrative Case Examples

HITTITE MICROWAVE CORPORATION

The Violation: Hittite Microwave Corporation, Chelmsford, Massachusetts, on six

occasions, exported microwave solid state amplifiers and related equipment, including

downconverters, from the United States to Russia, China and Latvia, without obtaining

licenses from the U.S. Department of Commerce. In addition, on one occasion, Hittite

made a false statement to the U.S. Government on a Shipper's Export Declaration

(SED).

The Penalty: Hittite agreed to a $221,250 administrative penalty.

AVIACSA AIRLINES

The Violation: Between February 2002 and May 2003, in conjunction with exports of

aircraft parts to Mexico, Aviacsa Airlines on 75 occasions failed to file with the U.S.

Government the SEDs required by the EAR.

The Penalty: Aviacsa agreed to administrative penalties totaling $450,000, of which

$225,000 was suspended.

ASHER KARNI

The Violation: Asher Karni, a South African businessman, conspired to violate and

violated U.S. export restrictions arising out of unlawful exports to Pakistan and India of

U.S.-origin goods controlled for nuclear nonproliferation reasons. Humayan Khan, of

Islamabad, Pakistan was indicted for conspiring to violate and violating U.S. export

restrictions on goods controlled for nuclear nonproliferation reasons. Khan arranged,

through Karni, the purchase and export to Pakistan of U.S.-origin triggered spark gaps,

which can be used as nuclear weapons detonators. Khan falsely indicated that the

goods were intended for medical use.

The Penalty: On August 4, 2005, Karni was sentenced to three years' imprisonment.

On April 8, 2005, Khan was indicted for his role in diverting the controlled goods. On

August 1/ 2006/ BIS issued a 10-year denial of export privileges against Karni and

related parties/ Pakland PMECorporation and Khan.

SCP GLOBAL TEc:HNOLOGIES, INC.

The Violation: Between May 2003 and January 2005/ SCP Global Technologies/ Inc.

("SCP") made 45 exports of controlled pumps and valves to Taiwan/ China/ and Israel/

without the required export licenses. The items are controlled for their potential use in

chemical and biological weapons/ and would have required a license for shipment to

Taiwan/ China/ or Israel. SCP had previously received a Warning Letter for the

unlicensed export of controlled pumps.

The Penalty: SCPagreed to a $264/000 administrative penalty.

METRIC EQUIPMENT SALES

The Violation: On March 21/ 2005, Metric Equipment Sales pled guilty in the Northern

District of California to one felony count of exporting digital oscilloscopes controlled for

nuclear nonproliferation reasons to Israel without a BIS license. The oscilloscopes, with

sampling rates exceeding 1 GHz, are capable of being utilized in WMD development

and missile delivery fields.

The Penalty: Metric was sentenced to a $50,000 criminal fine. Metric agreed to a

$150,000 administrative penalty and a five-year suspended denial of export privileges.

VALTEX INTERNATIONAL

The Violation: Vladimir Alexanyan and his company, Valtex International, committed

export violations and made false statements in connection with the attempted export

of satellite/missile insulation blankets to the Chinese Academy of Space Technology in

Beijing. BIS had previously rejected Valtex's application for an export license for these

items.

The Penalty: Alexanyan was sentenced to pay a $12,000 criminal fine, to serve three

years' probation, and was barred from any international activities or trade for the term

of his probation. Valtex was ordered to pay a $250,000 criminal fine. In addition,

Alexanyan agreed to an $88,000 administrative penalty and Valtex agreed to pay a

$77,000 administrative penalty. Alexanyan's and Valtex's export privileges to China

were denied for five years. Valtex also agreed to implement an export management

system.

WILDEN PUMP AND ENGINEERING

The Violation: Wilden Pump and Engineering Co., LLC (Wilden), a company based in

Grand Terrace, California, violated the EAR in connection with unauthorized exports of

diaphragm pumps from the United States to the Iran, Israel, the People's Republic of

China, Syria, and the United Arab Emirates without the required Department of

Commerce export licenses between 2000 and 2003. In some cases, Wilden transferred

diaphragm pumps with knowledge that violations of the EAR would occur. Wilden also

made false statements on export control documents related to these transactions.

