Trade Risks (Part 3): Trade Preference Programs

by Janet Labuda

In recent hearings on Capitol Hill, Peter Navarro of the National Trade Council talked about the need for free, fair, and reciprocal trade agreements. According to Secretary of Commerce, Wilbur Ross, the United States, Canada, and Mexico will engage in discussions to modernize the North American Free Trade Agreement starting in early summer.

As we all know, the United States canceled its participation in the multi-lateral Trans-Pacific Partnership agreement, stating that any new agreements would most likely be bi-lateral in nature. Regardless of how the state of play turns out, the ability to administer, monitor, and enforce these agreements will be crucial to their success.

Currently, the United States has free trade agreements with twenty countries. In addition, there are legislative initiatives such as the African Growth and Opportunity Act,  the Caribbean Basin Initiative, and the Haiti HOPE Act that are meant to provide an economic stimulus to the foreign countries involved, if certain conditions are met.

There are two rules of origin that enter into the trade process, one for non-preferential treatment, and one for preferential treatment of goods. What is basic to the use of any preferential agreement is the description of the product to enable an accurate classification in the Harmonized Tariff Schedule. The classification, linked to the country of origin, will be key to meeting the requirements or conditions necessary to claim a benefit under a preferential trade program. It should be noted that origin, or where the product was made, as opposed to where the product was purchased or obtained is what drives preference.

In general, legislative trade programs tend to have easier preference requirements compared to negotiated Free Trade Agreements (FTAs). Most FTAs contain similar origin requirements which include:

  • Employing the “wholly obtained” criterion for goods that are wholly the growth, product, or manufacture of a particular country. On the other hand, for goods that consist in whole or in part of materials from more than one country, the majority of U.S. preferential rules of origin schemes are based:
    • on a change in name, character, and use (substantial transformation) and
    • on a required minimum local value content; unless specified otherwise, the cost of foreign materials may not be included in local value content unless they undergo a double substantial transformation.
  • Other preferential rules of origin (e.g., NAFTA preferential rules of origin) are based on a tariff-shift method and/or regional value-content method for goods that are not wholly obtained from the applicable region or country.

Therefore knowledge of the origin of various components will be key to obtaining preferential treatment.

One of the more complex rules involves the manufacturing of wearing apparel. While many exceptions can be negotiated, the basic rule for textile imports claiming preference include a yarn forward rule of origin. This means that the yarn must originate in a partner country, the downstream fabric production must be originating in a partner country, and the assembly must occur in a partner country.

It does not matter which rule of origin you are claiming or for what product. What matters is that everyone in the supply chain understands the conditions of preference and possesses documentary evidence supporting the preferential claim of reduced, or duty free, treatment. It is imperative that all participants in the supply chain know that a claim of preference under a special trade rule will be made.  Each participant in the supply chain needs to understand what documents are required to show production, to support the claim. Enforcement of trade preference programs is complex; traditionally non-compliance has often exceeded 20% of claims reviewed.  In most instances the participants in the supply chain failed to maintain adequate records.

It is recommended that for every product for which a preference will be claimed, a manufacturing log be created and updated as any changes to the production occurs.  Begin with the purchase order that provides an in-depth description of the final product. Identify components used and their origin.  Describe each step of the manufacturing process, and maintain backup documents showing the process from beginning to end.  This will go a long way in effectively dealing with Customs inquiries as both Congress and the Administration are calling for stepped up enforcement of U.S. trade laws.

Fourth Individual in NYPA Big-Rigging Scandal Comes Forward, Faces up to Three Years and $250,000

Washington, D.C.-  The New York Power Authority (NYPA) has recently come under multilateral investigation over allegations of bid rigging, tax fraud, and market fixture.  The DOJ, IRS, and New York Inspector General are all working jointly in this case and have subsequently made their fourth indivdual charge.  John Simonlacaj (White Plains, NY) has confessed to aiding the NYPA in filing false tax returns and now faces up to three years in prison and a $250,000 fine.

The original article is reproduced below with its link following.


Fourth Individual Charged in Ongoing New York Power Authority Procurement Fraud Investigation

The Department of Justice, the Internal Revenue Service (IRS) and the New York State Inspector General, which are all conducting a joint federal and state investigation into bid-rigging, fraud and tax-related offenses in the award of contracts at the New York Power Authority (NYPA), announced today that a Westchester County, New York, resident pleaded guilty today to aiding and assisting in the filing of a false tax return.

According to the one-count felony charge filed in the U.S. District Court for the Southern District of New York, in White Plains, New York, John Simonlacaj caused another individual to file a Form 1040 for the tax year 2010 that substantially understated that individual’s taxable income.  Simonlacaj pleaded guilty to aiding and assisting in the filing of a false tax return, which carries a maximum penalty of three years in prison and a $250,000 fine.

