New daily routine of a customs expert: The implementation of EU and US sanctions against Russia (a personal experience report)
It was February 24, 2022, a date that will probably remain in our minds as much as September 11, 2001, a date that also represented a turning point for me as a customs expert.
On the one hand, it was clear that the Russian war of aggression in Ukraine would also have a shattering effect on world trade. Since then, we have been reading daily about senseless bombings and the Ukrainian population suffering senselessly.
Moving from Switzerland to Germany
On the other hand, February 24, 2022, also represented a caesura for me. Being on the train from Zurich to Mannheim, I realized: "I am going to Germany to live there from today on. I am emigrating from Switzerland".
It went through my mind how from now on I will be deeply involved in the EU customs legislation. In the newspaper, I read how the German chancellor talked about the turn of eras. And about the fact that the EU would probably unite to put together a sanctions package against Russia. Switzerland, for its part, was looking for answers to whether it was compatible with its neutrality policy to adopt the EU sanctions.
The EU's first sanctions package against Russia
As early as February 25, the EU issued the first, major sanctions package, supplementing the regulation against Russia that had been in place since 2014. It was supplemented by 140 pages.
On March 1, 2022, I started my job as a customs expert at a med-tech company based in Mannheim. It was already clear to me then that this would be a stress test for all customs departments in companies that regularly ship goods to Russia.
Compare Annex 7 with the BAFA recoding directory
I looked at Annex 7 of the Russia Regulation and realized how it was structured similarly to the EU Dual-Use Regulation. As is well known, this “nomenclature” is not comparable to that of the Harmonized System of the World Customs Organization. At least, I recognized from the items of Annex 7 that many goods of the customs tariff chapters 84 as well as 85 are involved. With this knowledge, I again thought of combining it with the entries of the recoding directory of the German BAFA.
Why did I think of this in the first place? Well, somehow it must be possible to link the company's own master data with the sanctions text.
Customs tariff numbers as an integral part of (foreign trade) master data
As a customs consultant, I have always known that clean master data is the be-all and end-all, not only in foreign trade. It must be possible for every company to be prepared for any new legislation at any time using properly maintained master data. In a suitable process, a company that ships goods globally should have maintained a customs tariff number for each product – at least for saleable ones – in the ERP system. This will at least make it clear which customs duties a customer has to pay and whether a product is subject to an authorization requirement (for example, in the case of local legislation).
By maintaining the customs tariff numbers, a company is at least ready to recognize within a useful period of time how much it is affected by a certain sanction. Again, it is always advisable to know good tools. Especially for small companies that cannot afford their own customs department. A recoding directory such as those of BAFA helps here, for example.
Link customs tariff numbers with Annex 7
With the support of the recoding directory, it is possible to identify relatively quickly/roughly which and how many products are impacted by Annex 7. It is important to know that only the first six digits of the customs tariff number should be used for this purpose if you want to implement the sanctions from an international perspective. If the wording in the nomenclature of the customs tariff includes the word “other”, this item may also mean that other goods are not impacted by the Russia sanction. After all, it is now clear that not every product in a portfolio is affected by the sanction, but only a part of it. This part must then be examined in more detail by a product specialist.
On March 15, luxury goods (Annex 18) were added
When the initial excitement about implementing as quickly as possible had died down and the people involved knew what to do, the next big sanctions package came on March 15, again with 31 pages of legislative text. Once again, many different goods were sanctioned. Annex 18, in particular, was a tough one. Over 300 tariff numbers were listed. Fortunately, these were specified more precisely with an “Ex” suffix. This annex, based only on the customs nomenclature, was implemented comparatively quickly.
In the ERP system, after a brief preparation in a spreadsheet program, these could be entered in a search mask and with a few clicks the affected products were revealed.
The weaknesses of imprecisely formulated legal texts
It quickly became clear that the legislator – in this case the EU – was also under great time pressure to sanction products. In particular, item 15 under Annex 18 turns up electronic articles for “domestic use” of a value exceeding EUR 750 that are just as well suited for commercial use. Thus, all items of item 8471 are affected, in which all PCs, laptops, tablets, and peripherals are classified for this purpose. Of course, one would think that shipments to businesses that do not resell such products to end users would not be impacted. However, the related Article 3h is strictly worded. There is no exemption for companies. Thus, it remains unclear how the term “domestic use” is to be understood in the end.
In the light of the Russian war crimes in the suburbs of Kyiv, the EU's 5th sanctions package was implemented on April 8
The reports of the survivors of the Russian occupation of Kyiv's suburbs shock. The EU now decides to sanction Russia's industrial sector and indeed Annex 23 is newly added in conjunction with Article 3k. As a customs tariff expert, I am surprised, and I realized immediately that the importance of the customs tariff number has increased once again.
Annex 23 consists of over 650 different tariff numbers at the HS level (so again, look at the first six digits). And none of these were specified with an “ex” suffix, so all goods that fall under one of these many HS headings are sanctioned.
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Serious problems in the spare parts business from July 10 pre-programmed
From the customs tariff's perspective, it is clear that here, too, the EU had to work on the sanction texts under time pressure. Items appear in Annex 23 that cover more goods than was probably intended:
The problem of the HS subheading 847990
The list of examples could be longer, but for clarity I will focus on heading 8479.
