Customs is reacting in part to pressure from Congress, which has repeatedly expressed concern about protecting domestic industry by enhancing enforcement of antidumping and countervailing duty orders, intellectual property rights, transshipments and perceived abuse of trade preference programs. A recent Government Accountability Office report, for example, identified $2.3 billion in antidumping and countervailing duties that were owed to the U.S. government, but not collected.
The main tools CBP is using are audit surveys, quick response audits and informed compliance letters suggesting companies get their house in order.
Customs began audit surveys three years ago and they’ve been “so efficient that I’ve tripled them this year and plan for more next [fiscal] year,” Tom Jesukiewicz, acting executive director of Regulatory Audit, said in a phone interview.
Under the Customs Modernization Act of 1993, Congress changed the enforcement mentality from trying to catch as many violators as possible to one of shared responsibility for adhering to trade laws based on the concept of “informed compliance.” CBP is responsible for clearly informing the trade community about its legal obligations and importers are expected to exercise reasonable care to follow the rules and regulations. CBP publishes extensive education material on the technicalities of meeting various regulations and issues rulings on disputed topics.
Putting the onus on the private sector to achieve voluntary compliance ostensibly allows CBP to expend fewer resources on inspections or entry reviews, while at the same time making it less likely for compliant shippers to have their shipments examined or their entries reviewed.
In a focused assessment, CBP auditors evaluate a company’s internal controls for mitigating revenue risk to the government, such as the ability to properly value and classify imported goods, as well as the firm’s financial health. The full-scale audits, which are labor intensive and must follow stringent accounting standards, can take more than a year to complete. They are typically conducted on large importers that are capable of implementing, and are expected to have, comprehensive compliance systems. However, there are more than 300,000 importers in the United States—far too many for the small staff of 350 checkers in the Office of Regulatory Audit to thoroughly review.
The top 3,000 importers account for roughly 75 percent of the total imports into the United States by value.
The new approach by CBP is designed to identify priority audit candidates by zeroing in on potential problem areas and addressing them quickly.
Audit surveys are simply short questionnaires sent to one or more importers Customs believes might pose a compliance risk in a certain area, either because of an anonymous tip, shipment and trend analysis by CBP specialists, internal modeling showing problems in an area such as counterfeit goods, concerns from criminal investigators or other information that raises suspicion.
Using the surveys, “I can touch more companies than through a single audit” and use fewer resources, Jesukiewicz said. They enable CBP to test assertions for their validity and determine whether to order a container examination, issue a formal request for information (CF-28), conduct an audit, or drop the matter.
Enforced Compliance. CBP has moved from an “informed compliance” posture to one of “enforced compliance,” according to Larry Ordet, a trade attorney in the Miami office of Sandler, Travis & Rosenberg. Focused assessments previously looked at a firm’s end-to-end processes and written procedures to determine whether it was meeting the reasonable care standard, with some limited testing of entries. Today, the focus is more on what is actually happening with an importer’s shipments, he said in a recent webinar.
In cases where intelligence or assertions against an importer are more specific, Jesukiewicz’s office will send out an “informed compliance package” with a letter raising a potential cause of concern, such as significant use of a trade preference program, and urging a self-review. Importers are encouraged to monitor their transactional data in the secure data portal of the Customs computer system known as the Automated Commercial Environment (ACE). The letters are typically accompanied by a DVD that points out penalty statutes and related regulations, as well as copies of selective informed compliance publications, such as those on classification, valuation and record keeping.
Ordet said CBP in July began issuing the “informed compliance” letters to an unknown number of top 1,000 importers that had not been audited in recent years.
CBP’s hope is that the letter will result in corrective action and possibly a prior disclosure by the importer that could preclude the need for a formal audit.
Disclosing a violation prior to, or without knowledge of, a formal Customs investigation lessens any potential penalties.
Under a standard prior disclosure, an importer simply makes up the underpayment with interest. When CBP finds fault, on the other hand, the maximum penalties can be two times the loss of revenue when negligence (i.e. lack of reasonable care) is determined and four times the loss of revenue for “gross” negligence. For violations of trade regulations that don’t involve duties or fees, the maximum penalty is 20 percent to 40 percent of the value of the goods, depending on whether it occurred due to negligence or gross negligence. CBP often does not seek to impose the maximum penalty, according to customs experts.
ACE gives companies the ability to see all of their account history, so the onus is on them to take advantage of the data, figure out where compliance fell through the cracks and make the government whole, Ordet said.
