Customs Non-compliance in Japanese companies

You may consider Japanese compnanies are honest and reliable, thus most of companies seriously follow customs compliance in Japan. NOT really! The figure shows 69% of Japanese companies are pointed out non-compliance and had penalty by Customs authority, according to the post-audit result published by Japanese Customs in 2007.

It is mostly result of misunderstanding (or lack of knowledge) of customs valuation system. In my view, most of Japanese business people e.g. in marketing, management and even in SCM are just too innocent and non-professional in Customs regulation.

• Amount of penalty collected on incorrect import declarations is the highest based on historical records
  The total non-declared and short-declared value of all investigated companies were approximately JPY155billions (US$1.4billions). The amount of penalty collected for this customs compliance violation was approximately JPY11.1billions (US$100 millions), an increase by 3.2% compared with previous year’s post audit results. This amount is the highest and worst in history of customs compliance violation on import declarations.
  
  
• High rate of non-compliance
  The post-entry audit team investigated a total of 5,548 companies. Of which, 3,836 or 69% of the total companies investigated were found to have failed in making correct import declarations, an increase by 1.7% compared with the previous year.
  
  
• Top five items found out to be short of duty/tax declaration
  Ø Electrical Machinery (Chapter 85)
  Ø Machine and mechanical appliances (Chapter 84)
  Ø Apparel and clothing (Chapter 62)
  Ø Articles of apparel and knitted (Chapter 61)
  Ø Wood and articles of wood (Chapter 44)
  
  
• Sample cases of short-declaration subject to penalties
  Case 1 - A company in Japan imported air conditioners from China. The importer did not include the value of raw materials and mold, which have been paid by the importer to a manufacturer in China.
  
  Case 2 – A company in Japan imported Integrated Circuit Board from Taiwan. The importer did not include the value of raw materials of the board which have been provided free of charge by the importer beforehand. Although the raw materials were given free of charge, the cost of such raw materials must be declared together with the value of the finished goods value.
  
  Case 3 - A company in Japan imported medical materials from Germany. The importer did not include the license fee, which have been paid based on the contract. Such loyalty fee or license fee must be included in the transaction value and must be reflected in the customs declaration.

Japanese customs authority strongly encourages importers to learn and understand the correct customs valuation system. The lack of enough knowledge on customs valuation system and interpretation of customs law may result to additional costs to companies. Non-compliance to customs laws may result to imposition of huge penalties and may damage a company’s brand image and credibility.

EPA Japan-Indonesia effective on July 1

According to the press release of The Ministry of Foreign Affaris of Japan, EPA with Indonesia will enter into force on July 1 (Tue).

(Source: MOFA web http://www.mofa.go.jp/announce/announce/2008/5/1180458_1010.html )

Hault Elimination of First Sale Rule? (US Customs)

In a significant victory for U.S. consumers and businesses, Congress has moved to stop U.S. Customs and Border Protection from revoking the First Sale Rule. CBP proposed to eliminate this favorable import valuation methodology in January, a move that ignores 20 years of federal judicial precedent and could raise import tariffs by as much as 15 percent. CBP has been inundated with opposition from the private sector, including an industry coalition spearheaded by Sandler, Travis & Rosenberg, P.A., but lawmakers concerned about the lack of transparency in the process CBP used to develop this proposal and how it could affect a struggling domestic economy are acting to make sure that CBP does not go ahead with it.

The “First Sale” rule was established by the court in Nissho Iwai American Corp. v. United States, 982F.2d 505 (Fed. Cir. 1992) and set forth in Treasury Decision 96-87 (“T.D. 96-87”).
It applies in instances where merchandise is imported into the United States as a result of “back-to-back” sales. Typically, the first sale is from a foreign manufacturer to a foreign middleman and the second sale is from the foreign middleman to the U.S. importer. Under the “First Sale” rule, an importer can base the transaction value (or the appraised value) of the imported goods on the lower price that the middleman paid to the foreign manufacturer rather than on the higher price that the importer paid to the middleman, if a two-pronged test is met.
The court in the Nissho Iwai case ruled (1) that the goods must be “destined for the U.S. at the time of the first sale” and (2) that the sale represents a “viable transaction value.”
In practice, this meant that if the sale was an arm’s length sale and an importer could produce documentation that the goods were sold to the middleman as a result of a U.S. purchase order, the two-pronged test was met. The use of this rule has become increasingly popular since 1993 and has allowed U.S. importers significant duty savings over the past 15 years.

