Chapter 3: Compliance issues in international sourcing

Shipping documents

• Bill of lading
• Waybill
• Consignment note

Bill of lading

·       A document issued by carrier (transport company) to the shipper (seller) containing details of goods

·       Acknowledges contract between carrier and shipper

·       A negotiable bill of lading gives holder legal title to the goods

·       Several types of bill of lading, including ocean bill of lading (transport by sea) and multimodal bill of lading (more than one mode of transport)

Waybill

·       Can be used instead of bill of lading, serves most of the same purpose

·       A receipt from the carrier to acknowledge goods have been received

·       Evidence of a contract to transport the goods

·       Unlike bill of lading, it’s not negotiable, and doesn’t give holder legal title to the goods

·       Commonly used for air travel, “air waybills”

·       Rail waybill is known as CIM

Consignment note

·       Used for freight transport by road. Confirms that carrier has received goods and contract exists between sender of the goods and the carrier

 

Import tariffs and duties

·       Import tariffs are tax rates on imported goods

·       Import duty is the actual amount if import tax paid

·       Duties can be calculated ad valorem (by value), meaning fixed % of goods value. Or specific (by unit, measurement or weight)

Arrangements for making payments

·       Payment in advance: importer makes payment before exporter ships the goods

·       Payment on open credit account: normal arrangement, where exporter submits invoice when goods are delivered, and importer then pays

Bills of exchange can be used as part of payment mechanism. It’s a “you owe me” for a specified amount. This is then accepted and becomes legally enforceable as an “I owe you”.

Letter of credit: exporter draws bill of exchange on the importer’s bank. When the bank accepts the bill, it will make the payment. Bills of exchange are either:

• A sight bill (payable on sight)
• Term bill (payable at specified date after it’s been accepted)

In letter of credit, the importer’s bank is the issuing bank. They ask a bank in the exporter’s country (advising bank) to send the letter of credit to the exporter. Advising bank also becomes confirming bank if they add confirmation to the letter of credit.

 

Incoterms

Incoterms for any mode of transportation:

·       EXW – Ex Works

·       FCA – Free Carrier

·       CPT – Carriage Paid To

·       CIP – Carriage and Insurance Paid

·       DPU – Delivered at Place Unloaded

·       DAP – Delivered at Place

·       DDP – Delivered Duty Paid

Apply to transportation by sea:

·       FAS – Free Alongside Ship

·       FOB – Free On Board

·       CFR – Cost and Freight

·       CIF – Cost, Insurance and Freight

Every Incoterm has three letters, first letter is E, F, C or D:

• E – Goods available to buyer the supplier’s premises. Buyer collects goods from supplier
• F – Goods available to carrier appointed by importer at a place in the supplier’s country. Importer pays for transport
• C – Goods available to carrier appointed by importer at a place in buyer’s country. Supplier pays for transport
• D – Goods delivered to specified place in importer’s country. Supplier bears all costs / risks

Ex Works: minimum responsibility on seller. Importer responsible for transportation from seller’s premises.

DPU, DAP and DDP: opposite extreme to EXW. Seller responsible for transportation to importer’s country.

• Delivered at Place Unloaded: seller delivers unloaded goods at place. Buyer responsible for after unloading activities e.g. duty, taxes, onward carriage
• Delivered at Place: DPU + onward carriage. Seller needs to deliver to potentially importer’s premises
• Delivered Duty Paid: DAP + seller responsible for import clearance

FAS, FOB, CFR, CIF: only for sea transport. Goods need to be loaded onto ship.

• Free Alongside Ship: seller delivers goods alongside a ship at a port in the seller’s country
• Free On Board: FAS + on board ship
• Cost and Freight: seller does transport to a port in the importer’s country, and bears cost. But seller’s responsibility for goods condition ends at the port of shipment i.e. importer is responsible for arranging cargo insurance
• Cost Insurance and Freight: CFR + seller needs to pay for cargo insurance

FCA, CPT and CIP: other Incoterms used across any transport.

• Free Carrier: seller arranges transport to a place in seller’s country. Used for multimodal transport, in containers, ro-ro shipping
• Similar to FAS, but for all modes of transport
• Carriage Paid To: specifies place of delivery in importer’s country
• Carriage and Insurance Paid: CPT + seller buys insurance of goods

Customs import declaration: contains info about imported goods. Documents may be needed to support this, such as commercial invoice, certificate of origin etc.