If you know the General Rules of Interpretation, the Notes as well as the Explanatory Notes of the Harmonized System, you will immediately realize how unwise it is to sanction such positions without differentiation. After all, many industrial sectors are affected; including the med-tech sector, which operates branches in Russia that can no longer be supplied at all as of July 10 (see below).
Subheading 847990 includes parts which are manufactured exclusively for devices with an individual function. There are many devices classified under heading 8479 whose principal function, according to Notes 3 and 4 to Section XVI, cannot be classified under any other heading of Chapter 84. One can well imagine that many devices are classified there – and these may be elementary devices which function mechanically.
Legacy contract provision for industrial products of Annex 23
Unlike the luxury goods of Annex 18, Article 3k (Annex 23) includes a legacy contract provision under paragraph 3 that allows shipments until July 10, provided the contracts were entered into before April 9. Again, the text of the law simply refers to “contracts” and it is unclear to the reader how the regulation defines “contracts.” In Article 1, where other specific terms are defined, the term “contracts” does not appear.
The 6th sanctions package arrives on June 3
In this round, only isolated industrial products (mainly chemicals in Chapters 28 and 29) will be added to Annex 7. The main purpose of the 6th sanctions package is to restrict imports of oil and natural gas into the EU.
It is slowly becoming clear that not much more can be added in terms of goods.
Do not forget the condition codes!
Each sanctions regulation also includes codes, which should be indicated on an export customs declaration (“box 44 codes“) at item level to confirm to the customs authorities that the appendices in question have been checked. There can be positive or negative codes.
In the case of positive codes in connection with a license, one confirms that the product is affected by a specific article or annex. In the case of negative codes, it is stated that the product is not covered by the relevant annex.
This sounds very logical at first, but it is not immediately clear for each annex exactly which products are impacted. For example, Annex 7 is not based on customs tariff numbers (see above).
A company must also ask itself how it wants to map these codes in the ERP system if it transmits the customs declarations to the customs authority itself. But in the end, even a customs agent wants to know exactly according to which aspects a shipment has been checked.
Also consider US re-export law
The United States also exercises export control law extraterritorially and has also imposed sanctions on Russia and, according to its own statements, has wanted to harmonize those of the EU. It has only partially succeeded in doing so, as a brief look at the annexes will suffice.
But a customs expert does not equal a specialist in export control law, and so I leave this detailed look to my esteemed colleagues.
Last but not least
These sanctions have given us trade compliance analysts a stress test. They have shown us how much is interrelated in the fascinating world of foreign trade. A clear distinction can never be drawn between issues such as customs tariffs and export control.
Nonetheless, companies looking for specialists cannot simply assume that a customs expert covers everything. I can say from my own experience: No, nobody can.
The decisive factor is good cooperation between these specialists on the one hand and between the departments on the other.
Be forgiving if someone from the customs department approaches you with an unusual question. Because if the customs experts don't know everything, they have to ask numerous questions. And definitely, they are grateful for any answer.
Helping multinationals navigate the ever-changing international landscape of regulations & risk management in trade compliance.
2 年This newsletter gave me chills and made me think of my daily life in 2014 when Russia "annexed" Crimea. The part you don't mention in the article was the acid reflux and IBS when you realize that your seemingly unrelated actions or decisions either help or harm people and you don't know which it is. Thank you for writing this: "Nonetheless, companies looking for specialists cannot simply assume that a customs expert covers everything. I can say from my own experience: No, nobody can" I totally agree! 2014 was the year when I had to learn on the fly how to handle import compliance AND export controls synchronously. I am grateful to people like Daniel Kiselbach Alison Eakin and Michael Gee who supported the company and myself so we did not have a major incident of any kind. Agree that companies need to build teams of experts who can liase with other departments. It has as much to do with the supply chain as it does the sales floor and everthing in between.
Trade Compliance Director - Europe | Creating, Driving and Maintaining Robust Compliance Program
2 年Yes! One of the most complex regulations I've had to navigate! Interesting times for Compliance experts...
Vice President, International at e2open
2 年Thanks for summarising your experience, Thomas. Global Trade continues to become more complex, including compliance, documentation, restricted parties, trade agreements, ... The regular introduction of new sanctions against a country, organisation, or individuals makes the role you support ever more important.
Owner and Customs consultant
2 年Absolutely spot-on and well written, thank you!
Growth Enablement Manager - Customs p? A.P. Moller - Maersk
2 年A pretty much spot-on article mirroring the complexity of EU and international trade compliance, and the challanges existing, and the challenges to come. It′s important to remember that what we "decide" is based on regulations and sanctions packages that are not always easy to interpret! And, the part about Customs Master Data is probably top 3 of the priorities any company should have when talking about compliance, unfortunately i have seen during my years in the business that this is far from a prioritized area. The idea of "if it sits on a machine, surely it′s a part of a machine" is one of the most common misconceptions in customs classification. I am sure you are all aware about this.. Great article - worth sharing over and over :)