Expeditors International of Washington, Inc. (EXPD) Earnings Call Transcript & Summary

Thank you for joining us today for our export compliance 101 webinar. My name is Julia Perry, and I'm the regional sales and marketing operations manager for the North Central region based in Detroit. I will be your flight attendant for today's flight.

And I am Bill Rotondi, the Branch Customs Compliance Manager for Detroit and Grand Rapids, and I will be your first officer for this flight. Before we begin, please review our short webinar disclaimer. Now we will cover a few housekeeping items. This webinar will be 60 minutes in length. There will be 50 minutes of content with 10 minutes at the end for Q&A on.

Our first officer will be answering questions during the presentation. We will address as many questions at the end of the webinar as possible. But if we do not get to your question, we will follow-up after the webinar to make sure your question is answered. Today's webinar will be recorded and you'll receive a pop-up notification alerting you that recording has started in just a moment. After the webinar concludes, you'll receive an e-mail which includes a short feedback survey that we would like you to complete from this webinar. After you complete the survey, you will receive the recording and presentation material. Before we introduce our speaker today, we ask that you place your seats and tray tables in the upright position, fasten your seat belts and secure your baggage in the overhead bins.

At this point, please turn off all personal electronic devices, ans stall them during the flight. I'd like to introduce our speaker for today's export compliance 101 Webniar, Jeffrey Kim. Our regional compliance manager for the North Central. He is based in our Louisville branch. Jeffrey is a licensed customer broker and has been with expeditors for 10 years and has held different roles within the custom to compliance departments. Please remember that all questions should go to the Q&A window. And with that, I'll turn it over to Jeffrey, your pilot for today's flight.

