Customs and International Trade Law Blog : International Trade Lawyer & Attorney : Becker & Poliakoff Law Firm : Customs Law, Border Protection

Co Authored by Perry Sofferman

Forrester Research predicts that the global market for cloud computing services will have increased from $40.7 billion dollars in 2011 to approximately $241 billion dollars by 2020. You can see the ZDNet article here.  This figure includes the Platforms as a Service, Infrastructure as a Service and Business Process as a Service delivery models. What this information reveals is that while cloud computing is already a significant part of operational strategy for many businesses (as well as governmental agencies), we should expect it to not only grow as a market but to become even more intertwined with the way we conduct business and store data on a daily basis. Consequently, businesses in general and export compliance officers in particular need to be vigilant and make sure that their use of this important technology is consistent with US export regulations.

When using cloud services, the user is uploading data to available servers in the cloud provider’s server facility(ies). The type of data uploaded and the location of the server where that data is stored can potentially trigger export compliance issues for the user. In fact, the ultimate location of the particular server used to hold the user’s data may be unknown to either the user or the cloud provider. Data can be redirected to various servers in different countries in order to properly allocate server space based on fluctuations of usage in different time zones.  It should be noted that this is only one example of several possible scenarios where the actual export of restricted data could occur inadvertently by the user.

Based on Advisory Opinions issued by the Bureau of Information and Security (“BIS”), there is guidance indicating that in scenarios where exports take place through means of cloud computing:

• (i) the cloud computing provider is not the exporter (the user is) and
• (ii) if foreign nationals employed by the provider access restricted data there may well be a deemed export of such data to such foreign national on the part of the user. 

If, however, a cloud computing service provider is aware that the service will be used to support certain proscribed activities, then the provider will be obligated to properly acquire the necessary license.    Neither the Directorate of Defense Trade Controls (DDTC) nor the Office of Foreign Asset Controls (OFAC) have yet provided substantive guidance on the subject of export regulations in relation to cloud computing, although OFAC has provided some limited guidance related to exports to Iran involving software and services incidental to personal communications. “Cloud Computing” remains an undefined term in the EAR, ITAR and OFAC regulations.

Top 5 Tips for Export Compliance Professionals in Regard to Cloud Computing 

1. It is critical for compliance officers and others involved in export control management, including providers of cloud computing services, to take steps to better familiarize themselves with the many complex issues at play in this area. A good start would be a detailed review of the BIS advisory opinions, which can be found here.     
2. In addition, users of cloud services should think about how to approach this issue with their providers. Users might consider gaining a good understanding of where their provider’s servers are located and whether the providers have instituted any safeguards to address export compliance issues. Likewise, providers may want to delve more deeply into the ITAR regulations with particular emphasis placed on the relation between cloud computing services and “brokering” activities.
3. Compliance officers should make sure that members of their organizations are aware that export regulations are applicable to cloud services and that while the storage of data in the cloud might feel virtual, the penalties for export regulation violations remain brick and mortar.
4. While exporters remain liable for violations of export regulations, compliance officers should work with their IT departments when negotiating terms to agreements with cloud services providers. For example, require the service provider to notify you in the event servers are added in geographic locations that might be problematic for you. See if it is possible to obtain a right to terminate in such instance. In addition, try to get the provider to indemnify you in the event there is an export violation as a result of a provider’s action or inaction.
5. Make sure a review of how your organization uses cloud services is part of your standard compliance self-audit so as to identify any possible problems or lapses before they become significant.

In a speech in 2012, Under Secretary of Industry and Security, Eric Hirschorn, noted that a future project for the Bureau might be a review of “for clarification’s sake – the rules regulating cloud computing.”    For both users and providers, such a review should be anxiously awaited.

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The U.S. Food and Drug Administration (FDA) has been court ordered to set firm dates for FSMA's implementation.  Details of the court case forcing FDA to set these dates, and the organization that sued the FDA to make this happen follow.

Background

The Center for Food Safety (CFS), a national non-profit public interest and environmental advocacy organization, filed a lawsuit against the FDA on August 29, 2012.  The complaint alleged FDA failed to promulgate 7 food safety regulations required by the Food Safety Modernization Act (FSMA).  Congress enacted the FSMA – which was signed into law on January 4, 2011 – to modernize food safety laws and regulations by mandating science-based standards and controls; by providing the FDA with greater authority to prevent and address food safety hazards by taking steps to prevent them from occurring; by strengthening the FDA’s inspection and enforcement powers; and by improving coordination among federal, state, and foreign food safety agencies. CFS documented the foodborne illness outbreaks since FSMA was signed into law, January 4, 2011.

