Illegal diversion is one of the significant challenges facing importers during transshipment.
Such a diversion happens when an importer sells goods to a customer only for the goods to end up in a prohibited destination, end user, or end use, against the importer’s consent.
Cases of export compliance diversion or illegal diversion are common in the absence of effective compliance and export management practices. Illegitimate trade is also a key contributor to such cases.
But how can importers prevent export compliance diversion?
This article discusses transshipment best practices to prevent export compliance diversion. But before then, let’s have a brief background.
What is transshipment?
Transshipment is part of the export logistics processes. It involves transferring goods from one shipment vessel to another during shipment at an intermediate hub or port in a different country.
There are two types of transshipment:
- Silent transshipment: The goods are transferred from one shipment vessel to another without informing the importer (keeping the transfer confidential).
- Active transshipment: The transfer is reported to the consignee or importer of the goods with the new shipment details.
When does a transshipment occur?
Various reasons necessitate a transshipment, including the following:
No direct shipment route: Due to geographical constraints, some destinations can be inaccessible by land or ocean transport.
In such a case, the cargo can be transported from point A to B (a port that’s more accessible to the destination port). It’s then moved via sea from B to C (the destination port).
As such, transshipment facilitates the transfer of containers or cargo from one mode of transport to another, ensuring the cargo reaches the destination port in time.
Cost-saving: Direct shipment can be expensive with logistical issues such as bad weather or long distances. If the expenses are too high, you can choose transshipment as the cost-effective alternative.
Legal or political restrictions: Trade embargoes or other regulations can be effected, posting restrictions on some routes or certain types of goods.
If importers and exporters want to trade regardless of the bans, transshipment can provide alternative means of shipment.
How does compliance diversion occur during transshipment?
Transshipment is a risky logistical operation with the following factors creating loopholes for diversion:
- The government intending to divert
- Government officials practicing corruption
- An honest mistake by government officials
- Entities involved in the transfer providing false information
- Government officials neglecting the export compliance responsibility
- Competent government authorities lacking adequate security and monitoring
Export compliance diversion example
State A prepares the correct documentation and authorizes the delivery of conventional arms to State B. Then there’s State C, which has not received any notification or request for transit due to negligence.
When the ship transporting the conventional arms arrives at transit C, part of the cargo intended for B is unloaded against the customs officials in C due to inadequate security and monitoring.
The ship continues its journey to state B. However, the cargo unloaded at state C is distributed to armed groups in state D, leading to illegal diversion.
Note: Compliance diversion can happen before transit, during transit, after importation, or post-delivery.
Whether a planned diversion or a diversion that happens mistakenly, it is against the export compliance law and warrants penalties, loss of export privileges, or surrender of merchandise.
Best practices to prevent export compliance diversion
Manufacturing industries and the governments in both importing and exporting countries are responsible for ensuring the security of imported items. With guaranteed security, the diversion incidences for dual-use goods are reduced.
Additionally, effective export management and compliance practices ensure legitimate trade, lowering the risk of diversion.
However, as discussed in the causes of diversion, ignorance, negligence, and corruption remain barriers to ensuring export compliance.
Hence, importers and exporters must ensure adherence to the best practices for export compliance throughout the export logistics supply chain.
Here are the transshipment best practices for preventing illegal diversion:
#1 Communicate export compliance diversion red flags
Companies should pay keen attention to Red Flag indicators on the BIS website. When they encounter a suspicious transaction, they should seek further information and try to resolve any concerns the transaction raises.
For instance, a freight forwarder may decline an export transaction, making the transaction suspicious. Other suspicious transactions are outlined in the “Know your customer” section of the Export Administration Regulation (EAR).
#2 Use a freight forwarder with a good export compliance program
Exporters or importers should partner with freight forwarders with a reputable export management and compliance program.
For instance, established freight forwarders handle shipment logistics, providing tracking information through the export supply chain.
#3 Seek customer information when shipping to foreign destinations
As an exporter /reexporter, you should determine if the customer is an authorised reseller and if they have guidelines to follow when reexporting to third parties.
The scrutiny is important, especially if the customer is a trading company, a broker, or a distribution centre.
#4 Gauge trustworthy relationships
Exporters should determine if an item is to be reexported or shipped within an item to be reexported. This includes inspecting the transactions to, from, and through transshipment hubs to establish the presence of a long-standing relationship.
For instance, when facilitating the shipment of dual-use goods, companies should avoid routed export transactions unless the customer has an existing trustworthy relationship.
#5 Verify routing requests from foreign principal parties in interest
The US principal party in interest keeps details of consignees of all shipments. Hence, freight forwarders should seek more information when prompted by foreign parties in interest to route shipments to destinations other than those recorded.
#6 Share product classification information with relevant parties
Exporters/Reexporters should communicate relevant classification information, including the Export Control Classification Number (ECCN), to end users and ultimate consignees (where relevant).
The exporter should also report the classification information for all transactions to the electronic export information system (AES), including details such as “No License Required” designations.
#7 Leveraging technology for due diligence
Exporting companies should utilize information technology to help with due diligence and boost confidence that shipments will reach intended end users and be used for the intended purpose.
For instance, they can incorporate the “Know Your Customer” and other due diligence measures to lower the risk of compliance diversion.
FAQs
1. What is the Enhanced Proliferation Control Initiative (EPCI)?
The EPCI, also known as the Catch-All controls, is a list of regulatory guidelines that require the government to prohibit the shipment of software, commodities, or technology listed as dual-use without a licence.
The controls also help ensure dual-use goods that do not require a specific license don’t end up in destinations of chemical/biological, nuclear, or missile proliferation concern.
Essentially, EPCI controls ensure that dual-use goods do not contribute to projects of proliferation concern.
2. What does export compliance do?
Export compliance ensures the legal obligation to comply with all export regulations and rules (globally, regionally, and nationally) applying to your business jurisdiction.
3. What are BIS export compliance guidelines?
BIS export compliance guidelines are BIS-provided rules and regulations that govern the exportation of US commercial software, technology, and products.
This article’s seven compliance best practices exemplify the BIS export compliance guidelines.
4. What are the trade compliance procedures?
Trade compliance procedures are the processes involved in ensuring that import and export transactions conform with national and international trade and financial laws.
For instance, consignees must provide a letter of assurance for technology subject to US controls to certify they will not release data or a direct product of the data to specified destinations, nationals, or groups.
5. What is the export compliance agreement?
The export control agreements or laws are the federal controls governing how certain technologies, commodities, and information can be transmitted to foreign destinations nationally.
Partner with an IOR with recognized standards of import compliance
Preventing export compliance diversion can seem like a hard nut to crack. And it can be, especially if working with independent export service providers throughout the supply chain.
The challenge lies in ensuring compliance with regulations, transparent communication, and verifiable procedures. But what if you had a single point of contact with known compliance standards and a good export compliance program?
Here at Blackthorne, we act as the reputable freight forwarder who has helped Fortune 500 companies and startups to evade compliance diversion for over 25 years.
Our accreditations of Authorised Economic Operator (AEO) and regulated agent status from the Transport Security Administration (TSA) and The Civil Aviation Authority (CAA) are a testament to the security of our airline operations.
Besides, we employ the BIS export compliance best practices to relieve you of the hassle of avoiding compliance diversion and allow you to focus on your core business.
So, if you have any questions concerning compliance diversion or need our unrivaled export compliance services, let us know so we can discuss further.
