Export Compliance Problems with Michelle Schulz

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Michelle Schulz 0:00
In my opinion, the mistakes happen oftentimes because folks just don’t appreciate how difficult it is and how serious the government is about getting every detail and getting it right.

Lalo 0:14
Welcome to simply trade. Brought to you by global Training Center. My name is Lalo, and together with my co host, Andy, we have well over 60 years of combined trade logistics and supply chain experience along the way, we have seen and witnessed different challenges in trade compliance. We decided to put the show together and call on our friends and colleagues in the business to hang out with us and share their knowledge in all things trade. Thank you for spending some time with us. Enjoy the show well,

yeah, recently, we’ve been talking about lots of like, how to get the attention of your managers and your executive suite and all that kind of stuff so that they can listen to you on trade compliance. Michelle came to us with a really good idea, on, on, on, on, just pitfalls for for export controls. I mean, things you don’t think about, yeah, is things you don’t think about. So, I mean, I don’t know. I think this is going to be a good episode in the sense that it’s going to shed some light on things that we’ve normally may not think about or, huh, you know why?

Speaker 1 1:26
You know? Anyway, she, I like the idea. So go ahead, the

Andy 1:30
level of detailed knowledge, Michelle, you have is phenomenal. And it’s just like, and, but you, you display such grace and and wisdom when you’re presenting things to people that I’m like, it just I’m always in awe of you, and I you’re just one of my favorite folks that I love being around you, but I also love learning from you.

Michelle Schulz 1:52
Thank you. You’re too kind, and I love presenting with you as well. You always have something really interesting to say, some sort of observation from experience that we can put into motion. You know,

Andy 2:08
yeah, so Well, it’s, it’s one of those where, you know, again, some of these topics are, it’s so complex, and you can lose somebody real quick. And if you can keep me up there with you, because you know me, I’m dumb as a box of rocks, is what I always say, and I got to keep up with you. And if I can understand it, then hopefully the rest of the crowd gives because I’m like, you know, at that fourth grade level, you know,

Michelle Schulz 2:38
I think you’re at least, I’m sure you’re,

Andy 2:44
oh my god. Well, listen, okay, I love your topic is, this is going to be one for advanced export compliance. So when we’re saying advance, he’s like, you’ve got your basics with your synchronizing your data, if you will, from your purchasing all the way through your compliance. Your commodities are classified, hopefully accurately, and all those kinds of things. That’s your basic stuff, the information that you generate with your commercial invoice, some use letters of instruction, some use, you know, with your bill of lading you’re even creating, hopefully you have synchronized your data with your bill of lading, regardless of mode of transportation. So synchronize the data with your bill of lading, your commercial invoice, and all the other data, so that really all the information should be on your paperwork up front, and that a broker, a transportation company, really doesn’t they should not have to go to a database, if you’re a computer, to look up any information. It’s all it should be, right there. Now, okay, that said that’s that’s easier said than done, right? Yes, but as we get into more advanced topics in this is that now we’re getting into some nitty gritty things, and there has been an upscale in export controls, export accountability, if you will, from the US government towards exporters and importers that are doing some things in transit and whatnot. All right, so Michelle, with the pitfalls. And again, I love the concept here, the pitfalls of advanced export compliance is, why don’t you just start off with where, in general, what you’re going to talk to us today about and what these pitfalls are,

Michelle Schulz 4:37
sure? So as you know, Andy and Lalo. I’m an international trade attorney, which means I typically don’t get calls from companies that are doing everything correctly. In fact, I often get calls from companies that have made a mistake, or potentially made a mistake, and so sometimes. I feel like my whole career is problem solving and being a fixer for people’s mistakes. But with that said, I also find that companies tend to underestimate both the government as far as how strictly they will enforce and the complexity of export issues. We have many cases where a company will call us up and they’ll say, we don’t export. But so and so told me to call you come to find out we pull up their ACE data. They’ve been exporting millions. You know, they just didn’t know that they met the definition of an export. So there’s, there’s a lot to consider with exports, and I, in my opinion, the mistakes happen oftentimes, because folks just don’t appreciate how difficult it is and how serious the government is about getting every detail and getting it right.