“Our investigation into bid rigging and fraud by companies supplying the New York Power Authority has uncovered a variety of criminal activity,” said Principal Deputy Assistant Attorney General Renata Hesse, head of the Justice Department’s Antitrust Division.  “Filing a false tax return is a serious offense and we are pleased to have worked with our partners in law enforcement to prosecute the criminal violation.”

“We say many times the FBI won’t stop until we find everyone responsible for their roles in a criminal investigation,” said Assistant Director in Charge Diego Rodriguez of the FBI’s New York Field Office.  “These charges prove our tenacity in digging until we hit the bottom of the pile and uncover anyone who had a part in criminal wrongdoing.”

“Today’s plea marks yet another defendant admitting guilt following a bid rigging investigation that began at the state level. My office and those of my federal law enforcement partners, will continue to follow the evidence wherever it may lead,” said New York State Inspector General Catherine Leahy Scott.

“Mr. Simonlacaj is now held accountable for his role in filing a false tax return,” said Special Agent in Charge Shantelle P. Kitchen of the IRS Criminal Investigation New York Field Office.  “Towards pursuing its goal of ensuring that that everyone pays their fair share of taxes, IRS Criminal Investigation remains committed to this ongoing investigation.”

The investigation is being conducted by the Antitrust Division’s New York Office with the assistance of the FBI, IRS Criminal Investigation and the New York State Office of the Inspector General.  NYPA is cooperating with the investigation.  Anyone with information on bid rigging or other anticompetitive conducted related to the award or performance of municipal and state contracts should contact the Antitrust Division’s Citizen Complaint Center at 888-647-3258 or visit http://www.just

Original Link


Company Must Pay $232.7 Million Penalty

The U.S. District Court of the District of Columbia entered a formal judgment yesterday memorializing the sentence requiring Schlumberger Oilfield Holdings Ltd. (SOHL), a wholly-owned subsidiary of Schlumberger Ltd, to pay a $232,708,356 penalty to the United States for conspiring to violate the International Emergency Economic Powers Act (IEEPA) by willfully facilitating illegal transactions and engaging in trade with Iran and Sudan.

The judgment was announced by Assistant Attorney General for National Security John P. Carlin, Acting U.S. Attorney Vincent H. Cohen Jr. of the District of Columbia and Under Secretary Eric L. Hirschhorn of the U.S. Commerce Department’s Bureau of Industry and Security (BIS).

At a hearing on April 30, 2015, the District Judge John D. Bates of the District of Columbia accepted the company’s guilty plea and sentenced the company to the proposed sentence articulated in the plea agreement, which called for the fine and other terms of corporate probation.  The court recognized the seriousness of SOHL’s criminal conduct, which posed a threat to our national security.  In addition, the court noted that the scope of criminal conduct justified the large monetary penalty imposed.  Finally, the court concluded that the terms of probation provided adequate deterrence to SOHL as well as other companies.  Yesterday, the court entered the written judgment confirming the sentence imposed on April 30, 2015.

“The court’s judgment represents a milestone in the enforcement of U.S. sanctions laws,” said Assistant Attorney General Carlin.  “This case marks the first conviction of a corporate entity for facilitating violations of the International Economic Emergency Powers Act and the highest criminal fine ever imposed in a sanctions prosecution.  The Court’s imposition of this serious sentence should serve as a strong deterrent for multinational corporations doing any business in countries subject to U.S. economic sanctions.”

“This guilty plea and sentence hold this company accountable for violating trade laws by doing business with sanctioned countries and undermining the interests of the United States,” said Acting U.S. Attorney Cohen. “We hope that other companies tempted to break our export laws take note of the $232.7 million penalty that will be paid in this case.”

The criminal information and plea agreement were filed on March 25, 2015, in federal court in the District of Columbia, charging SOHL with one count of knowingly and willfully conspiring to violate IEEPA.  The plea agreement that the court approved also requires SOHL to submit to a three-year period of corporate probation and agree to continue to cooperate with the government and not commit any additional felony violations of U.S. federal law.  SOHL’s monetary penalty includes a $77,569,452 criminal forfeiture and an additional $155,138,904 criminal fine.  The criminal fine represents the largest criminal fine in connection with an IEEPA prosecution.  In addition to SOHL’s commitments, under the plea agreement SOHL’s parent company, Schlumberger Ltd., has also agreed to the following terms during the three-year term of probation, among others: maintaining its cessation of all operations in Iran and Sudan, reporting on the parent company’s compliance with sanctions, responding to requests to disclose information and materials related to the parent company’s compliance with U.S. sanctions laws when requested by U.S. authorities, and hiring an independent consultant to review the parent company’s internal sanctions policies and procedures and the parent company’s internal audits focused on sanctions compliance.

The court agreed that in addition to SOHL continuing its cooperation with U.S. authorities throughout the three-year period of probation and agreeing not to engage in any felony violation of U.S. federal law, SOHL’s parent company, Schlumberger Ltd., will also hire an independent consultant who will review the parent company’s internal sanctions policies, procedures and company-generated sanctions audit reports.