Thank you, Bill, for the wonderful introduction. Hello, everyone. And welcome to our webinar on Export 101. We appreciate your time today, and let me get right into our agenda here. So here's our agenda for today. First, we'll take a look at export agencies and controls. We'll take a look at some of the acronyms and key definitions and some things to consider before you export -- your export documentation, the export clearance process and recordkeeping responsibility of parties in the transaction enforcement and penalties, and we'll take a look at some of the recent export regulation changes. And lastly, we'll provide some helpful government websites. Let's dive right into Export agencies and controls here. Let's talk about Department of Commerce. So under the DOC, we have the Bureau of Industry and Security. The BIS enforces the EAR, which covers Title 15 of the CFR, parts 730 through 774. And then we have the U.S. Census Bureau, who collects data mainly through data received from the automated export system. Federal trade regulation under 15 CFR Part 30 narrates the export filing requirement into the AES which is also known as the electronic export information. Next, let's consider Department of State. So under the DOS, we have the DTC, which is also known as Director of Defense Trade Controls. Who has the responsibility of controlling military items under the ITAR, Okay? And then under the U.S. Treasury, we have OFAC, also known as Office of Foreign Assets Control. And their main role is to administer and enforce sanctions embargoes and any financial transaction prohibitions. And then moving on to the U.S. Department of Justice. We have several different agencies here. You can deal with ATF, DEA, FDA, who enforce regulations pertaining to specific products of each agency's realm of. responsibilities. Then lastly, we have the NRC Nuclear Regulatory Commission. And they're concerned with anything nuclear For example, exportation of heavy water used for nuclear purposes may require NRC license prior to expectation. Okay. Here are some reasons for control. Each product with a ECCN or export control classification number will have a reason for control. And each control for your transaction will need to be investigated for possible license requirements. We'll dive right into some acronyms and key definitions. So here are some acronyms to be familiar with when it comes to export regulations. And I suspect everyone is somewhat familiar with some of these acronyms already. Okay, let's define what is an export. So export is an actual shipment or transmission of items, whether it's commodities, software or technology, subject to export enforcement regulations outside the United States or release of technology or software subject to the export administration regulations to a foreign national in the U.S.. So we're talking about general expectation here I'm sorry. And then let's consider reexport. We export as an actual shipment or transmission of U.S. items subject to the EAR from one foreign country to another foreign country. And then lastly, items. Items can be commodities, software or technology. There are types of exports. Firstly, physical exports are the export of an actual product and deemed export is an export of technology deemed to take place when it is released to a foreign national within the United States. I think transferring up technology. The regulation defines it as any release in the U.S. technology or source code to a foreign person is a deemed export to the foreign person's most recent country of citizenship or permanent residency. We'll go a little bit deeper into the definition of technology on the next slide. Okay. Let's talk about technology here. What is it specific information necessary for the development, production or use of a product and the information can take the form of technical data or technical assistance. So the technical assistance can be instructions, skills, training, working knowledge, consulting services and technical data can be blueprints, diagrams, models and several other things you're listed. And when we consider release. This is defined in part 734 Section 15, and it is also listed here, a visual inspection by foreign nationals here in the U.S. oral exchange of information in the U.S. or practice and application on their guidance or persons with knowledge of the technology in the U.S.. And we're going to come back to just the two main regulations that regulate expectations to define what they regulate. So you have the EAR. These are the export regulations, which contains the CCL also known as the commerce control list as well as general prohibitions, license exceptions, record-keeping as well as administrative enforcements. And then you have the foreign trade regulations, which regulates the EEI or also known as electronic export information. Now we'll go into the steps to take prior to exporting items. First, let's walk through the general prohibitions listed in 15 CFR Part 736. Part 736 Section 2 states that any transaction that fall within the scope of the 10 general prohibitions will require a license from the BIS or qualify under Part 740 of the EAR for license exception in order to proceed with the transaction. So let's take a look at the 10 general prohibitions here. First prohibition is regarding exportation of controlled items based on the country chart and type of control without a proper license. So it is necessary to utilize the commerce country chart to investigate whether general prohibition #1 will be applicable. Number two is regarding items bundled incorporated with U.S. controlled content. So license will be required to export if a foreign-made item incorporates or bundled with the controlled U.S. content more than a de minimis amount. The de minimis amount generally is 25% of entered value, but do refer to 734.4. Number three is regarding foreign direct product that contains U.S. technology or software. And number four is denial order pertaining to a person denied of export privileges. Number 5 is regarding the end use or end user. Part 744 can be referenced, refer to these holes. Number 6 is regarding embargoes and sanctions. -- licenses required to export items to embargo countries. Number 7, prohibits engaging in certain military and proliferation activities. As an example, proliferation of weapons of mass destruction. Number 8, prohibits in-transit of items to certain countries. Number 9, prohibits breaking the terms of the license and exceptions. And lastly, number 10, prohibits against dishonesty. -- are helpful questions to ask before exporting items. You want to consider what is it? Where is it going? Who will receive it? What will they do with it? And what else do they do? So knowing what the item is for export control purposes, depending on the classification of the CCL is what you want to consider. It is the ECCN and not the Schedule B that you want to dive into and take a look at. Country of destination as well as the ultimate destination for export is important for license determination as well as sanctions. Making sure the ultimate end user is not a bad user and the ultimate end use of your item cannot be bad use, again, just as an example, weapons of mass destruction and for voluntary use. And just considering what else do the parties to the transaction do? And is it contracting, financing and transporting, freight forwarding, any activity that supports proliferation. And here are some additional questions to consider to protect yourself from violating laws pertaining to sanctions and embargoes. Have you screened the parties to the transaction against the denied parties and other restricted party list? Are there any embargoes to the destination country -- have you been asked to make any prohibited or reportable boycott statements? And do you have knowledge of any prohibited end use of your product by customer or end user? Overall, let's not blind self-ind ourselves if there are any red flags, do ask the question. So here are some red flags pertaining to Title 15 CFR supplement 3 to Part 732. I believe we are going to launch a poll here at this point. So the poll says, how do you currently screen the parties to your transaction? We have DIS consolidated list, third-party provider, my authorized agent or freight forwarder. And I'm not sure that is a question I want to ask.

Do we need some music for this part.

That will be nice.

Is that jeopardy?

Yes, it is. Good Alex, interpreting, run with it, Alex?

I got you Okay. Looks like we have a decent amount of responses. So I'll go ahead and end it now.

