With the advent of U.S. Customs' Outbound Compliance program many U.S. companies are tempted to restructure their sales to foreign customers and to make such sales on an ExW or "domestic sale" basis in order to avoid exporter of record status. This temptation is real because status as exporter of record makes U.S. companies responsible for export clearance and for compliance with U.S. export laws and regulations, thereby exposing non-compliant exporters to Customs' enforcement actions. While the opportunity to eliminate responsibility for export clearance and liability for export compliance might have great appeal, U.S. companies should not conclude that avoiding "exporter of record status" is always in their best interests, in that such avoidance forces a U.S. company's foreign customers to assume the "exporter of record" role and causes a U.S. company to forfeit control over the export of their product, thereby exposing a U.S. company to a whole host of risks and problems as outlined below.
Foreign Buyers Precluded From Export Clearance Duties
Foreign buyers are precluded by U.S. regulation from performing most export clearance duties because they are foreign and must, as a result, appoint a U.S. agent to perform these duties on their behalf. This adds cost in buying from a U.S. seller as seen from the foreign buyer's perspective and is generally considered to be an inconvenience by most foreign buyers.
U.S. Agents Unwilling to Conduct Foreign Buyers Responsibilities
The U.S. agents appointed by foreign buyers are often reluctant to conduct a foreign buyer's export clearance responsibilities in the U.S. agent's own name and frequently designate the U.S. seller as the "exporter of record," without the knowledge of the U.S. seller and without first obtaining authorization from the U.S. seller. In this situation, a U.S. seller is unwittingly exposed to: (a) administrative penalties (monetary fines and or denial of export privileges) arising from any violation of U.S. export laws and regulations perpetrated by a foreign buyer's U.S. agent, should such agent fail to comply with U.S. export laws and regulations and deliver the U.S. seller's goods to a prohibited end user, to a prohibited destination or to be used for a prohibited end use; and (b) liability for General Average peril if the vessel on which the U.S. seller's goods are shipped sinks or is forced to jettison cargo while en route to its ultimate destination.
U.S. Buyer Exposed to Diversion of Goods
Even if a foreign buyer does appoint a U.S. agent who does make an attempt to comply with U.S. export laws and regulations, the U.S. seller remains exposed to the foreign buyer's diversion of the purchased goods to the U.S. market, in the event that the foreign buyer's U.S. agent is unable to obtain U.S. export clearance for the purchased goods or in the event that the foreign buyer simply decides to divert the goods purchased from the U.S. seller back into the U.S. market as opposed to exporting the purchased goods as originally agreed.
Foreign buyers can also elect to divert the goods that they have purchased from a U.S. seller to a foreign market which:
- Is a prohibited destination under U.S. export regulations; or
- A U.S. seller has not authorized; or
- May represent a market for which a U.S. seller already has exclusive agents or exclusive distributors, thereby causing contractual difficulties for the U.S. seller with such exclusive agents and distributors.
U.S. Seller Exporter Difficulties
In addition to these risks, a U.S. seller who succeeds in avoiding "exporter of record" status is likely to experience problems with:
- Performing under a letter of credit on which the U.S. seller is a beneficiary, when the letter of credit calls for the U.S. seller's presentation of a bill of lading or air waybill because the U.S. seller may not be able to obtain a copy of the bill of lading or air waybill from a forwarder who is working at the behest of a foreign buyer;
- Prevailing upon a buyer to waive letter of credit discrepancies because the seller has no leverage over the buyer in that the buyer has already taken control of the goods:
- Claiming drawback since the seller will not receive a dated copy of the export bill of lading which is the required proof of exportation for drawback claims;
- Loss of potential Foreign Sales Corporation (FSC) benefits due to the fact that the U.S. seller will not have access to the documentation required (Shippers Export Declaration, bill of lading and or air waybill) to prove that an export occurred and to substantiate FSC eligibility; and
- Liability for state sales taxes because an ExW sale is technically not an export sale.
U.S. Seller Control Liability Issues
Furthermore, a U.S. seller who avoids "exporter of record" status may have reduced the operational burden associated with being exporter of record, but the export control liability issues remain unchanged -- a U.S. seller will be liable for an export violation if the U.S. seller fails to exercise due diligence and proceeds with an ExW to a foreign buyer when the U.S. seller knows believes or has reason to know believe that an export violation has occurred, is about to occur or is intended to occur.
Summary
These are all good reasons why U.S. companies should think twice before attempting to avoid "exporter of record" status. Additional support for this position has recently come from the U.S. Census Bureau which has proposed to enact a regulatory change that will require a U.S. principal party in interest (as opposed to a freight forwarder) to be listed as the exporter of record on the Shipper's Export Declaration (SED) -- without regard for any arrangements to the contrary that have been made by the U.S. seller and the foreign buyer. The rationale for the proposed change in regulation is two-fold. First, a seller should be legally responsible for export clearance, if the seller knows that one of its products is going to be exported. Second, a seller who knows that one of its products is going to be exported should retain legal responsibility, if such product is diverted contrary to U.S. export laws and regulations.
At the moment, there is considerable opposition among U.S. exporters to Census' proposed regulatory change. Customs is reviewing exporters' comments and is working with BXA to finalize proposed regulations. Opposition from the export community, notwithstanding, it appears likely that a change to the present "exporter of record" definition is imminent and that the U.S. seller as the U.S. principal party interest will no longer be able to avoid exporter of record status.