According to court documents, starting on or about early 2004 and continuing through June 2010, Drilling & Measurements (D&M), a United States-based Schlumberger business segment, provided oilfield services to Schlumberger customers in Iran and Sudan through non-U.S. subsidiaries of SOHL.  Although SOHL, as a subsidiary of Schlumberger Ltd., had policies and procedures designed to ensure that D&M did not violate U.S. sanctions, SOHL failed to train its employees adequately to ensure that all U.S. persons, including non-U.S. citizens who resided in the United States while employed at D&M, complied with Schlumberger Ltd.’s sanctions policies and compliance procedures.  As a result of D&M’s lack of adherence to U.S. sanctions combined with SOHL’s failure to train properly U.S. persons and to enforce fully its policies and procedures, D&M, through the acts of employees residing in the United States, violated U.S. sanctions against Iran and Sudan by: (1) approving and disguising the company’s capital expenditure requests from Iran and Sudan for the manufacture of new oilfield drilling tools and for the spending of money for certain company purchases; (2) making and implementing business decisions specifically concerning Iran and Sudan; and (3) providing certain technical services and expertise in order to troubleshoot mechanical failures and to sustain expensive drilling tools and related equipment in Iran and Sudan.

The investigation that commenced in 2009 was led by the Justice Department’s National Security Division, the U.S. Attorney’s Office of the District of Columbia and the U.S. Department of Commerce BIS’ Dallas Field Office.  Assistant Attorney General Carlin is grateful to Special Agent Troy Shaffer from BIS’ Dallas Field Office for his excellent work.  Assistant Attorney General Carlin also acknowledged the work of those who handled the case from the National Security Division and the U.S. Attorney’s Office, including former Trial Attorney Ryan Fayhee and former Assistant U.S. Attorneys John Borchert and Ann H. Petalas.

The case was prosecuted by Trial Attorney Casey Arrowood of the National Security Division, Assistant U.S. Attorney Maia L. Miller of the National Security Section and Assistant U.S. Attorney Zia Faruqui of the District of Columbia.

Japanese Freight Forwarder Agrees to Pay a $2.3 Million Criminal Fine











Company Agrees to Pay a $2.3 Million Criminal Fine

WASHINGTON — A Japanese freight forwarding company has agreed to plead guilty and to pay a $2.3 million criminal fine for its role in a conspiracy to fix certain fees in connection with the provision of freight forwarding services for air cargo shipments from Japan to the United States, the Department of Justice announced today.

Including today’s charge, as a result of this investigation, 14 companies have either pleaded guilty or agreed to plead guilty and to pay more than $100 million in criminal fines.

According to the one count felony charge filed today in the U.S. District Court for the District of Columbia, Yamato Global Logistics Japan Co. Ltd. engaged in a conspiracy to fix and to impose certain freight forwarding service fees, including fuel surcharges and various security fees, charged to customers for services provided in connection with freight forwarding shipments of cargo shipped by air from Japan to the United States from about September 2002 until at least November 2007.

As part of the plea agreement, which will be subject to court approval, Yamato Global Logistics Japan Co. Ltd. has agreed to pay a criminal fine of $2,326,774 and to cooperate with the department’s ongoing antitrust investigation.

“Consumers ultimately were forced to pay higher prices on the goods they buy every day as a result of the noncompetitive and collusive service fees charged by these companies,” said Scott D. Hammond, Deputy Assistant Attorney General for the Antitrust Division’s criminal enforcement program. “Prosecuting these kinds of global price-fixing conspiracies continues to be a high priority of the Antitrust Division.”

According to the charges, the company carried out the conspiracy by, among other things, agreeing during meetings and discussions to coordinate and impose certain freight forwarding service fees and charges on customers purchasing freight forwarding services for cargo shipped by air from Japan to the United States.  The department said the company levied freight forwarding service fees in accordance with the agreements reached and engaged in meetings and discussions for the purpose of monitoring and enforcing adherence to the agreed-upon freight forwarding service fees.

Freight forwarders manage the domestic and international delivery of cargo for customers by receiving, packaging, preparing and warehousing cargo freight, arranging for cargo shipment through transportation providers such as air carriers, preparing shipment documentation and providing related ancillary services.

The company is charged with price fixing in violation of the Sherman Act, which carries a maximum $100 million fine for corporations.  The maximum fine may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

Today’s charges are the result of a joint investigation into the freight forwarding industry being conducted by the Antitrust Division’s National Criminal Enforcement Section, the FBI’s Washington Field Office and the Department of Commerce’s Office of Inspector General.  Anyone with information concerning price fixing or other anticompetitive conduct in the freight forwarding industry is urged to call the Antitrust Division’s National Criminal Enforcement Section at 202-307-6694 or visit or call the FBI’s Washington Field Office at 202-278-2000.