In the wake of September 11th, US Customs has formed the Customs-Trade Partnership Against Terrorism (C-TPAT). C-TPAT's purpose is to try and ensure that neither terrorists nor their weapons infiltrate commercial shipments. Eventually, US Customs will invite all parties in the chain of supply -- importers, foreign manufacturers, brokers, carriers, and warehouse providers -- to join C-TPAT. Initially, however, membership in C-TPAT will be limited to importers but over two phases. The first importers invited to join will be those who have been graded by US Customs as low-risk importers (LRIs) during trade compliance reviews. After that, membership will be opened to non-LRIs.

The primary benefit to importers of joining C-TPAT will be expedited processing of cargo. Importers, who are not C-TPAT members, may over time, as C-TPAT membership becomes more widely available, find their shipments subjected to higher scrutiny and added examinations, with no guarantee of processing times.

In order to join C-TPAT, importers will need to sign and submit to US Customs a form memorandum of understanding (MOU), together with a supply chain security questionnaire. The MOU obligates the importer to develop and implement a documented and verifiable program for supply-chain security consistent with security recommendations issued by US Customs. These security recommendations, which have only recently been published, are specific to each stage of the supply chain. Thus, there are separate security recommendations for importers, brokers, air carriers, land carriers, rail carriers, warehouse providers and foreign manufacturers. It is the importer's responsibility to communicate the relevant security recommendations to each of the other members of the supply chain with which it deals.

It remains to be seen how much oversight US Customs will expect an importer to exercise over these other supply-chain participants to ensure compliance with their particular security recommendations. The answer is probably very little when it comes to carriers, brokers and warehouse providers (since these parties have traditionally operated independently of their importer clients) but probably a good deal when it comes to foreign manufacturers. Importers have historically exercised on-site oversight over foreign manufacturers to ensure compliance with quality, delivery and US customs requirements, and US Customs will presumably expect importers to expand such oversight to include security concerns.

Security Recommendations For Foreign Manufacturers And Importers

The security recommendations for foreign manufacturers cover the following five areas:

1. Physical Security
Using sturdy building materials and adequate locks, segregating cargo in packing areas, having adequate lighting and ensuring internal communications in place to contact security or local police.

2. Access Controls
Limiting unauthorized access to shipping, loading dock and cargo areas, and tracking and identifying movements in and out of the facility by employees, visitors and vendors.

3. Procedural Security
Covers both incoming and outgoing goods, and includes having a designated security officer and procedures for detecting and monitoring shortages and overages and for affixing, tracking and verifying container seals.

4. Personnel Security
Conducting background checks and screening of prospective employees. No similar recommendations are set out for current employees.

5. Education and Training Awareness
Maintaining employee programs (including how to recognize "internal conspiracies") with incentives for active employee participation.

Foreign manufacturers are expected to prepare written security procedures dealing with these five areas. While the recommendations are silent on this point, these security recommendations should also extend to subcontractors of foreign manufacturers, particularly any packing subcontractors.

The security recommendations for importers are similar but are applied to the importers' own operations and also contain recommendations in respect of Manifest Procedures (manifests be complete, legible, accurate and submitted in a timely manner to US Customs) and Conveyance Security (maintaining such security against the introduction of unauthorized personnel and material).

We surmise that C-TPAT will have the following other effects:

Security Recommendations Means Security Requirements
While US Customs states that the security recommendations are just that and that one size does not fit all, these recommendations will undoubtedly become de facto security requirements. It would be naive to assume otherwise.

Additional Costs
As C-TPAT is absorbed into the supply-chain process, it will likely result in additional costs for all supply-chain participants. This is particularly bad news for smaller manufacturers. Larger manufacturers have the resources to absorb added security costs, for example, closed circuit TVs in packing areas and smart cards for employee identification.

Opportunities For Market Differentiation
As mentioned above, US Customs will extend membership in C-TPAT to other supply-chain participants, including foreign manufacturers. Membership in C-TPAT, whether as an importer, foreign manufacturer, carrier or otherwise will become one way in which supply-chain participants can differentiate their goods and services from the competition. In addition, foreign manufacturers should consider asking outside auditing firms to vet their security procedures, with the issuance of an ISO-like certificate being the outward manifestation that the foreign manufacturer is security-compliant.

Eventually, we expect a "virtuous circle" of supply-chain participants, i.e., all parties in the supply chain will be C-TPAT members.

Supply-Chain Security Is Now A Part of The Sourcing Equation
Importers' concerns over supply-chain security will become another piece of the sourcing equation. In addition to requiring foreign manufacturers to upgrade security consistent with the measures discussed above, importers will impose security-related obligations on their manufacturers in purchase orders, certifications, codes of conduct, vendor manuals and vendor letters. In fact, the MOU obligates importers to condition their relationships with other supply-chain participants on adherence to the relevant security recommendations.

Who Verifies Security Procedures?
The MOU requires that importers put in place verifiable security procedures. This begs the question of who carries out the verification. It is not plausible that US Customs will allow importers to be the only verifiers of the security procedures of other supply-chain participants, particularly foreign manufacturers. To keep importers and foreign manufacturers honest, we anticipate that Customs will visit the premises of foreign manufacturers on a random basis to verify their implementation of security procedures . As those in the apparel area know well, Customs regularly sends teams to factories in Asia to verify origin compliance. These teams could be trained to check for security concerns.

Supply-Chain Security For All Markets
As a result of C-TPAT, foreign manufacturers will upgrade their security procedures for shipments to all markets, not just the United States. The bar will get raised for everybody, as these upgrades will be factory-wide. Further, buyers from other markets will piggyback onto C-TPAT, as their jurisdictions (the EU in particular), are terrorist targets also.


C-TPAT is of course only in its early days, but supply-chain participants, who stay ahead of the curve, will be in a better position than their less pro-active competitors.

Roy Ian Delbyck
Law Office of Roy Ian Delbyck
February 28, 2002

Disclaimer: The above article is not intended as legal advice. Please consult your lawyer should you seek advice on any of the matters discussed in this article.
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