Andy 6:04
Okay, let me, let me talk about it. Before we get too far into some details here is that in general, as far as the level of accountability towards the executive levels that the government is looking at for, you know, accountability, their own personal liability, as well as liability of the company, the the executive levels, and I’m talking literally, the CEO, Chief Operating Officer, even the CFO have Some really, they’ve got skin in the game in this, in that I’ve read recently. Of you know, there’s a company that was trying to do business and send some information to Russia and China, both. And they got themselves into not only trouble with their from a company, but they themselves were brought up on criminal charges for the actions that their, if you will, their company was trying to follow through on with a international transaction. Is that valid? Is that a Am I reading that correctly, that it comes into this is what we’re under the umbrella of the advanced export compliance? Yes,

Michelle Schulz 7:23
absolutely. There are both criminal and civil penalties. And with criminal penalties, you are kind of looking at what you said at the sea level position, someone who is in top management, they’ll want to make an example out of them. So for example, if you had a sanctions violation or the Russian one, you mentioned, it could be 20 years in prison. Now that’s scary. You didn’t kill somebody, you didn’t rob somebody, but you did something shady with your export paperwork, and that can really land a person in prison. Also monetary penalties. Penalties can be up to a million dollars criminal but even the civil penalties are now up around 330,000 per violation, and so the civil penalties are also high. You could make some errors that you don’t think are a big deal, and come to find out, the government views them as a very big deal, because export controls have to do with national security and regional stability and political issues. So a lot of stuff goes missed, and then you end up with these serious penalties and violations.

Andy 8:45
And in addition, then you’ve got a scenario where not only are you personally on the hook for some of the penalties, as well as the possible criminal situation at all, but the company itself stands to lose its exporting privileges, and as such, I mean, if you have, let’s say 1020, 30% of your revenue is tied to export sales, and you can’t export anymore. That would be, you know, how would you like to be the executive of a company that goes back to the board and say, well, we kind of messed up here. And yes, it’s under my watch. And oh, by the way, we can no longer sell internationally and export the goods directly ourselves. We will have to go through somebody else.

Michelle Schulz 9:36
Yes, that could be that, that could even sink a company theoretically, if they don’t get their act together, and we’ve seen that happen before, it’s not the government’s goal to cause trouble for companies and good business, but they will penalize and I think you reminded me, Andy, another thing that’s really interesting about Penn. Penalties and companies is they lose their reputation at the BIS update conference. I don’t know how many people went to that. There were a lot of people there, but this year, the Commerce Department announced that they were going to publicize administrative penalties. This is the first time so you get named and called out, named and shamed. I That’s just shocking to me, from a PR perspective, from companies

Andy 10:35
well, and that all said is, here’s something else. Let’s take it another step further. We’ve talked about the executive levels here a little bit and whatnot. And again, we’re going to get there’s a lot of good details that I like, of the information that you’d send in preparation here. But one of the things that we hadn’t really hit on is the actual compliance management, the person, the director, the manager, the compliance person that is employed by a company, you know, if they, if you’re involved in a company that gets called out on the carpet, if you will, like this, I mean, your own personal reputation is going to go, you know, on the skids real quick. But the other thing is, is that, what actions have you done as a compliance person to try and inform those above you and those around you? And the scenario there is, it can be pretty serious for that particular person as well. Would it not

Michelle Schulz 11:36
if a person is in a compliance position and they either don’t know very much about compliance, or they don’t care, that can result in huge penalties for a company. So I mean actually from a legal perspective, sometimes when we see really big mistakes, or what they call systemic problems, the company will let go that person because the person wasn’t paying attention. So Right? It can be taken really seriously, because in the end, it costs money.

Andy 12:13
Well, there’s something that I’ll bring up towards the end of this, as far as one of the things I like to do is we’ll talk about the issues here, and I want to get into the pitfalls. And at the end of this is that, you know, what is the key nugget of knowledge that we’re going to that somebody needs to take away from this? Well, some of these pitfalls are those nuggets that they need to pay attention to. But then the other is, at the end of this is kind of recap, and say, what is the specific action that a compliance related person should be taking? The other thing is, I want to be looking at and go, Okay, what are the specific actions or questions that a C suite level should be taking to say, Okay, we’ve got your attention now. What are the questions they should be asking of their internal organization, so that, Hey, am I covered? Are we covered? Or, you know, those kinds of things. So we’ll get into that in just a little bit here. So all right, what’s the first pitfall here that we can talk about?

Michelle Schulz 13:13
So first pitfall, let’s say you’re with a company that’s about to buy another company. You probably have heard about successor liability. So with export controls, when you buy a company, you essentially buy their last five years of export activity. This is really frightening, in a way, because when mergers and acquisitions happen, we have usually corporate counsel, maybe some litigators, maybe some IP lawyers, but you’re not going to often find that the trade lawyer is brought in until it’s too Late. So trade gets overlooked in mergers and acquisitions, and if you buy a company that has been exporting, or maybe they’ve been exporting and they didn’t know it, the liability immediately becomes your baby. So yeah, I go ahead and, well, I was