(Source: http://www.strtrade.com/ and Bryan Cave Publication http://www.bryancave.com/bulletins/ on Jan. 25, 2008 IRN No. 377)

BIS will introduce NEW export license exception "ICT"

According to the BIS, new export license exception Intra-Company Transfers ("ICT") will be introduced hopefully in July 2008. Details are described in below.

In recent weeks, the US Department of Commerce's Bureau of Industry and Security (BIS) has taken long-awaited action to address an area of concern for companies that have an international presence - namely, the need for a license exception to permit intra-company transfers of US-origin software and technology. Under the US Export Administration Regulations (EAR), most cross-border accessing of US-origin software source code or technology is considered to be an export, subject to US regulations and licensing requirements.

In March 2008, BIS Deputy Assistant Secretary Matthew Borman announced BIS's progress on a proposed "intra-company transfer" (ICT) license exception. This license exception would allow companies to share dual-use items and technology with their foreign subsidiaries and foreign nationals without a license. Companies would be required to obtain one-time approval from BIS, which would be based on a company's implementation of a strong internal compliance plan as well as a vetting of foreign end-users and individuals who would be eligible to have access to the technology. An annual audit mechanism would also likely be required. Mr. Borman stated that "if a company meets all the requirements, and that consists of a very tight export control program, then it will be able to transfer within its corporate structure here or abroad a universe of hardware, software and technology." Mr. Borman also indicated that there would be significant flexibility with respect to the types of EAR-controlled items that would be eligible for the license exception.

The proposed intra-company transfer license exception is consistent with the March 2007 recommendations of the Coalition for Security and Competitiveness, which also suggested that BIS use its license exception on encryption (i.e., license exception ENC) as a procedural model. Under the procedure for license exception ENC, a company must first apply to BIS for approval to export the controlled items. If BIS does not make a decision within30 days, the company may proceed with the export under the license exception. It is unknown at this time whether BIS's draft intra-company transfer license exception rule follows this process.

BIS's recent announcement followed on the President's January 2008 statement that his Administration would ensure that dual-use export control policies and practices support the National Security Strategy while facilitating US economic and technological leadership. In connection with increasing US competitiveness, the President highlighted several specific initiatives, including the need to revise controls on intra-company transfers. A license exception for intra-company technology transfers was also recommended in December 2007 by the Deemed Export Advisory Committee (DEAC), which was tasked to advise the US Secretary of Commerce on deemed export policy.

The draft rule relating to license exception ICT has been circulated for interagency feedback, and BIS officials have indicated their intent to publish it for public notice and comment by the end of May 2008. With respect to items that are eligible for license exception ICT, Mr. Borman has said that specific prohibitions on eligible items will not vary from company-to company. However, he has not indicated what will constitute the universe of items that can be freely exchanged among all companies that qualify for this license exception.

Companies that are involved with cross-border transfers of technology and those that seek to centralize multinational business processes and databases will benefit from this new intra-company transfer license exception, as it will make it easier for multinational companies to conduct research and development around the world as well as to facilitate global production and sourcing.

(Source: Client Memorandum by Clifford Chance http://www.cliffordchance.com/ April 2008)

Japan tighten monitoring of hand carry money

Effective on 1st June 2008, Japan will implement new regulation when you bring hand carry money exceeding JPY1 million (approx. US$10,000) or equivalent amount of cash, traveler's check, bond, securities etc. , you need to declare the amount in Customs application form. This is in order to monitor illegal money laundering activity which is regulated world wide.
Both export (bring out) and import (bring in) are subject to this new regulation. In addition, gold ore more than 1 kg is also applicable to this declaration requirement.
Actually this notification requirement have been implemented by FEFTL (Foreign Exchange and Foreign Trade Law) since 1998, now with amending the Customs Law, Japanese Government tighten the monitoring the hand carry more closely.
The application form will be distributed in airport, and you can download from Customs web site. It looks easy and simple to fill in.
http://www.customs.go.jp/kaigairyoko/H20k591_e.pdf

If you fail to declare, the penalty is not more than five years of imprisonment or a fine of not more than five millions yen based on the Customs Law Article 111. Same penalty would be given if you "try" to do so.

(Source: Japan Customs web site http://www.customs.go.jp/kaigairyoko/shiharaishudan.htm )

OFAC is Focusing More on Export Trade Compliance

OFAC, which is part of the Treasury Department, administers and enforces economic and trade (export/import) sanctions based on U.S. foreign policy and national security goals. The Bureau of Industry and Security (BIS), which is part of the Commerce Department, deals with export policy. Sometimes the export jurisdiction of these two agencies appear to overlap. OFAC is concerned with assets/financial transactions in addition to exports/imports, while BIS is more focused on export product classification. Also the primary expertise of OFAC is financial, while BIS has the engineering and product knowledge to make complex export classification determinations.