The Penalty: Wilden agreed to a $700,000 administrative penalty. It also agreed to be

subject to a three-year denial of export privileges for items on the CCL. The denial was

suspended in its entirety for two years provided that Wilden did not commit any

violations of the EARduring the suspension period.

JOHN CARRINGTON

The Violation: John Carrington, the former president of Sirchie Fingerprint

Laboratories and a former North Carolina State Senator, illegally exported

approximately $1.2 million dollars in crime control equipment to China through

intermediaries in Italy and Hong Kong.

The Penalty: In the criminal case, Carrington was sentenced in March 2006 to 12

months' probation and agreed to pay an $850,000 criminal penalty. In the related

administrative case, Carrington accepted a fiveyear denial of his export privileges.

Sirchie also agreed to a $400,000 administrative penalty and accepted a five-year

suspended denial.

BJ SERVICES COMPANY

The Violation: Between 1999 and 2002, BJ Services Company of Tomball, Texas

committed 37 violations of the EAR in connection with 13 exports of items controlled

for chemical and biological weapons reasons to various destinations without obtaining

the required export licenses.

The Penalty: BJ Services agreed to a $142,450 administrative penalty and to perform

an audit of its internal compliance program to be submitted to BIS.

Mitigating Circumstances: BJ Services voluntarily self-disclosed these violations and

cooperated fully with the investigation.

NING WEN

The Violation: Ning Wen and Hailin Lin used a business called "Wen Enterprises,"

which they operated from their home in Wisconsin, to ship semiconductors and other

controlled electronic components with radar and satellite applications, both military and

civilian, to Jian Guo Qu and Ruo Ling Wang at Beijing Rich Linscience Electronic

Company in China. For most of these transactions, Lin obtained the restricted

technology from a United States manufacturer or supplier based on a request from

Wang or Qu; falsified shipping documents at

the direction of Qu by concealing the true nature of the shipments and stating that alicense was not required for the shipments; and then shipped the product to Wang

and/or Qu in China, without obtaining the required export license.

The Penalty: In 2005, Qu was sentenced to 46 months' imprisonment (later reduced

to 22 months based on his cooperation in the prosecution of the co-defendants), a

$2,000 criminal fine, and two years' supervised release. Lin was also sentenced in

2005 to 42 months in prison and a $50,000 fine for her role in these unauthorized

exports. In 2006, Wen was sentenced to five years in prison, a $50,000 fine and twoYCCII-=:>'=:>upcrvi=:>cd I-CICCl=:>C.AdditiOIlCllly, tne COUI\: oruereu tile rorrerture or tile norne or

Wen and Lin and over $329,000 in cash.

MANTEN ELECTRONICS

The Violation: Four former employees of Manten Electronics, Weibu Xu, aka Xu

Weibu, aka Kevin Wu, Hao Li Chen, aka Ali Chan, Xiu Ling Chen, aka Linda Chen, Kwan

Chun Chan, aka Jenny Chan, illegally exported millions of dollars of sensitive national

security controlled items, with applications in radar, electronic warfare and

communications systems, to state-sponsored institutes in China. On September 13,

2005, Kevin Wu pled guilty to violating the Export Administration Act and the Arms

Export Control Act. Wu and the other defendants also pled guilty to conspiracy charges.

The Penalty: On May 1, 2006, the four defendants were sentenced. Specifically, Kevin

Xu was sentenced to 44 months in prison, and two years' probation; Ali Chan was

sentenced to 30 months in prison and two years' probation; Linda Chen was sentenced

to 18 months in prison and two years' probation; and Jenny Chan was sentenced to six

months' home confinement and two years' probation. The defendants also agreed to

forfeit $391,337, their profits from the illegal exports.

ELAN PHARMACEUTICALS

The Violation: Between May 2000 and April 2002, Elan Pharmaceuticals, Inc. (Elan),

of San Francisco, California, made four exports of a synthetic conopeptide MVIIA

medical product, ziconotide (trade named PRIALT) to Belgium, without the required

export licenses.

PRIALT is the synthetic equivalent of a nontoxic peptide that is a component of the

venom produced by the marine cone snail. Elan was studying and developing PRIALT

as a new therapy for pain management. PRIALT is controlled for chemical and

biological chemical warfare, and anti-terrorism reasons.