Court Order

The court case is being heard by Judge Phyllis Hamilton, in the U.S. District Court for the Northern District of California.  Yesterday, May 21, 2013, Judge Hamilton ordered that the FDA and CFS have an extended deadline of June 10, 2013 to file a joint statement with a mutually agreeable proposed schedule for the outstanding food safety rules.

Rationale for Suit and Missed Deadlines

The ongoing battle between the CFS and FDA to complete this process has lasted for several months. On August 2012, the CFS filed a suit against the FDA Commissioner after the FDA missed a series of deadlines for publishing the regulations mandated by the Food Safety Modernization Act. After numerous deadlines went by without the release of the mandated rules, CFS went to court to try to force FDA to adhere to these time constraints. Following the court appearance, Judge Hamilton ruled that the FDA must come up with a new schedule for issuing the proposed rules by May 20.  This extension came about as a result of the inadequacy in time provided for the FDA and CFS to resolve their differences regarding the schedule FDA suggested to issue the proposed rules.

The FDA sent its updated schedule to CFS on May 15; however, CFS was not satisfied with the proposed timeline. Due to the fact that there were only five days left until the deadline expired, the parties filed a Joint Stipulation for Extension of Time. This extension was granted by Judge Hamilton.

New Rules Released by FDA & What's to Come

Since CFS filed its complaint last year, FDA has released some of the key FSMA mandated rules it failed to publish on time, including preventive controls for human food and standards for produce safety, both released in early January. However, there are some rules that are yet to be released. Among them is the foreign supplier verification program (section 301).  This program is set to overhaul import safety, an establishment of regulations to ensure the safe transport of food products and a rule ensuring neutrality of third-party audits.  I think of it akin to C-TPAT (Customs-Trade Partnership Against Terrorism).  It's a self policing and auditing type program that includes functions like  monitoring records for shipments, lot-by-lot certification of compliance, annual on-site inspections, checking the hazard analysis and risk-based preventive control plan of the foreign supplier, and periodically testing and sampling shipments.

I look forward to seeing and reporting on FDA's implementation of FSMA.

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The American Conference Institute will be having its 8th Import Compliance and Enforcement Conference on June 11, 2013, in Washington DC. The conference will consist of two days full of lectures discussing highly complex U.S. import compliance challenges, along with how to satisfy Canadian and Mexican customs authorities. Unlike previous conferences, this unique event is designed to provide attendees with a comprehensive benchmarking experience, where participants can exchange best practices and lessons learned for 2013 and beyond. Some of the most notable industry experts that will be present are Chrystler, Hershey, Williams-Sonoma, Boeing, IBM, General Electric, Cisco, Tyco and yours truly.

This event is uniquely designed to maximize benchmarking on how to resolve the most complex, pressing import compliance issues affecting the industry. The new program features for 2013 are:

• Two highly focused sessions on valuation and transfer pricing:
• ISA member case studies: New and longstanding members speak about their recent experiences, and how to meet ISA requirements.
• Inside a focused assessment: Lessons learned from recent experiences on how to handle common and unanticipated CBP requests
• C-TPAT and Foreign Re-Validations: Meeting new expectations for C-TPAT risk assessments, and how the new EU Mutual Recognition Agreement affects importer validation requirements
• NAFTA, CAFTA, and US-Korea - FTA success stories:
  • The finer points to minimizing duties, fees, taxes, red tape, and proving origin
• Developing a global strategy for customs classification and tariff engineering.

One of the most notable topics discussed will be broker selection and management. I have the privilege to discuss important aspects within the broker selection and management process such as:

• Detecting warning signs: How far you need to go in conducting due diligence.
• Designing a questionnaire for brokers: Assessing the skills, experience, and resources of customs brokers. 
• Evaluating brokers’ supply chain relationships
• Quantifying risk factors
• Communicating compliance expectations and requirements to brokers, and developing guidelines for your brokers
• Where the importer and broker responsibilities begin and end
• Incorporating contractual safeguards, including audit mechanisms
• How to monitor compliance, and what to do if you suspect or discover non-compliance by a broker
• Auditing foreign brokers, and conducting periodic review sand site visits
• When and how to terminate the relationship
• What constitutes customs brokering and business,and how to avoid unintended brokering activities 

The conference will kick-off with discussions about strengthening global trade compliance. Meredith Covey, Director of Customs Operations and Compliance at Williams-Sonoma Inc., will discuss real world issues related to the implementation and monitoring of monitoring a global import compliance program. She will discuss structures, resources, tools, and techniques leading companies are using to implement, manage, and monitor an import compliance program. Following the conclusion of multiple speakers discussing these aspects, a discussion on Canadian customs regulations and enforcement will ensue. Eric Trudel, a Manager of CBSA, will discuss the key concepts and common pitfalls to compliance in Canada. 