At the April 2008 National Customs Brokers & Forwarders Association of America's Annual Conference, an Office of Foreign Assets Control (OFAC) official discussed a variety of export-related issues. Highlights of her remarks include the following points:

OFAC Focusing More on Export Trade Compliance
OFAC is now focusing more on the exporting community, and has been conducting more audits of forwarders, carriers, exporters, etc.

Culpability Never Stops
With OFAC, culpability never stops; anyone in the chain of export is susceptible to OFAC regulations. OFAC often learns about potential violations from banks, as they are able to follow the chain of payment and can tip OFAC when potential violations occur.
(Banks are subject to OFAC regulations as they are part of the export chain.)

Personally, this is very interested in and important to note Banks are tipping the violation to OFAC!

(Source: International Trade Today - (Tue 05/20/08) by by Broker Power, Inc.)

Ukraine Joined WTO on May 16

Ukraine joined the WTO on May 16, 2008 as its 152nd member after concluding fourteen years of negotiations. Ukraine has offered extensive market-access liberalization and non-discriminatory treatment in areas including agriculture and industrial goods, service, intellectual property rights and other reforms.

Reference: JTASS web page (Japanese)
http://www.kanzei.or.jp/topic/international/2008/for20080222.htm

Reference: WTO press release (English)
http://www.wto.org/english/news_e/news08_e/acc_ukraine_apr08_e.htm

Source: Bryan Cave LLP bulletin No. 386 (English)
http://www.bryancave.com/bulletins/

"BIS Outlines Nine Minimum Requirements for 'Great Weight' Civil Penalty Mitigation for Effective Compliance Programs"

(Source: Dewey & LeBoeuf LLP Client Alert, April 30, 2008)

At a recent Export Control Forum in Newport Beach, California, Assistant Secretary of Commerce for Export Enforcement, Darryl Jackson, gave the keynote address on export control compliance, especially as it relates to the mitigation of administrative penalties. The address was particularly timely, given the drastic increases in penalties for export control violations under the recently passed IEEPA Enforcement Act.

Before passage of the IEEPA Enhancement Act, the maximum civil penalties for export control violations were $50,000 per violation. Under the new law, those penalties were increased to $250,000, or twice the value of the violative transaction, whichever is greater. See Client Alert, Penalties for Violations of U.S. Embargo/Sanction Programs and Export Controls Drastically Increased; Export Enforcement On the Rise, Oct. 17, 2007. It was unclear initially how BIS would choose to implement the higher penalty regime; thus, Assistant Secretary Jackson's remarks provide some much needed and valuable insight for the trade community.

"Effective Compliance" = "Great Weight" Mitigation = 25 Percent Reduction in Penalties

According to Assistant Secretary Jackson, BIS is now giving "Great Weight" mitigation - equal to a reduction of 25 percent - in administrative penalty cases, where the exporter can demonstrate that it has an "effective compliance program". While noting that there is no "one size fits all" solution to export compliance, Assistant Secretary Jackson did identify nine indispensable components that will be a feature of all "effective" export compliance programs meeting the threshold for great weight mitigation. These nine components, described below, must appear in the design of the compliance program, and must also actually be implemented to be considered by BIS. Moreover, the burden is on the exporter to clearly demonstrate that its compliance program is "effective".

(1) Meaningful Risk Analysis: The first component of an effective compliance program is performance of a "meaningful risk analysis". A meaningful risk analysis considers, for example, the types of merchandise exported, the particular export destinations, and the likelihood of diversion. A meaningful risk analysis is not just a one-time thing, however. Rather, according to Assistant Secretary Jackson, exporters should revisit this step periodically, and make any necessary changes to their compliance program, in light of changing conditions.

(2) Formal Written Compliance Program: Once the meaningful risk analysis is performed, the written compliance program should be tailored to it. Formal written compliance procedures and directives are "the fundamental baseline" of any compliance program. The written compliance program should be developed, implemented and made available to all relevant personnel. Without this component, common goals cannot be adequately established or communicated.

(3) Oversight by Senior Officials: Responsibility for oversight of export control matters should be tasked to a senior official. The appropriate official must have the authority, expertise and resources to provide effective oversight. An isolated, lower-level manager or staff person will very likely lack the ability, or the accountability, to deal adequately with export control issues.

(4) Employee Training: In addition to having a written export compliance program, and making it available to all relevant personnel, exporters must properly train those personnel so they will know what is required of them for the company to be in compliance. Training, like a meaningful risk analysis, cannot be a "one-time" event. Training must occur on an ongoing basis and must be well documented for accountability purposes.