The letters conclude with a rather ominous warning: “Because [the importer] has been provided this information, violations that may occur in the future could result in seizure and forfeiture of importer merchandise and/or the assessment of monetary penalties.”
Ordet said it’s possible that the letters constitute notice of a formal investigation, which may wipe out the option of submitting a voluntary disclosure.
The new tactics have made many traders anxious that Customs is looking to come down on them with a heavy hand, George Weiss, a former Customs commissioner and now senior advisor at customs compliance software provider IntegrationPoint, said in an interview.
CBP officials believe “they have worked with the importing community and been tolerant of mistakes when importers have shown a commitment to improve their processes and procedures to get their transactions right in the future,” he wrote in a recent IntegrationPoint blog post. “Now they expect importers to clearly demonstrate a commitment to the exercise of reasonable care to get their transactions right, particularly in those instances when CBP has made a concerted effort to inform them.”
Ordet said some companies participating in the Importer Self-Assessment program, which enables importers that prove they have strong internal controls to monitor their compliance with trade regulations in return for fewer audits, are upset they received these “informed compliance” letters.
Jesukiewicz characterized CBP’s approach as “very cooperative,” and said that if a company can provide reasonable assurance it is taking care of any compliance issues, it will be treated accordingly.
“I mean, no one’s perfect,” he said.
Importers should treat the development as opportunity “to relook at compliance procedures and see whether automation makes sense,” said Virginia Thompson, vice president of product development for global trade management solutions at IntegrationPoint. Software than can analyze a database with harmonized tariff numbers for classification purposes, for example, is much more accurate than having a customs broker look at each entry document and make a coding decision. An automated system can also be used to compare what a broker is going to transmit to Customs, or compare a supplier’s information against the internal database. And it can analyze entries after goods have entered the country and assess whether there are problems so so the company can file prior disclosures.
“I think they (CBP officials) believe they done all they can to educate the importer community to exercise reasonable care and if you’re not going to make those investments to get it right, expect more consequences,” Thompson said.
“I think it’s smart of CBP,” she added. “One of the things the trade been asking for is to use effective risk management approaches about what CBP is going to scrutinize more closely. I think for the most part the compliant importers will feel this is what CBP should be doing.”
Prevention And Response. What should an importer do to make sure it doesn’t catch the eye of CBP auditors or if it receives an “informed compliance” packet from Customs?
Trade attorneys and compliance experts say the best defense is to create a robust compliance culture and specific programs within your company.
According to Ordet, that means companies exercising reasonable care should:
• Create a compliance manual and have processes in place to make sure employees follow it;
• Request advice on classification, valuation, qualifications for preference programs, and other matters from customs experts;
• Request rulings (formal or informal) from CBP or an expert;
• Periodically review CBP’s Informed Compliance Publications;
• Subscribe to newsletters and other publications that keep abreast of Customs developments;
• Check for new rulings on CBP’s online database of published rulings (CROSS);
• Attend compliance webinars and log your attendance;
• And consistently perform post-entry reviews.
Post-entry reviews, which can focus on a single entry or on an entire issue like classification, have the additional benefit of helping companies find duty and cost-saving opportunities, as well as identifying a path to address future compliance risks, Ordet said.
Clear errors should be reported to CBP, but sometimes reporting may depend on the facts and circumstances, such as making a valid claim under a preferential tariff program, but not having all the documentation at hand to prove it, he said.
There are several steps a trade compliance department should take if it receives an informed compliance letter from CBP, according to a client note from the Braumiller Law Group in Dallas:
• Tell management about the letter and what it might mean for the company, as well as what it means if executives opt not to sign and return the letter;
• Conduct a risk assessment of categories identified in the letter, as well as antidumping and countervailing duty compliance;
• Confirm any corrective actions in prior disclosures are working as intended and review the results of prior CBP requests for information (Forms 28 and 29, and post-summary corrections submitted to CBP), as well as any internal post-entry audits conducted by the company;
• Test and measure your compliance level in all areas through targeted statistical sampling to make sure you can pass a full audit if CBP expands its review;
• Identify possible loss of revenue and corresponding penalties using metrics;
• Consider a prior disclosure to protect the company from penalties; and in order to ensure prior disclosure rights are not cut off, consider filing an initial notice, which would then be completed with an updated prior disclosure;
• Develop a corrective action plan to strengthen internal controls to ensure errors to not reoccur, and when they do, conduct a root cause analysis;
• And retest compliance levels periodically to validate new controls are working effectively.
Eric Kulisch is Trade and Transportation Editor of American Shipper. He can be reached by email at ekulisch@shippers.com.