The ACI offers my clients and colleagues, and you, my special blog followers, a discounted price to attend the conference on June 11-12. This rate will expire on May 17th.  Contact Adina Schwartz, JD, at 310-295-9789 or A.Schwartz@AmericanConference.com to get your discounted rate!  You don't want to miss this! 

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On April 18, 2013, the Office of Foreign Assets Control ("OFAC") announced its effort to streamline license processing procedures by accepting requests for licenses, license amendments, and interpretive guidance electronically. This will not only simplify the process for those that wish to travel to Cuba, this new electronic application program can also be used for applications to request the release of blocked funds and much more.

For those that are more "old school" - you still have the opportunity to submit applications by snail mail pursuant to 31 C.F.R. § 501.801.

The new electronic OFAC License Application Page will allow users to apply:

1. to travel to Cuba (for many, though not all, categories of travel to Cuba);
2. to export agricultural commodities, medicine, or medical devices to Sudan or Iran pursuant to the Trade Sanctions Reform and Export Enhancement Act of 2000;
3. for the release of a wire transfer blocked at a U.S. financial institution; and
4. for a license or interpretive guidance in all other circumstances (referred to generally as Transactional).

For those wishing to travel to Cuba in a jiffy, you must first consult an expert to review and assure you understand the Comprehensive Guidelines for License Applications to Engage in Travel-Related Transactions Involving Cuba.  Once you know that you can apply to OFAC for your specific category of travel - the next step is reviewing the online application page.

Thus far, the electronic form may be used to apply for licenses to travel to Cuba in the following categories of travel, which are not generally authorized pursuant to 31 C.F.R. 515:   

• Journalistic Activities
• Professional Research and Professional Meetings
• Religious Activities
• Support for the Cuban People
• Humanitarian Projects Activities of Private Foundations  
• Research or Educational Institutes Exportation
• Importation
• Transmission of Information or Informational Materials
• Licensed Exportations

The OFAC has stated that they intend to update the online application system in the future so that all the categories of travel (including family visits, educational activities, public performances, clinics, workshops, competitions, and exhibitions) may be applied for using this streamlined online process.

If you want to travel to Cuba, want to export agricultural commodities, medicine, or medical devices to Sudan or Iran, have funds blocked by OFAC, or want interpretive guidance from OFAC, assure you consult a regulatory expert so you have the best chance for success with OFAC.

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Did you know importers and consignees can request that U.S. Customs and Border Protection (CBP) keep your manifest information confidential?

If you are currently letting your competitors know your source, read on, and learn how to keep your private data private!

Pursuant to the privacy statute, 19 C.F.R. § 103.31 (d) the public is allowed to collect manifest data (e.g., bills of lading) at every port of entry. This information is limited to vessel manifests. Air, rail, and truck manifests are not available to the general public in any form.

Websites such as panjiva.com, datamyne.com and importgenius.com (to name a few) collect and publish the names of importers, suppliers, and manufacturers from vessel manifest data. This can be troubling for some, as your competitors are able to access information related to the sourcing and/ or manufacturing of your products. However, an importer/shipper may make a request to CBP for confidentiality. The confidential protection is valid for 2 years, thereafter, you have to renew your request.

The public may obtain manifest data at every port of entry. However, Section 103.31 states that

Only the name and address of the shipper, general characteristics of the cargo, number of packages, gross weight, name of the vessel, port of exit, port of destination, and country of destination may be copied and published.

The regulation also states that

An importer or consignee may request confidential treatment of its name and address contained in inward manifests, to include identifying marks and numbers. In addition, an importer or consignee may request confidential treatment of the name and address of the shipper or shippers to such importer or consignee.

It is essential that you send in renewal requests 60 days prior to the expiration of the 2 year confidentiality period.  The importer will receive a response when the confidentiality request has been granted and it will state the effective time period.

