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- ECN classification: Best practices for exporters
ECN classification: Best practices for exporters
For exporters, determining the necessity and/or accuracy of an Export Classification Number (ECN) for goods shipped from the United States isn’t just an important technical requirement for trade compliance – it’s a key piece of information that, if applied incorrectly, can lead to significant fines and penalties, as well as supply chain disruptions and loss of a business’s reputation.
ECNs only apply to a specific class of goods that the government has deemed “dual use,” meaning that in addition to their civilian purposes, these items could have military applications or be useful to terrorists. High-end technologies, specialized software, and certain raw or toxic materials are some of the main product categories that require an ECN for export to a foreign country or foreign national. Identifying the need for ECN classification is also the first step in determining whether a product needs an export license or not.
Export penalties and sanctions
As an export control tool, the U.S. government relies upon ECNs to prevent sensitive technologies and materials from landing in the hands of foreign adversaries. And because there are national security implications, the consequences for ECN misclassification tend to be much harsher than penalties on the import side.
For example, in addition to having their export privileges denied, violators of ECN compliance rules can be fined up to $300,000 per transaction or twice the value of the transaction (whichever is higher). Criminal penalties can go up to $1 million per transaction and/or 20 years in prison.
Sanctions violations are often the costliest transgressions. For example, in April 2021, the Office of Foreign Assets Control (OFAC) fined the software company SAP $2 million for shipping software to Iran in violation of U.S. sanctions, even though the violations were self-disclosed. And in 2020, Comtech Telecommunications Corp. was fined $894,111 for shipping satellite equipment to Sudan through a Canadian subsidiary.
Challenges of ECN classification
Because the risks for misclassified ECNs are so high, some companies hire third-party vendors or even outside counsel to manage and ensure the accuracy of their ECN classifications. Such measures are not strictly necessary if proper classification protocols are followed, but outside assistance does offer peace of mind for companies and other organizations (e.g., universities) that do not have the resources, inclination, or confidence to do it themselves.
That said, it can be a challenge to know for certain what the proper ECN classification is for any given product. Several factors come into play when determining the correct ECN. Among them:
- Dual-use designation and licensing: Not all technologies are “dual-use,” and not all products require an export license. To find out if a good needs an ECN for export compliance, one must consult the Bureau of Industry and Security (BIS) Commerce Control List – but the list is always changing, so constant vigilance is required to avoid getting caught by surprise.
- Changing sanctions: Running afoul of U.S. sanctions is perhaps the biggest risk of improper ECN classification, but sanctions too are constantly changing, so it’s important to remain current on U.S. foreign policy toward sanctioned nations and entities. Improper classification from a company’s subsidiaries or suppliers can also result in penalties, so understanding the origin, destination, end-use and end-user of all goods shipped under the company’s name is paramount to sanctions compliance.
- High product volumes: Companies that ship a wide variety of goods in high volumes, or export parts and components with various stock-keeping units (SKUs), can easily make classification errors. Getting it right takes time, personnel, resources, and diligence, none of which are free.
- Lack of resources: Even in large companies, global trade teams are often small and do not always have the automated tools they need to ensure trade compliance.
- Manual identification: All exporters have the option of manually self-identifying their ECN classifications, but even a single typing error can cause problems and confusion downstream.
ECN classification best practices for exporters
Exporters who want to avoid costly compliance mistakes and make sure their ECN classification protocols are accurate should review their procedures to see if incorporating industry best practices can improve their current methods.
Some factors that can boost an organization’s confidence in its ECN compliance protocols include:
- Proper export compliance training and documentation: The U.S. Dept. of Commerce’s BIS recommends that all exporting companies establish an Export Compliance Program (ECP) – not only to minimize the risk of noncompliance, but also to protect company interests and aid national security. No two compliance programs are exactly alike, but exporters should be well-trained in the areas of a company’s technology that could come under scrutiny for an ECN. The team’s decision-making process should also be documented, both to improve institutional knowledge and provide a defense in case of an audit.
- Supply chain communication: As the aforementioned Comtech case demonstrates, ECN export control violations can creep in through foreign subsidiaries and suppliers whose business practices put the company at risk, intentionally or not. Ongoing communication with partners all along the supply chain is essential to ensure global compliance, as is an explicit understanding of who will be receiving the shipment and what the end-user intends to do with the product. A violation can be triggered at any point in the process, so regular screening of all partners and participants in the export distribution chain is essential to mitigate risk and maintain confidence in the trade compliance team’s effectiveness.
- Up-to-date global trade content: When it comes to ECN classification, staying current on shifting U.S. sanctions and import/export policy is an ongoing challenge. It is difficult, time-consuming, and risky to rely on periodic manual checks, so it makes sense to utilize software that automatically compares a company’s supply chain against a continuously updated database of import/export policies and sanctions. Such a tool will alert exporters to possible violations and provide confidence that all relevant rules and sanctions have been acknowledged and addressed.
- Systems/data integration: Because manual processes for due diligence are so prone to error, it’s essential for companies that want to minimize the risk of ECN misclassification to have an integrated data system that serves as a single source of truth for all the company’s export data. Proper ECN classification requires cross-referencing a product’s relevant technical characteristics with several other key pieces of data – e.g., Commerce Control List categories, ECN product groupings, export destination, importer, and end-user. Classification software that automatically catalogues the technical details of a company’s products and cross-references them with the relevant ECN classification criteria is virtually the only way to ensure that a company’s ECN classification process is being conducted accurately and consistently across the board.
- Automated import/export workflows: Automating ECN workflows boosts efficiency and ensures that exports that need an ECN classification number are never overlooked. Indeed, today’s global trade management software allows companies to use a single platform to manage all of their import/export compliance needs. They also enable communication with key U.S. agencies such as the BIS, which oversees the U.S.’s export control and treaty compliance system and is the enforcing body behind ECN classifications. In any case, automating ECN workflows eliminates the risk of error-prone manual processes and frees trade compliance teams to manage a company’s import/export process as accurately and efficiently as possible.
Exporters need the right tools and technology to get ECN classifications right
Because accurate ECN classification is so important and the consequences for misclassification are so serious, it makes sense for global trade teams to use the most sophisticated and capable tools available to do the job right, every time. ONESOURCE Smart ECN is specifically designed to ensure correct ECN classification, automatically. You can streamline and automate your export classification process, so you can reduce risk of misclassification, increase accuracy, and improve collaboration across your organization. ONESOURCE Smart ECN gives you access to the most up-to-date global trade information, so that you can be confident that you’ve made the correct classification decisions and avoided costly penalties.
Simplify your entire global trade management process with trade compliance information and facilitation tools that automate routine tasks, give you compliance confidence, and save time