Business Mirror

Atty. Lino Ernie M. Guevara discusses the Internal Compliance Program Pre-authorization audits to be conducted by DTI's Strategic Trade Management Office (STMO) per DTI Memorandum Circular 20-45 (August 3, 2020) for the authorization/licensing needed in trading strategic goods under Republic Act No. 10697 or the Strategic Trade Management Act (STMA).

Gearing up for the Pre-Authorization Audits by DTI’s Strategic Trade Management Office

By: Atty. Lino Ernie M. Guevara

In my last article, I wrote about Republic Act (RA) No. 10697, otherwise known as the “Strategic Trade Management Act” (STMA) enacted to prevent the proliferation of weapons of mass destruction (WMDs) by managing and regulating the trading of strategic goods, including software and technology. This affirms the Philippines’ binding commitment to U.N Security Council Resolution 1540 imposing upon member states to enforce measures to establish domestic controls preventing WMD proliferation.

The Department of Trade and Industry’s (DTI) Strategic Trade Management Office (STMO) headed by its Director, Atty. Luis M. Catibayan, started last July the authorization for the export of strategic goods. To recall “strategic goods” are 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. STMA provides a National Strategic Goods List comprised of Military Goods (Annex 1), Dual-Use Goods (Annex 2) and Nationally Controlled Goods (Annex 3). RA 10697 applies to and requires the authorization by STMO of any natural or juridical persons operating within the Philippines or Filipinos wherever located engaging in the export, import, transit or transshipment, re-export or reassignment of strategic goods, including software and technology, as well as the provision of related services (i.e., brokering, financing and transporting). Any person covered by the requirements of STMA intending to engage in these regulated activities should obtain the necessary STMO authorization.

There are three (3) types of license or authorization granted by STMO. First is an individual authorization given to one specific person engaged in regulated activities with respect to one end-user/consignee, covering one or more strategic goods. Validity is for a maximum period of two (2) years while six (6) months for individual authorization for transit or transshipment. Next is a global authorization granted to one specific person or entity engaged in regulated activities with respect to one or more specified end-users and exported to one or more countries covering one or more strategic goods. It is valid for a maximum period of five (5) years. Third is a general authorization to import, export, transit, transship, re-export re-assign specified goods or provide related services to destination countries subject to conditions specified in the general license. It has a lifetime validity until revoked or amended by STMO.

STMO requires, among others, an Internal Compliance Program (ICP) as a precondition for the issuance of a global authorization, on a case-by-case basis. It may also require a Technology Control Plan (TCP) for applicants of individual authorizations and governmental end-use assurances relevant to Intangible Technology Transfer (ITT).

What is an ICP? And why is an ICP pre-audit important?

ICP refers to an effective, appropriate, and proportionate means and procedures, including the development, implementation, and adherence to standardized operational compliance policies, standards of conduct, and safeguards, developed by exporters for compliance with the provisions and conditions of authorizations under STMA. Since trading strategic goods is a privilege granted through authorizations issued by the government, STMO shall now conduct ICP Pre-Authorization Audits on all covered persons per DTI Memorandum Circular 20-45 (August 3, 2020).

ICP pre-authorization audits shall cover the following:
• Registered entities determined by STMO to be eligible for a global authorization;
• Applicants of global authorization;
• Applicants of individual authorization relevant to ITT;
• Applicants of governmental end-use assurance relevant to ITT; and
• Other persons as determined by STMO.

Through this ICP audit, STMO may assess whether said ICP or TCP adheres to the standard elements under the STMO Guidelines for ICP set-up and whether said standard elements are effectively implemented within the company. Among the criteria to be used by STMO to inspect an entity’s ICP or TCP compliance are the management commitment, ICP structure/responsibility/training, commodity classification, end-use/r screening, risk assessment, Standard Operating Procedures Manual and record keeping. Covered persons engaging in ITT shall establish a TCP, which is an ICP for entities engaged in ITT or engaged in the transmission of software and technology by electronic media or through non-electronic means.

STMO employs various audit approaches such as Paper Audit (desk review of submitted information), Remote Audit (use information and communication technology to conduct audit when “face-to-face” methods not possible) and Field Audit (physical visits by the STMO Audit Team to the site). An ICP Field or Remote audit could take more than one day depending on various factors (e.g., volume and nature of the transactions, auditee’s preparedness, ICP efficiency, etc.). Audit result will be available within thirty (30) working days from the closing meeting or from the submission of all information requested, whichever is later. The type of audit results could be (a) Satisfactory Rating where applicant may proceed with the authorization application process, (b) Unsatisfactory Rating with a request for corrective action and where STMO shall assist the entity to meet the required standards, and (c) Re-audit whenever any action is still required by the STMO such as production of record or minor ICP modifications.

Applicants failing to obtain a satisfactory rating during audit or re-audit shall have an option to apply for an individual authorization while improving their ICP to obtain a satisfactory rating. Note that without a Satisfactory rating in the STMO ICP Audit, a global authorization/ individual authorization (ITT), or Governmental End-Use Assurance (ITT) cannot be granted. Under the Circular, STMO shall guide entities in establishing their own ICPs. Entities may contact the STMO Policy and Enterprise Relations Division (PERD) in this regard.

Undertaking this ICP pre-authorization audit could greatly improve and strengthen stakeholders’ compliance as well as heighten their awareness. As envisioned by STMO, this may identify gaps early on and proactively detect and prevent potential violations. It could certainly boost the effective implementation of RA 10697. But what is also critical would be the agency’s valued guidance and assistance to stakeholders during the process, especially at this early stage of the law’s implementation.

It is also encouraging to know the various positive steps being undertaken by STMO through Director Catibayan’s leadership. I understand that STMO has actively engaged in discussions with local partners for the current trends in strategic trade management and also provided needed trainings for its personnel relating to the best practices in other jurisdictions. Locally, STMO has been conducting outreach activities since 2019 to both government and industry stakeholders in various locations such as Subic, Laguna and Cebu, among others, to ensure STMA compliance. They are also developing strategic trade database in coordination with other concerned government agencies. But what was most promising, especially during this pandemic and its dire economic impact, was that according to Director Catibayan, the implemented strategic trade management legislations have shown benefits in terms of investments in the manufacture and exports of strategic goods as shown in other countries. This indeed could very well be the silver lining for our export sector during this economic downturn. Aside from its positive economic impact, a robust and well-grounded STMA enforcement by STMO also highlights the Philippines’ significant contributions to the international community’s concerted effort in preventing the proliferation of WMDs, thus, helping maintain peace and security in the region.