(5) Customer/Transaction Screening: Effective compliance programs must also include screening procedures for all export transactions and customers. Screening against the various lists maintained by export control agencies should be an automatic step taken in every single transaction and for every single customer.

(6) Recordkeeping: Requirements All exporters must have effective recordkeeping controls in place. Effective recordkeeping procedures will provide for compliance with all the recordkeeping requirements of the Export Administration Regulations, as well as for maintaining the kinds of documentation commonly expected in the exporter's particular line of business, so that the details of all transactions can be verified.

(7) System for Reporting Violations: Effective compliance programs will also include an established process by which employees raise concerns over possible export control violations. These issues must be escalated to the appropriate authority within the company so that they may be properly investigated, and so that any necessary remedial actions, including the filing of voluntary disclosures, may be taken. This is also a critical step for protecting a company's bottom line, as BIS routinely mitigates administrative penalties by 50 percent when violations have been voluntarily disclosed.

(8) Periodic Reviews and Audits: Performing periodic internal audits is necessary for every compliance program to verify that it is effectively minimizing risk.This process should entail not only reviewing the details of past transactions, but also making modifications to compliance procedures in light of the results of the audit.

(9) Remedial Actions: Finally, all effective export compliance programs will provide for appropriate disciplinary action to be taken in the event of violations. Non-compliance with established procedures, or with export control laws or regulations, must not be merely "swept under the rug".

Assistant Secretary Jackson's remarks provide a welcome glimpse at how BIS will approach final penalty determinations under the new penalty regime, and were about as clear a directive to the trade community as it is likely to receive from an export enforcement agency.The nine components he identified are, effectively, a recipe for exporters to try to ensure that they will be granted civil penalty mitigation of, at least, 25 percent. Moreover, and as mentioned above, a voluntary disclosure will typically reduce the final penalty amount by an additional 50 percent.

All exporters should carefully review their export compliance efforts to ensure that they incorporate all of the nine components outlined by Assistant Secretary Jackson. Especially considering that maximum penalties may now be a multiple of the value of the merchandise, exporters neglecting their compliance obligations do so at their own peril. Finally, Assistant Secretary Jackson also indicated that the Department of Justice is devoting more resources than ever to export enforcement activities, "so you should expect to see an increase in criminal prosecutions. Thus, compliance is more important than ever."

Closed community of Japan MOF and Customs

I was in a evening party on May 16th (Fri) at luxurious hotel in Akasaka, Tokyo.
The party was annual party of Japan Tariff Association (JTA), the people gathered there were Japanese MOF and Customs people, and from companies involved in international trade.
The total number of people there were approx. 200, I guessed.
I was first time to join this party, as I set up Tokyo office for the US law firm last year.
The impression of the party is that, all people there were same "tribe".
All Japanese male with Senior age, probably 60-70 years old. No women! No foreigner!
The word "Diversity" is meaningless in such community.

I find young guy who is from JTA, he said 70-80% of people there are from MOF or Customs.
Even from private companies, the participants are actually ex-MOF or ex-Customs who now belong to private sectors as advisor after long years of service in government. We call it "Amakudari", which means appointment of a retiring government official to an important post in an industry controlled by his former ministry. Most of people despise "Amakudari" as it is a vested interests of senior government officials and such peoples are generally not competitive.
Namely, this party is alumni party of Japanese government officers. People there seem to be known each other by group and by group. For me, most of senior guys there look like same face and had same dark suit.

Although I'm typical Japanese male, I felt I was like alien there, probably I was only manager from foreign company. But luckly, I happen to find nice guy who is from JTA, manager of planning department. He is close to my age, and very energetic and thoughtful, has many idea to positively activate Customs community, I really enjoyed chat with him. The MOF and Customs officials community is still so closed and dominated by old generation, I was so happy to find an able manager in JTA last night.

Japan will tighten deemed export control of technology

According to the Nikkei press on May 13, Japanese government will rectify FEFTL (Foreign Exchange and Foreign Trade Law) to tighten deemed export of sensitive technical information in order to better protect national security.

http://bizplus.nikkei.co.jp/genre/soumu/index.cfm?i=2008051210507b3 (Japanese)

METI will impose business users screen knowledge transfer of sensitive advanced technology based on the law, such as e-mail, Internet transfer and bringing it by electric media. Currently, the control scheme is to screen the transfer from "Japanese resident" to "non-resident", and non-resident can be resident after staying in Japan more than 6 months. The potential problem is pointed out, foreign resident can be back to home countries after getting knowledge transfer legally within the stay in Japan more than 6 months. This is considered as "loophole" of FEFTL.
Therefore, METI will impose screening of intangible technology transfer as definite method to protect illegal technology export.