Andy 14:17
just going to say, is like I have seen that situation. So again, for the audience, the mergers and acquisition side of things, people are really they’re moving quickly. They’re trying to make a deal come through the even those that coordinate those mergers and acquisitions, as you said, the compliance side of the thing is usually not what is not at the forefront. And so when people, I would say that are looking at that, when you’re forming your you know, acquisition team, or your merger team, again, as you just said, there’s the attorneys that are involved, there’s, you know, the contract. Protecting the thing, the negotiations that probably labor may be involved in some of this, in the marketing efforts and things of that nature go through. At some point, there’s going to be accounting, usually as part of the team, so they’re going in, and you even may have forensic accounting that’s going in and say, you know, this is what was presented. Now, let’s validate the information that has been presented in the merger. But one of the key Essentials is, is that with the logistics, and I’m talking everything from from the warehousing, the transportation, but also important is the export and import compliance. Pieces of it, not only us, but also globally. So those need to be added to those merger and acquisition teams, as people are assessing things, and I would make sure that the compliance of the company that’s being bought is participating, along with the new the new the new owner, if you will, and their compliance team. Would you agree with that? Yes,

Michelle Schulz 16:05
I do. And it’s, it’s kind of like the Commerce Department and the State Department and no fact always say you have to have top down support. So if you have key decision makers in a big business deal, they need to be focusing not only on the technical aspects of acquiring a company, they need to also look at, do I have liability here? For example, we’ve had some companies that have found out the company they’re buying is probably about, I’m going to just say, four to $6 million deep in potential penalties that company that’s purchasing the other company would want to know that, because that reduces the value of the company they’re buying drastically. And I think without top down support, we run into mistakes because the people at the top are guiding the transaction.

Andy 17:04
Okay, so let’s, let’s talk a little bit before we move on to the next point. Is that that top down support, you know, theoretically, it’s easy to say, you know, yes, the CEO or the CEO, but I would say, when it comes to this element, the seed suite is generally going to be pushing for this merger. Or, you know, obviously they’re making the deal, they’re involved in the deal. More specifically, of that top management that should be looking at this is where the transportation, logistics and compliance roll up to whatever Officer of that company is responsible for that, and it may be two different officers, because a lot of times the compliance group is many times under the legal umbrella. It could be under something else. A lot of times the compliance are going, it’s like a stepchild. I don’t want to you take it. You take it, all right. But regardless, whatever officers we’re talking about top down support, it should be, whoever’s responsible for that needs to step up on behalf of their organization. Would you agree?

Michelle Schulz 18:14
I would agree completely. And tossing it around, that happens all the time. We see departments say, I don’t want it, I don’t want it. Or what if a department wants it, but they’re not qualified to have it. That happens too and and you can bet that in an investigation of any kind, that a special agent would ask the question, what training have you had and what’s your background? They’ll call people and talk to them, and those folks may have no idea what an ECCN is, for example. And so it’s really important that you have the right people, and you have that top down support, centralized in some way, with centralized records.

Andy 19:01
Okay, what’s our next point? So the next

Michelle Schulz 19:04
it is this kind of spins off of the merger and acquisition question, are you reading your agreements? The legal department in your company probably is reading them, but they’re reading them with an eye to making a good deal limiting liability? Do we want an arbitration clause? What’s going to be the jurisdiction? Do I have to go to London to litigate this? Or can I just stay here in Texas, where I’m happy there are so many things that those lawyers have to look at so they don’t necessarily have the time to look at contractual provisions that either protect a company or that harm a company.

Andy 19:51
Okay? So before you go further, let me just find when you’re saying reading the agreements, agreements of what a international like, the same. Sale, like a buyer seller agreement, or are you talking about the agreement of the actual merger itself could be both.

Michelle Schulz 20:08
Typically, I end up reviewing what they call a master purchase agreement in an international sale, and the master Purchase Agreement, which they also call the MPA, tends to contain both buyer and seller side provisions. What the seller will do in that type of agreement is say, Okay, if you buy us, you hold harmless. You hold us harmless for everything that we’ve done in the past five years. And of course, we certify that we’ve been

Andy 20:44
compliant, trust me, no problem. Yeah,

Michelle Schulz 20:49
we don’t export. It’s just Canada. I mean, we hear this all the time, right? Or, oh, it’s Mexico. Does that count? Well, yeah, still. So yeah, we’ll find that sellers will make representations, and then buyers will make representations. So anytime that I’m involved in a merger or an acquisition, I have to first step back and say, Okay, wait, first of all, who do I represent? Because if I represent the buyer, I’m going to rip up those sellers representations. I’m going to make sure they’re true, and I’m going to ask for sample records, sample export documents, and I’m going to audit whereas, if I’m the seller, my main concern is, am I signing off on something that is a blatant lie? I don’t know. I mean, the person signing the document probably has no idea, um, whether a license was required for an export three years ago. So when you’re the seller, you gotta think about what you’re signing.