CBP sent a message to trade on Feburary 7, 2013 (CSMS #13-000064), titled "improperly formatted ACE ocean manifest data resulting in release of confidential data."  CBP made it clear that after an importer requests confidentiality, and its granted by CBP, the importer must be sure the commercial party names submitted to CBP always match - CBP will not grant confidentiality if you use any variation of the name originally requested. One incorrect keystroke by an individual who is processing the information can result in a new variation of company information that is not covered by the grant of confidentiality. CBP has stated that the release of confidential data is strictly the result of improper data entry by users and not by CBP programming or system errors. 

To assure you send an effective request for confidentiality and so your competitors don't have access to your private data, contact me today!

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Sitting with your head down moping about U.S. Customs and Border Protection (CBP) holding your goods is never the right answer!

Two days ago, a potential client called and explained that a valuable shipment was detained by CBP. The potential client asked if I could help recoup the goods from CBP, during this detention phase, or if they should wait.

When I get this question, I always want to scream, NOW!!  This is the most essential time an importer has.  Here's the real question - do you want an expert in Customs law to assist you before your goods are guaranteed to be stuck in CBP for months, or work on getting them back for you NOW?!

I always request pertinent information about the commodity and the supposed rationale for the detention (if you don't have this information yet, I help you get it). In this case, the potential client adamantly stated that the goods were legitimate, gray market goods; however, CBP was skeptical.

I advised the potential client that obtaining my services at this point would be the BEST option so I could clearly determine and explain to CBP the legitimacy of the merchandise and demand the release. After being hired, I immediately began working on the case due to the exigency of the circumstances. My tasks were to understand the basics of the commodity, learn the history of the product, and prove the legitimacy of the goods before CBP made a decision to seize them.

The consequences of not taking these immediate actions would be the potential seizure of the goods. More importantly, if the goods are seized by CBP, it could take several months (sometimes years) before they may be released.  The great news is within 1 business day I was able to convince CBP that the goods were in fact legitimate gray market goods, and they were released.  Waiting an extra week to get me involved would have been the difference between a detention by CBP (and release of the goods) or CBP's seizure of the goods, and many months (or years) before the goods were released (with storage fees to pay!).

Thereafter, I worked with this client and discussed pre-compliance - which is especially important to understand why the detention occurred in the first place and how to avoid a similar situation from re-occurring. 

Hiring an expert in CBP laws, prior to the seizure of the merchandise saved this client much time and a considerable amount of expenses. If your business is going through a similar issue with CBP, contact me during the detention phase, preferably before the seizure notice is issued! 

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International passengers at Miami International Airport (MIA) have certainly felt the detrimental effects caused by the sequestration, as thousands have missed connecting flights - because of CBP processing delays.   

The sequestration has created hard caps on the amount of government spending due to the government's inability to compromise on a budget.  Prior to the sequestration, CBP stated that they would ensure that their core mission would not be compromised, and under no circumstances would CBP diminish their commitment to completing their responsibilities.  On March 11, 2013, CBP began sending furlough notices to all of its 60,000 employees as the agency aims to make $754 million in cuts required under the sequestration. The furloughs are set to begin on April 21, 2013 and continue through September 30, 2013. 

These furloughs will...

• put full time employees on unpaid leave for no more than 14 workdays.
• pro-rate furlough time for part-time workers. 
• freeze hiring
• reduce and eliminate overtime and compensatory time

CBP agrees the biggest hit to border security comes from cuts to overtime. CBP will see income cut by 40%. Partly as a result of having to take up to 14 unpaid days off work.

What should importer/exporters and those involved in international trade expect?

Cargo processing during arrivals/departures outside normal business hours may experience delays until the following business morning. This roll over of work may in turn provide for regular cargo processing delays which are expected to take from 30 minutes up to a few hours during regular working hours. The daily tasks completed by cargo processing are not expected to be reduced. However, additional work usually performed during normal overtime shifts will be added to these daily shifts thus providing for extra delays! 

CBP has prioritized perishable goods due to the obvious health risks involved. Agricultural products will also be prioritized to avoid spoilage and delays of these delicate products. The Food and Drug Administration (FDA) has commented that they are not expecting any direct impact to their operations and will immediately notify the industry if they anticipate any negative effects to sequestration. For the Transportation Security Administration (TSA) at Fort Lauderdale Airport (FLL) overtime was immediately ceased, with the exception of security checkpoints. Staff has been kept on to accommodate delayed departing flights. TSA is still evaluating possible furloughs.