 

International trade and laws

WTO is an organisation designed to promote free trade and resolve trade disputes (is very slow). Countries can choose to make trade agreements, or just operate under WTO rules:

• National treatment principle: imported goods treated same as domestic goods after they’ve been cleared to enter the country
• Most favoured national (MFN) principle: if a member lowers trade barrier to one WTO member, must do it to all

UN Convention for the International Sale of Goods (CISG)

There’s no definitive law for international trade between organisations. But UN charters become binding for transactions if countries have ratified them.

There should also be agreement between both parties in a transaction as to which country’s laws would be used in a dispute.

Arbitration might be used as a resolution mechanism, to avoid litigation. UNCITRAL is a framework for this. Award given by arbitrator is enforceable in most cases.

 

ESG: Human rights

Universal Declaration of Human Rights (UDHR): 30 articles setting out various aspects of human rights.

International Bill of Human Rights: incorporates UDHR with other protocols.

European Convention on Human Rights, and the Court (ECHR): countries in it have legislation to implement the Convention and recognise the authority of the ECHR (the court).

ESG: Employment rights

International Labour Organisation (ILO): has a system of International Labour Standards. The Conventions are legally binding, recommendations are not. 4 fundamental principles:

• Freedom of association
• Elimination of forced labour
• Abolition of child labour
• Elimination of discrimination in employment and occupation

ILO also encourages companies to develop ESG and EDI policies.

Ethical Trading Initiative (ETI): commitment to ethical trade and adopt a code of labour practice affecting e.g. wages, health and safety.

Social Accountability International (SAI): SA 8000. The SA 8000 standard is based on UDHR and ILO. Companies can get certified.

UK has Modern Slavery Act 2015 (companies need to make an annual statement disclosing their activities to prevent modern slavery), and ILO has a standard against modern slavery.

 

CIPS Code of Conduct

1.     Enhance and protect the standing of the profession

2.     Promoting eradication of unethical business practices

3.     Maintaining the highest standard of integrity in all business relationships

4.     Enhancing proficiency and stature of the profession

5.     Ensuring full compliance with laws and regulations

This should be familiar from L4M1, hence is not expanded in further detail here.

Whistleblowing

The act of drawing senior attention to potential poor conduct in the organisation. The whistleblower will report to someone other than their line manager, and there will be a specific process for this. There may be a Compliance Officer for example.

 

How can ESG be embedded into assessments of suppliers?

·       Prequalification questionnaires can contain questions about suppliers’ ESG practices, including requiring certain certificates

·       Due diligence could be conducted on suppliers. This should end with a due diligence risk assessment of the supplier

o   Desk research

o   Visiting suppliers’ premises

·       Tenders may include criteria on ESG

·       Compliance with ethical standards could be a term/condition in contracts e.g. maintaining SA 8000 compliance

 

Ethics audits are formal investigations to establish whether ethical standards are being complied with.

Environmental audits are formal investigations into compliance with environmental legislation/standards.

Both of the above audits can be conducted by external agencies or the organisations internal audit dept. They will examine:

• Systems and procedures
• Organisation structure
• Personnel
• Supervision
• Management

Standards:

·       ISO 14001: environmental management

·       ISO 26000: Social responsibility (guidance standard – no certification)

o   Covers things like human rights, labour practice, environment, consumer issues

·       ISO 20400: Sustainable procurement (guidance standard – no certification)

o   Covers: policy and strategy, organising procurement function, and the procurement process

UN Sustainable Development Goals: 17 goals e.g. ending poverty, zero hunger, gender equality etc.

Fairtrade movement is a worldwide movement promoting fair prices for small businesses.

Global Reporting Initiative (GRI): seven different GRI Standards that businesses can use and report their sustainability.

 

Offset / industrial participation (popular in defence sales to governments)

Direct offset: exporter might agree to firms in the buyer’s country benefitting in some way through the transaction e.g. using those firms in the supply chain, knowledge transfer etc.

Indirect offset: customer getting something else in return for buying equipment from the country. This will require the country of the exporter to agree.