The amendment of FEFTL will be sometime in 2009. According to METI, they will modify Ministerial Ordinance and Notification accordingly, but to avoid confusion of business as much as possible, and intend NOT to give negative impact to international business by Japanese companies.

Interestingly, however on same day in United States, there is discussion that "ITAR Hurts U.S. Innovation, Industry Group Says". Source: http://www.defensenews.com/story.php?i=3524389&c=AME&s=TOP)
According to the article, The International Traffic in Arms Regulations (ITAR) that govern the export of defense-related goods is hurting innovation in the U.S. space industry and threatening national security.

Well, it is always difficult to balance ease and tighten.

First AEO program with New Zealand

On May 14, MOF announced it was agreed that Japan and New Zealand accepted the status of AEO exporters as granted under their respective programs.
This is first AEO agreement for Japan with foreign country.
The details are in below URL in MOF.

http://www.mof.go.jp/english/tariff/ka200514e.htm (English)
http://www.mof.go.jp/jouhou/kanzei/ka200514.htm (Japanese)

The implementation is scheduled in Oct 20, 2008.

Report on the WTO Inconsistency of Trade Policies by Major Trading Partners

On May 8, METI published "2008 Report on the WTO Inconsistency of Trade Policies by Major Trading Partners". (English translation is not available yet.)
http://www.meti.go.jp/report/data/g80508a01j.html

For export control issues, METI mentioned China encryption control issue, and US extra-territorial re-export regulation, they are as WTO Inconsistency.

1) China encryption issue (Page 47 in China chapter)
License for encryption is required in China for commercial telecoms activity, however the definition of encryption is not clearly mentioned, administration is inconsistent, and the procedures are very vague. Commercial License for encryption have never been granted so far to foreign companies. This is potential threat to foreign company.

2) US extra-territorial re-export control (page 116 in US chapter)
Japan have already established and maintained solid export control strictly according to world wide regime such as Wassenar Arrangement. US EAR force Japanese companies to follow US re-export regulation for US origin products and technology. This is additional operational burden for Japanese business. Japanese government request US to exclude Japan as its extra-territorial export control. If it is difficult for the time being, Japan request US companies to notice correct ECCN for business partners in Japan, and make it mandatory requirement.

List of items restricted by Japanese Export Control law revised and enforced in May 2008

Effective on May 15, 2008, newly revised Japanese export control list will be enforced. The new list was announced by METI in March 26, 2008. The revised points are mainly in newly added items as controlled products, providing new interpretation of items, definition and specification change for current restricted products, etc. This revision is to reflect the latest update of world wide control regimes, such as Wassennar Arrangement, MTCR (Missile Technology Control Regime), NSG (Nuclear Suppliers Group), and AG (Australia Group) within these couple of years. The change is not for principle of export control, but the addition and change of items list, therefore the classification of export items need to be re-assessed by manufacturer or by exporter. 　(As for Wassennar Arrangement, please be noted this change reflects only amendment in 2005 and in 2006. The agreement on Dec. 2007 in WA is NOT reflected yet.)

There are hundreds of changes in the list. Below items are some major samples of products newly added in the updated list in electronics and IT industries. Company needs to get export license by METI in exporting such products out of Japan.

Missile related items
Thermal batteries designed or modified for missile or unmanned aerial vehicle

Electronics
- High energy devices: ‘Cells’ (Terms and definitions changed from ‘Battery’ to ‘ Cell’)
Primary cells' having an 'energy density' exceeding 550 Wh/kg at 20°C;
Secondary cells' having an 'energy density' exceeding 250 Wh/kg at 20°C
- Imprint lithography equipment capable of producing features of 180 nm or less;

Telecommunication
- Jamming equipment specially designed or modified to intentionally and selectively interfere with, deny, inhibit, degrade or seduce mobile telecommunication service and specially designed components
- Passive Coherent Location (PCL) systems or equipment, specially designed for detecting and tracking moving objects by measuring reflections of ambient radio frequency emissions, supplied by non-radar transmitters
- Information security systems, equipment and components Designed or modified to use "quantum cryptography"

Please be noted above are just major samples, exporters need to fully review whole list for classification, which is available in METI and CISTEC web site. In classification operation, ‘Parameter sheet’ is useful check sheet, which is published by CISTEC (Center for Information on Security Trade Control). The revised parameter sheet will be available on May 27, according to CISTEC.