The Penalty: Elan agreed to a $31,000 civil penalty, and to perform an internal audit

of its export compliance program one year from the date of the agreement.

Mitigating Circumstances: Elan voluntarily self-disclosed these violations and

cooperated fully with the investigation.

EMD BIOSCIENCES, INC.

The Violation: EMD Biosciences, Inc. (EMD) of San Diego, California exported

biological toxins to Canada in violation of the EAR. Between June 2002 and July 2003,

EMD committed 134 violations of the EAR in connection with 67 exports of biological

toxins to Canada that were made without obtaining required Department of Commerce

export licenses.

The Penalty: EMD agreed to a $904,500 civil penalty and to a two-year suspended

denial order.

ZHAOXIN ZHU

The Violation: On May 6, 2004, Zhaoxin Zhu of Shenzhen, China pled guilty to

conspiring to purchase controlled satellite and radar technology for illegal export to

China. Zhu negotiated with undercover federal agents to purchase a variety of

sensitive goods, including traveling wave tubes with satellite and radar applications, for

export to China.

The Penalty: Zhu was sentenced to twenty-four months in prison and three years'

supervised release.

STOELTING COMPANY

The Violation: Stoelting Company, of Wood Dale, Illinois, and its president, LaVern

Miller, illegally exported polygraph machines to China without required export licenses.

These items are restricted to China for human rights reasons.

The Penalty: Stoelting was sentenced to two and a half years' corporate probation

and a $20,000 criminal fine. Miller was sentenced to two and a half years' probation,

including six months of electronically monitored home confinement, 500 hours

community service and a criminal fine equivalent to the costs of his probation and

monitoring, estimated to be $18,000. In addition, Stoelting and Miller each agreed to

$44,000 in administrative penalties, and Stoelting agreed to a five-year suspended

denial of export privileges.

BASS PRO, INC.

The Violation: Bass Pro, Inc. exported gun sights to a variety of destinations without

a license in violation of the EAR. Gun sights are controlled pursuant to U.S. treaty

obligations, as well as for human rights and antiterrorism reasons.

The Penalty: Bass Pro agreed to a $510,000 administrative penalty.

DR. THOMAS BUTLER

The Violation: On January 14, 2003, Dr. Thomas Campbell Butler, M.D., a professor

at Texas Tech University in Lubbock, Texas reported to the FBI that thirty vials of a

potentially deadly plague bacteria, Yersinia pestis (the causative agent of human

plague), were missing and presumed stolen from his research lab. The report sparked

a bio-terrorism alert in west Texas and President Bush was informed of the incident.

However, investigation proved that Dr. Butler had illegally exported the Yersinia pestis,

which is a controlled item under the EARand cannot be exported without the required

export licenses from BIS. On January 15, 2003, Dr. Butler was arrested. Dr. Butler was

found guilty of numerous charges at trial, two of

which were export control-related: making false, fraudulent and fictitious statements

regarding the exports to federal agents and making an unauthorized export to

Tanzania.

The Penalty: Dr. Butler was convicted of forty-seven counts of a sixty-nine count

indictment that stemmed from BIS's investigation. He was sentenced to two years in

prison on March 10, 2004, and he resigned from Texas Tech. On October 24, 2005, the

U.S. Court of Appeals for the Fifth Circuit affirmed his earlier conviction. In the

administrative case, Dr. Butler agreed to a $37,400 administrative penalty and to

accept a denial of his export privileges for a period of

ten years.

OMEGA ENGINEERING INC.

The Violation: Omega Engineering Inc., of Stamford, Connecticut and its former Vice

President, Ralph Michel, violated the EAR by exporting certain laboratory equipment to

Pakistan in 1997 after BIS had denied a license for the same shipment earlier that

year.

The Penalty: In the criminal cases, Michel was sentenced to ten months'

imprisonment and fined $50,000, and Omega was sentenced to a $313,000 criminal

penalty and five years' corporate probation. In the administrative cases, Omega agreed

to a $187,000 penalty and to a five-year denial of export privileges to Pakistan. BIS

also denied Michel's export privileges to Pakistan for five years.

[APPENDIX B

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BSM581_0813056_NAnderson[1]

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