All right. So it looks like we got a mix back here with the third-party provider being the majority. And then the next is the agents as well as the freight forwarder. Okay. So this is a list of some of the red flags to look out for. Firstly, if the customer is new to you and your knowledge about him or her is incomplete. I think overall, doing the due diligence of knowing your customer is a best practice. and any reluctance to offer information about the end use of the goods. Again, ensuring that you do your due diligence around the end use as well as the end user of the goods is a best practice. An unconvincing explanation is given as to why the goods are required. The product's capabilities do not fit the buyer's line of business, such as an order for sophisticated computers for small bakery. Routine installation training or maintenance services are declined. And then the customer is willing to pay cash for a very expensive item when terms of sale would normally call for financing, a customer with little or no business background or a customer with unfamiliar regarding the product's performance characteristics, but still wants the product. And then packaging is inconsistent with the stated method of shipment or destination. And lastly, when the question the buyer is invasive, especially unclear about whether the purchase product is for domestic use for export or for re-export. So who is on the denied party list? Government agencies maintain list of parties, including but not limited to entities and vessel parties that have violated their country's export regulations or have been deemed a threat to national security. So the parties can contain name of companies, persons as well as vessel parties. Some examples are BIS entity list, EU entity list, VIS military end user list as well as proliferation concerns list. Now what do we do if there is a match on the list, you definitely want to stop the shipments. And most likely, it cannot be shipped to anyone appearing on the list. There are exceptions, and it will really depend on what list the entity is listed under and whether a license is required to proceed with the shipment. So the BIS has a consolidated list, which will check these lists. There are also third-party providers that provide this service and just a list of different entities that you can run. Here, we define what embargoes is and another call out on sanctions. So embargoes is a partial or complete prohibition of commerce and trade with a particular country. And regarding sanctions is a restriction on moving only certain goods to a particular country. Here we have a map of for one comprehensive OPEC sanctions, which include Cuba, Syria, Iran, North Korea and certain regions of Ukraine, and they are colored in red. And we also have in color and black, some limited sanctions against Russia, Venezuela and Belarus. Here is the definition of boycotts as well as antiboycots. The boycott is to abstain from or act together in abstaining from using, buying or dealing with as an expression of protest or disfavor or as a means of cohersion. And antiboycots is a term used to describe excess buying of a particular brand or product in an attempt to counter a boycott, the same brand or product. Overall vigilance around anti-Bycott language is best practice to ensure you do not violate U.S. anti laws. And here are some helpful questions to ask prior to exporting. So have you classified your products, Schedule B as well as the ECCN? Is it an export license required? Is it a haz -- is EEI required? And who will be filing the EEI? Will it be the agents or the USPPI? Has the power of attnity been provided to the agent to file the EEI and has all the required EEI data been provided to the agent to file. And lastly, retaining the documentation as required by the regulation.

Jeffrey. Before we go to the next slide, I think it's very important that we've had several customers have reached out to us on what to do when they have routed transactions where they found that the forwarders aren't filing the schedule B correctly, value, et cetera. And researching this with our subsidiary Tradewin. One of the best guidance for this is to get it and written form that the forwarders I noticed that they're not filing correctly, that they've been instructed to file according to the SLI, the 15 CFR, et cetera. So I know this is kind of like an outreach to this webinar, but this has been -- I probably have had 3 inquiries on this. So as USPPI, there's a lot of exposure and responsibilities that you do carry. So this is definitely a documentation that you want to retain for those routed transactions?

