Tax Articles

Setting Up a Company’s Internal Compliance Program for Trading Strategic Goods under the Strategic Trade Management Act

By: Atty. Lino Ernie M. Guevara

In this last part of my article featuring the “Strategic Trade Management Act” (STMA) or Republic Act (RA) No. 10697, I will now focus on the Internal Control Program (ICP) needed to be established in accordance with STMA.

Previously, I gave an overview of the general features of the STMA enacted to prevent the proliferation of weapons of mass destruction (WMDs). This it does by managing and regulating the trading of strategic goods (i.e., products that, for security reasons or due to international agreements, are considered to be of military importance that their export is either prohibited or subject to specific conditions), including software and technology. The Strategic Trade Management Office (STMO), headed by its Director, Atty. Luis M. Catibayan, and ably assisted by Assistant Director Atty. Janice Sacedon-Dimayacyac, is an attached bureau of the Department of Trade and Industry (DTI). It serves as the executive and technical agency to establish the management systems for trading strategic goods. Subsequently, I discussed the STMO’s conduct of ICP pre-authorization audits on all covered entities (e.g., registered entities determined by STMO to be eligible for a global authorization; applicants for global authorization and individual authorization relevant to Intangible Technology Transfer (ITT); applicants of governmental end-use assurance relevant to ITT; and other persons as determined by STMO).

The establishment of an Internal Compliance Program is required as a precondition for the issuance of a global authorization. It may also require a Technology Control Plan (TCP) for applicants of individual authorizations and governmental end-use assurances relevant to Intangible Technology Transfer. ICP is a system intended to prevent the transfers of strategic goods to prohibited end-users, whether intentional or otherwise. It is a set of different policies and procedures designed to assist an entity in its compliance with the Strategic Trade Management Act or RA 10697 and its implementing regulations.

Per STMO’s guidelines, the various elements of a sound ICP are as follows:

I will try to explain briefly each one of these relevant elements.

Management commitment refers to the support given by the top management to properly comply with STMA and its implementing rules. Such commitment must be declared through a document stating that the company and all its personnel are aware of the STMA, its rule and regulations. Such document must be furnished to employees and posted inside company premises.

An ICP structure refers to its composition which includes having a Chief Strategic Trade Control Officer (CSTCO) primarily responsible for the ICP implementation, possessing an authority to require employee compliance and is knowledgeable about ICP. Large companies having voluminous transactions may also appoint Strategic Trade Control Manager/s and Strategic Trade Control Officer/s. Note that the number of personnel in an ICP structure depends primarily on the size of the company as well as the volume and nature of the strategic goods being traded.

The screening procedures would include four elements: product classification, end-use screening, end-user screening and risk assessment. Product screening is the process of determining whether an item or technology is controlled and requiring STMO authorization. End-use screening determines the reason why the goods are exported or the purpose of utilization by the end-user. End-user screening is the process of identifying the ultimate end-user of the strategic goods. Risk assessment identifies and evaluates the risks present in a transaction after product classification, end-use and end-user screening. It is considered a “catch-all” check.

Shipment control is a system of preventing diversion of goods from one party/country to another by checking, confirming and ensuring the trustworthiness of the shipper, forwarder and all other persons involved in the shipment undertaken through proper screening.

The ICP training provides the employees the skill and/or knowledge development in preparation for tasks concerning STMA. It may involve functional as well as awareness training. Internal audit is the process for the company to assess its own ICP, and in the process, strengthen it.

The Company’s Standard Operating Procedure (SOP) should contain the detailed procedures to be followed by employees to ensure compliance with the ICP rules and policies. It must be clear, understandable and implementable and should be constantly updated. Recordkeeping is the system by which the company maintains its records as the STMA expressly requires the company to keep all records and/or books of accounts for 10 years from the completion of the transaction.

Companies should report to the STMO any act violating STMA and its rules. Voluntary self-disclosure could merit some consideration in the imposition of administrative penalties. If a clear violation of the STMA is shown, it should be reported not only to STMO but also to other government agencies such as the Bureau of Customs, Philippine National Police or Philippine Coast Guard. The company must implement preventive measures and corrective actions so that violations will not be repeated.

As STMA covers not only shipment of strategic goods (tangible) but also transmission of software and technology (intangible), either by electronic media or non-electronic means (i.e., face-to-face communication), a Technology Control Plan may also be required. A TCP is designed to prevent unauthorized access, transmission or sharing of sensitive or controlled information, software or technology. Among those to be considered are the proper screening of personnel involved, inclusion of non-disclosure clauses in their employment contracts and the physical security plan for the premises.

Having a sound and viable ICP could well be one of the vital cogs in ensuring success in the STMA implementation. I agree with the STMO’s view that the Company’s size, nature of business, financial resources, consciousness for company’s reputations, and company policy, among others, are just some of the main factors influencing a company’s effort and involvement in promoting the legitimate trade of strategic good. Certainly, a highly compliant company with the STMA’s provisions could already spell half the success in the law’s implementation.

Let me close by quoting from STMO’s Assistant Director, Atty. Sacedon-Dimayacyac’s letter to this writer on the critical role of STMA during this time when international trade is likewise affected by this health crisis: “The effective implementation of STMA distinguishes the Philippines as a safe and secure trading market compliant with global standards, thus, providing confidence to investors and boosting our country’s competitiveness in the global market. Consequently, this will allow companies to expand their business, attract investors, and create new jobs.” Indeed, the STMA’s positive impact is one ray of hope that all stakeholders could work on, especially so for our country to rise up against the economic havoc mercilessly heaped upon us by this global pandemic.