For now there are still many what-ifs, and that uncertainty is already taking its toll.

What can be done?  Advise Congress now on how CBP furlough's will negatively impact your business.

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At today’s Import Operations Training, sponsored by the U.S. Food and Drug Administration (FDA) and the Florida Customs Brokers and Forwarders Association (FCBF), top officials from FDA traveled to Miami to educate importers and brokers.  Topics ranged from a general overview of FDA compliance, TOP rationales for FDA detentions, Food Safety and Modernization Act (FSMA) updates, an overview of the newly re-organized (now DIO) Division of Import Operations (formerly DIOP - policy has now been removed), an overview of CBP & FDA’s Joint Team 488 – which handles liquidated damages claims for underlying FDA violations and much more. Highlights of the TOP rationale for detentions follows, as I feel this is of most value to you to know and is arranged by commodity.

Food Products Top Rationales for Detention

• Manufacturer (processor, packer or person holding food product) is not registered with the FDA pursuant to the Bioterrorism Act.  (You can Register with the FDA here: www.FDA-USA.com)
• Low Acid Canned Foods (LACF) are imported without establishment registration (FCE #) or scheduled process (SID #)
• The products are subject to an Import Alert
• Product labeling is not compliant (FDA does not pre-approve food labeling, it is up to importers to assure it is compliant before importing)
• Common labeling violations include:

1. Label is not in English
2. Incorrect or missing statement of identity
3. Failure to list allergens
4. Failure to declare ingredients
5. Failure to include a proper “Nutrition Facts” label (incorrect formats for Nutrition Facts labeling is also common) required by 21 C.F.R. 101.9
6. Color additives are not declared correctly (or at all) on the label or not certified
7. Food  additives are unsafe or not declared on the label

Dietary Supplements Top Rationales for Detention

• The products are subject to an Import Alert
• Product labeling is not compliant (FDA does not pre-approve dietary supplement labeling, it is up to importers to assure it is compliant before importing)
• Common labeling violations include:

1.  Label is not in English
2. Unauthorized health claims
3. Undeclared active ingredients
4. Lacks a “Supplement Facts” panel required by 21 C.F.R. 101.36
5. Failure to list the name of product and “Dietary Supplement” or “Herbal Supplement” on the label
6. Failure  to list the appropriate disclaimer necessary when claims are made

Cosmetics Top Rationales for Detention

• The cosmetics are subject to an Import Alert (for example IA 66-38 for cosmetics labeled with drug claims)
• The cosmetics are contaminated and unsafe to use
• The cosmetics are manufactured under unsanitary conditions
• The cosmetics contain a non-permitted color additive
• Product labeling is not compliant (FDA does not pre-approve cosmetic labeling, it is up to importers to assure it is compliant before importing)
• Common labeling violations include:

1.  Label is not in English
2. Labeling is missing ingredients
3. Label lacks warnings and adequate directions for use
4. Missing the net quantity of contents
5. Cosmetic  contains a “drug” claim

Drugs Top Rationales for Detention

• The cosmetics are subject to an Import Alert (for example IA 66-41 – Unapproved new drugs)
• Drugs are not registered or listed with the FDA
• Product labeling is not compliant (FDA does not pre-approve drug labeling, it is up to importers to assure it is compliant before importing)
• Common labeling violations include:

1. Label is not in English
2. Label does not contain adequate directions for use
3. Active Pharmaceutical Ingredients (API) is not properly labeled or listed
4. Drug contains a “new” chemical or a different dosage making the product a “new drug”

Medical Devices Top Rationales for Detention

• The manufacturers is not registered with the FDA
• The initial importer is not registered with the FDA
• The device is not listed with the FDA
• The product does not contain a 510k or PMA
• Product labeling is not compliant (FDA does not pre-approve medical device labeling, it is up to importers to assure it is compliant before importing)
• Common labeling violations include:

1. Label is not in English
2. Label is false or misleading 

Bottom line, as you can see, it is up to you, the importer to perform pre-compliance and assure you get compliance right before you import.  FDA expects you to know the requirements and has little mercy if you don’t.  Assure you stay compliant and avoid the top rationale for FDA to detain your goods by hiring someone that is extremely knowledgeable with FDA’s laws and regulations and continually stays up to date with the constant changes. 

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