Excellent. Thank you -- let's dive right into the export documentation requirements now. So your basic export documents can consist of the following. We have the commercial invoice and the packing list, the shippers' letter of instruction, the EEI and airway bill or the bill of lading. We'll take a closer look at each document. So the following are some elements for a compliance commercial invoice. So you have your exporter information, consign, ultimate consigning type, schedule fee number, item description, number of units shipped required and reporting quantities, terms of sale, crib origin, currency, price per unit and total price, license determination, ECCN as well as the destination control statements. Entering these elements to the commercial invoice will ensure a smoother export filing process. Let's talk through the destination control statement. The destination control statement is required on all exports from the U.S. for any items on the CCL that's not classified as an EAR99. So in red, you can see the destination control statement on this slide. And a quick note regarding EAR99. While the DCS is not required, it is still a good practice to enter the DCS on the document. And following our information that should be contained in the shipper's letter of instruction. And a quick note regarding the shipper's letter of instruction. If the agent does not have a part of attorney to file on your behalf, assigned SOI could be a form of authorization for the agent to file the EEI on behalf of the shipper. So we have the shipper and consigning information, ultimate consigning type, order carrier, quantities and weights, values, Schedule B number or the HCS, notification of H, license information, exception or the license required waiver the license value, if applicable. ECCN, is it a routed or standard transaction, FTZ identifier, if applicable, general instructions for order and authorization to file an EEI on behalf of the shipper. And following our conditionally required documents, depending on where the shipment is going and what the commodity is, these documents could be required when it comes to exporting your goods. And we'll move right along to the details surrounding export clearance and recordkeeping here. So what is the EEI required? And it is required when shipped to foreign countries from the United States, Puerto Rico, FTZs in the U.S. and Puerto Rico as well as the U.S. Virgin Islands. It is also required to Puerto Rico from the U.S. to the U.S. from Puerto Rico to the U.S. Virgin Islands from the U.S. or Puerto Rico. And here are the data elements when it comes to the EEI. You have the name and address of the USPPI, USPPI's ID number, which is the EIN number, state of origin and a quick note on state of origin. This is the state where the shipment begins its journey to the port of export. So it may be different than the USPPI's address. You also have the Schedule B description of commodities as well as the Schedule B number, origin of goods, whether it's domestic or foreign, quantity unit of measure, value, ECCN or other government agency information. and lastly, sufficient technical information to determine licensing authority. Now there are certain EEI filing exemptions and following are some exemptions. One is shipments to Canada, values that are less than $2,500, tools of trade, dunnage, human remains, diplomatic pouches, carrier stores, head at baggages, shipment traveling in bond via the U.S. and export of technology and software that do not require an export license. One thing to keep in mind, certain exceptions that will -- can require an EEI filing, and we'll take a look at an example on the next slide. So here's the breakdown of the low value exemption. Exports of commodities classified under an individual schedule B number, where the value is $2,500 or less, items of domestic and foreign origin under the same commodity classification number must be reported separately and EEI filing is required for those lines over $2,500. And here's a note when it comes to low-value exemption. It cannot be used for any shipment with an ECCN. So anything that's not EAR99 and it is going to China, Hong Kong, Russia or Venezuela. So depending on the exemption that may be applicable, there may be additional details that may be considered to ensure that the EEI exemption is applicable or not. Here's a breakdown of the time frames when it comes to the EEI filing. 2 main ones your vessel cargo 24 hours prior to loading the cargo on the vessel. And then from an air cargo perspective, 2 hours prior to scheduled departure time of the aircraft. And so depending on the mode of transportation, there are different time frames to meet to ensure your EEI filing is filed on time. You do have some additional consideration when it comes to shipments falling on their U.S. amount. Stop for a little bit. Okay. So let's take a look at record keeping. Legally, overall, the recordkeeping requirement is 5 years. Depending on what type of document it is. So the following time frames are needing to be considered, date of export, any known reexport or transshipments, any termination of the transaction and the date person receives the [ boycott ] related requests or requirement when it comes to [ boycott ] related documents. Here are some documents to consider when it comes to recordkeeping. Let's move right along to responsibilities of parties in the transaction. So we're going to define key parties of interest to an export transaction, specifically U.S. principal party of interest and foreign principal party of interest. So the USPPI is the person or legal entity in the U.S. that receives the primary benefit monetary or otherwise from the transaction generally. That person or entity is the U.S. seller, manufacturer, order party or foreign entry purchasing or obtaining goods for export. And the FPPI is the foreign abroad who purchases the goods for export or to whom final delivery or end use of the goods be made. This party may be the ultimate consign. Here's a map of a standard export transaction. First, the order is placed by the FPPI to the USPPI. And the USPPI contracts to ship the goods and provides the required data. And then the EEI is filed and the goods are shipped. So this would be the standard export transaction scenario. And the following are responsibilities in a standard export transaction. So from a USPPI's perspective, they are -- you are responsible for providing all the EEI information or file the EEI as a self filer. Secondly, providing the POA or written authorization to file if the Asian filer is filing. And of course, document retention. And here's a map of a routed export transaction. So firstly, the FPPI orders a shipment to USPPI and also contracts to ship the goods with the carrier. And then the USPPI provides data to agents. And then the EEI is filed and the goods are shipped. Determining whether a transaction is routed or nonrouted could be confusing. My colleague gives an excellent advice regarding this matter, which is to follow the money, who is controlling the shipments? Is it the FPPI or the USPPI? Here are the responsibilities of the USPPI on a routed export transaction. The main difference between a routed transaction and a standard export transaction, aside from who is responsible for providing the POA is the responsibilities for providing the data under certain regulations. So under a routed export transaction, the listed information here on this slide would be the USPPI responsibility. And let's get into some enforcement and penalties. So under the Bu of Industry and Security you have your civil penalties, which is $11,000 per violation. And then you get into the criminal penalties and other sanctions to consider, which is suspension or revocation of export privileges. So definitely not a good deal here. And then from a Census Bureau's perspective, there can be a $1,100 penalty per day for late EEI filings with the maximum amount of $10,000 per violation. Then you have your criminal penalties and also suspension or revocation of export privileges. And we'll dive a little bit into some recent export regulation changes. One thing to highlight here is that the information can change as we are in certainly a fluid environment of constant regulatory changes. So I think the best practice is to continue to monitor the changes of regulations through some of the resource that we'll share in this presentation, certainly utilize those resources. It is definitely a best practice to keep up with some of the changes. So firstly, there's been a change regarding connected vehicle prohibitions. So this is regarding automated driving systems that enables a vehicle to connect to the outside world. There's a certain frequency that they called out 450 megahertz. It covers certain things. It doesn't cover certain things. But again, it's a fluid situation to some to be aware of depending on the industry you may be in. We also have controls surrounding AI chips. This has been a hot topic recently. Again, something to be aware of. There are certain exceptions made when it comes to shipping AI chips to certain countries, while it is restricted to other countries. Additional due diligence measures for advanced computing integrated circuits, generally additional due diligence procedures for exporters of advanced chips, new reporting requirements for certain higher-risk customers. And then controls of certain lab equipment and related technology -- so depending on what the commodity is in the lab equipment industry, you could face certain more restrictions and license requirements. And then lastly, Costco and China Airlines, they were listed in the list for DoD. So the list is called Section 126 and this list compiles a list of entities that the DoD will no longer be able to work with, and this will be in effect in 2027. So this will be pertaining to any government shipments related to the DoD. And following are some helpful government websites. You have your tools of the trade. and a list of websites for different agencies as well as some other resources that we can provide as a company. With that, we are at a Q&A point.

