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Customs Update Diversion!
Updated 5:24 p.m. ET, Mon Jun 26, 2000
BY FRANK REYNOLDS
Diversion in export terminology means shipping something somewhere other than as agreed or permitted. There are many restrictions on where and to whom U.S. persons may export. Violations can have both civil and criminal consequences.
Back in May 1996 this column, subtitled 'Who's the Shipper,' spoke to the common export reporting standoff between sellers and buyer-appointed forwarders. Concerned about illegal diversion, sellers are reluctant to be shown as 'exporter' in fields 1a and 1b of the Shippers Export Declaration when they do not control the forwarder arranging main carriage. Buyer-designated forwarders do not want this role either for products with which they lack familiarity, because it entails reporting such product-specific information as Schedule B and ECCN classifications. Taken to an extreme, the above situation creates an impasse, with neither party willing to take on the role of 'exporter of record.' Shipments are often held up while sellers, buyers and buyer-appointed forwarders negotiate mutually acceptable solutions.
Sellers wishing to distance themselves from actual exports have been using the EX WORKS (EXW) Incoterm in their sales contracts.
Incoterms, a creation of the International Chamber of Commerce, speak to responsibilities that sellers and buyers have to each other. EXW makes export clearance a buyer responsibility, thus absolving the seller from the 'exporter of record' role. Another reason many U.S. sellers prefer EXW is that they seek an Incoterm that closely matches our beloved 'FOB Factory.'
Incoterms speak only to seller-buyer responsibilities, and are confined to the sales contracts between these parties. Governments can impose additional responsibilities, and ours is about to do so.
Commercial diversion is more prevalent, and many times isn't a crime. This practice involves delivering product to destinations other than agreed in the sales contract. There are two kinds, domestic and third-country. Domestic diversion is the practice of purchasing goods for export at (usually lower) export pricing, and then not exporting them at all. Obviously, since the goods are not exported, U.S. export regulations do not apply. Often, these situations involve trademarked goods that are first quality but slightly obsolete. Think of two year-old style brand-name designer jeans sold at local flea markets for under $5 a pair!
The second commercial situation is third country diversion: purchasing goods and exporting them to the wrong country while taking care not to violate government regulations. This is possible as many countries are treated the same for most products as far as export control is concerned. Imagine the consequences when an excellent importing distributor sees his well-earned exclusive territory violated because of gray market exports from commercial diverters in the manufacturer's country. It isn't pretty.
Commercial diverters prefer to buy on the EXW Incoterm, because it is vital to their interests that export clearance be kept out of the sellers' hands. This way, they get the goods under false pretenses and avoid culpability to the government by filing correct Shippers Export Declarations which non-exporting sellers never see.
Good news. There is a cure for both, partially reflecting the changes in U.S. government regulations and Incoterms 2000.
Incoterms 2000 offers a new and vastly improved definition of the Free Carrier (FCA) term. When coupled with the seller's premises as the named place, FCA more closely matches both 'FOB Factory' and reality. First, it tasks the seller to load the collecting vehicle, an obligation that EXW sellers has universally accepted although the term didn't require them to do so. Second, and more important, it tasks sellers with export clearance.
I can just imagine eyebrows raising at this point, and it must seem as though we're right back where this column started. 'Why should I undertake export clearance when I don't control the forwarder?' Bear with me while we think it through.
First, commercial diversion. FCA sellers are entitled to demand transportation and destination information from buyer-appointed forwarders precisely BECAUSE they are contractually obligated to the buyers to arrange export clearance. Sellers may wish to prepare letters of instructions to buyer-appointed forwarders with words to the effect that AS WE ARE OBLIGATED TO THE BUYER TO ARRANGE EXPORT CLEARANCE, WE HOLD YOU STRICTLY ACCOUNTABLE FOR THE ACCURACY OF ALL TRANSPORTATION AND DESTINATION INFORMATION THAT WE ARE REQUIRED TO REPORT TO THE U.S. GOVERNMENT IN COMPLIANCE WITH REGULATIONS. In other words, any misinformation you give us about destination will be passed on to the federal government.
FCA is obviously preferable to EXW for avoiding commercial diversion. Since EXW sellers have no export clearance obligation, they cannot claim such need to know.
How about diversion contrary to U.S. export regulations? Besides using something like the above suggested language, FCA sellers can take comfort from the new regulatory changes. They will make sellers (called Principal Parties in Interest or PPIs) and buyer-appointed forwarders jointly responsible for correct reporting. Each will be tasked to provide the information with which they are most familiar, i.e., product-specific for sellers and transportation-specific for forwarders. Further, forwarders will be required to confirm to sellers that they have correctly reported the product-specific information. Watch the Federal Register in the JoC ONLINE for these new reporting regulations which are due very soon.
Although the combination of the new regs and improved FCA make life easier in dealing with buyer-appointed forwarders, savvy exporters try to route shipments through their own forwarders whenever possible. Not only does this prevent diversion, but it should provide a greater degree of accuracy in documentation. The way this is done is by proposing Incoterms from the 'C' or 'D' family, which task the seller with providing main carriage transportation.