Andy 22:01
Alright, to that extent, though, is that I think we need to separate a little bit of the agreement of the actual of the actual acquisition slash merger, is one thing that should be reviewed and read by every single team member as appropriate. I mean, there, there’s probably some things that can’t be shared with everybody on that that’s, that’s for the C suite level I get, but I would think that the acquisition team should be reading the full contract, and maybe it was like, Oh my gosh, let’s watch grass grow, because this is so boring, and then I’ll fall asleep. But you got to do it right, versus now the it would be a horrendous task, but it, and it could be delegated down, but it is reading the sales or the the purchase and sales agreements on your international transactions, that’s going to be a lot of those. Especially, I mean, you’re sourcing out goods, you’re selling goods, whatever. So I would think that that needs to be a separate category, but equally as important, and has got to be reviewed for what you’re looking for. And again, as you’re going through those things, like you said, you got your seller positions, you got your buyer, positions and things of that nature that I find vitally important. There’s certain language that you should be including in those contracts, that if you’re a US party, and it’s you know you’re selling, it’s, it’s going to be crucial, if you’re dealing with a foreign entity. Protect yourself

Michelle Schulz 23:44
definitely. And you can imagine somebody signs something, or maybe you write, you write a provision that says, I hereby certify that I have been compliant with all US export laws and all US export regulations for the past five years, someone like me might come in and say, to the best of my knowledge and belief, because you want to do your due diligence and make sure that you haven’t missed anything, but if something flew past me, I don’t want to be held accountable for that.

Andy 24:20
Well, let’s look at it this way. The difference of what you just said is like, all right, I have been compliant for the last five years for all us, laws and regulations on exports and whatnot. Okay, there’s that. And then if there was an infraction that comes up, it’s like, hey, what? Wait a minute. Did you just lie to us? Or you could be brought up and say, Wait a minute, you certified that y’all were compliant, and yet, here we have a problem. Versus you add that added language you just said, to the best of my knowledge and ability, and there’s like, you know what? I did not know about that. So it’s, I’m sorry I was not knowledgeable of that. I gave you a truthful statement, versus another one that could. Be considered, you know, I certify as correct, and then it wasn’t, and now I’m held liable for

Michelle Schulz 25:06
that. Yes, yeah, there’s a lot to think about in there, because even if the government holds the buyer liable and the government penalizes the buyer, there are certain remedies. You know, the buyer can come back and sue the seller for breach of contract, for lying in the contract. So we have to look at the the whole lifespan of this if, if three years down the road, they have a special agent knocking at their door, you can look back and see, okay, was this us or was this our predecessor?

Andy 25:38
Okay, so let me throw this out. That comes to mind. Would you think it would be wise for people in executive level positions, whether they’re a an executive with a customs brokerage firm, a logistics firm, a manufacturer, a distribution, distribution firm or something like that, a buyer, seller, whatever you’re going to have contracts that somehow your company is is engaging itself in international transactions, or you may be facilitating the move and or entries thereof of your clients. Would you not think that as an executive or upper management of these said companies that it would be wise to go and, you know what? We’re not buying or selling any or we’re not buying a company. We’re not being bought out. But let me go and just look at our own contracts, just as a standard rule, and say, let me look at so many contracts a quarter or something, and just do a review and put your own team together. Would that not be a wise move, or would that be like overkill?

Michelle Schulz 26:45
No, that would be wise. Even if you spot check. There are things like distribution agreements. There could be an agreement, even an employment agreement. What if you hire a foreign national and that person agrees that they don’t need a license. Maybe it turns out they did need a license, and they didn’t tell you the truth about all their nationalities. So there are a lot of nuances there, and it can get tricky because there’s certain you don’t want to ask and

Andy 27:16
you can’t. Guy, I mean, it’s just like, He’s really sweet. I mean, it’s like, no, you know, you told me he’s good, right? And he’s so smart,

Michelle Schulz 27:25
he’s always really smart, and the company can’t do without him.

Andy 27:31
So, but yeah, it holds you liable, though. Yeah, okay, all right. Any more on your second point here is reviewing these contracts.

Michelle Schulz 27:39
So I think on my second point, I would just say also that this does apply to every type of organization. It doesn’t matter if you’re a university, we can look back a few years and find the J Reese Roth case, where that university professor actually went to jail for sharing information with students. So it doesn’t matter if your university. Doesn’t matter if you’re a nonprofit, maybe you’re saving the world. You still can’t export stuff that might hurt the United States without a license. Anyway, so I think that’s something that also gets missed.

Lalo 28:20
All right, everyone, sorry, we ran out of time for this segment. We are going to keep recording here with with Michelle and and have her back for the next segment or the next episode, which will be airing later this week. Thank you all for joining us, and we really look forward to having you back and finish this conversation with Michelle regarding the the information she’s provided for us. Thank you so much, and we look forward to having you back.