Okay, Jeffrey. We do have one of the questions is what value should be listed on the SLI?

Yes, absolutely. So -- when it comes to the value, the value should be the exporters selling price or the cost of goods if the items were not sold to the FPPI and it will need to be reported in U.S dollars.

Okay. Another question would be, if I sell goods to a foreign company, but the freight is picked up from a nonrelated U.S. company? Would it still be the USPPI?

Yes, that's correct. So you will still be the USPPI while the even though the freight is picked up from a warehouse or a 3PL.

Okay. Is [ forwarder ] responsible for screening parties in an export transaction?

Absolutely. Yes. All parties within the transaction should be conducting due diligence screening for denied parties.

Does the forwarder have sole responsibility, am I responsible for screening at all as the USPPI?

Each party should be screened for denied parties. So the freight forwarder is responsible, but as well as the USPPI.

Okay. I'm just finishing up one of the -- give me 2 seconds finish of this response. And I think we saw one in the chat after this. And go with the Q&A back.

Something ahead here.

Good job. Thanks for answering in the chat box, Bill.

No problem. Julia. You didn't give me a choice.

I mean, why would I. Well, thanks, everyone, for attending today. As mentioned at the beginning, you'll receive an e-mail from me that includes a short feedback survey. And after you complete the survey, you'll receive a link to the webinar material.

And, thank you for flying Expeditors Compliance.

Have a great day, everyone.