The importer’s legal burden is to “get it right” upon entry. This means that if the importer makes an error as to the tariff classification, the value, the applicability of NAFTA or other free trade agreements, trademarks, compliance with DOT, EPA, FDA, CPSC, USDA, FCC or other agency regulations affecting importation, or any other kind of error, it is legally “negligence.” Negligence triggers Customs’ civil penalty law (19 U. S. C. 1592), which allows Customs to bypass the 90-day statute of limitations applying to liquidations and go back 5 years to recover any underpaid duties, and to impose penalties up to 4 times the underpaid duties or 40% of the value, if no duties are underpaid. And, Customs uses the penalty laws in routine, knee-jerk fashion.
So, what are the most common mistakes that importers make? In no particular order –
- Relying on Customs brokers for legal advice – Customs brokers are licensed by Customs and, if experienced, are very knowledgeable about the various Customs requirements relative to making entry. The service they render is invaluable. Customs allows customs brokers to practice customs law at the administrative level (i.e., short of going to court). However, their knowledge of the full breadth of Customs law is often limited to some tariff classification, some valuation, and some other areas, as well, depending on their experience. However experienced, they seldom have either the time or the training to expertly evaluate the complex maze of laws facing an importer, not to mention the penalty laws (both civil and criminal) which always hover in the background. Unfortunately, many do not advise importers of their limitations until after the axe falls. The importer’s legal duty is to know from the beginning what only an experienced Customs attorney can tell him.
- Allowing freight forwarders to stand between the importer and his Customs broker – Some freight forwarders are Customs brokers and some are not. Most Customs brokers are also freight forwarders. When a non-Customs broker/freight forwarder is “controlling” the transaction (has the client contact), he will contract with a Customs broker to handle the Customs entries.
Fearing the loss of his freight forwarding business to the customs broker, the freight forwarder has every incentive to greatly limit or cut off entirely direct communication between the importer and the Customs broker – often with disastrous Customs results. It is a guarantee of serious trouble with Customs. This conflict of interest is partially addressed in the regulations, but it still occurs with great frequency. Importers must ensure sure that they are communicating directly with the Customs broker on all matters relating to Customs.
- Casually responding to a Customs request for information – Every CBP Form 28 Request for Information should be treated as an alert to a possible Customs problem. Customs cannot review all transactions. It focuses its efforts on enforcement – catching importers doing something wrong. It does not send out such requests “routinely.” Just the fact that they have sent it out ought to trigger concern. Innocuous as it may seem, the information sought is usually very important, and warrants close inspection by experienced compliance personnel, prior to any response. These Customs requests are often the importer’s last chance to greatly limit penalty liability for past errors. The reason is that although the CBP 28 may alert the importer to past entry errors (and even may de facto alert it to an ongoing formal Customs investigation), it does not cut off a valid “prior disclosure” (see below). In many (perhaps most) cases, it’s best to consult with counsel prior to responding.
- Failing to know the basics re Customs’ penalties – Because Customs penalty law is an integral part of the Customs duty collection process (to bypass a 90-day statute of limitations applying to liquidations), importers must understand from the get-go how it operates and how to defend the company. “Prior Disclosure” under 19 U.S.C. 1592 is the importer’s first defense against penalties – it eliminates all negligence penalties. To be valid, a prior disclosure must be made before or without knowledge of the commencement of a formal customs investigation of the matter disclosed. Customs will charge the importer with knowledge whenever it can do so to impose penalties, and it many instances it’s a very gray area, with lots of penalty exposure turning on whether the importer had sufficient knowledge. But one thing is clear – a CBP 28 Request for Information (or a CBP 29 Notice of Action) does not convey knowledge of the commencement of a formal investigation (even if it does). Thus, receipt of either form may be the importer’s last opportunity to make a valid prior disclosure
- Moving the customs brokerage function in-house to save money and improve control – In this writer’s opinion from personal experience, this is among the gravest errors an importer can make. It’s a perfect example of being penny-wise and pound-foolish. Should errors be made in the Customs transactions Customs will try to penalize not only the company, but also any individuals who had personal knowledge of, benefitted from, or participated in the wrongdoing. And, Customs often sees a blurry line between civil and criminal behavior. The Customs broker serves, unwittingly, as a necessary, critical buffer between Customs and the importer. Neither the president, the vice-presidents, nor the chief counsel can afford to be seen hanging out with the person preparing the Customs entries.
- Mismarking products with the wrong country of origin – The applicable law is 19 U.S.C. 1304 which requires that foreign products be marked with the English name of their country of origin as visibly as the nature of the product permits and in a place reasonably calculated to apprise the U. S. consumer of the country of origin upon casual inspection.
That’s a mouthful. There are literally hundreds of Customs rulings and court cases interpreting how the law applies in particular circumstances. But, confusing as it may be in certain circumstances, the law is clear about the requirement, and there both civil and criminal for violations. It is a fact that many times exporters or importers seek to conceal the true country of origin because U. S. origin products often command higher prices in the U. S. marketplace. Thus, intentional violations occur frequently, along with unintentional violations. Customs is ever alert to country of origin marking violations, and frequently imposes large penalties, both criminal and civil.
- Misapplying NAFTA and the 19 other Free Trade Agreements (FTAs) – Your supplier says that your imported product was made in Canada or Mexico, and then issues you a NAFTA Certificate of Origin. Your product qualifies for NAFTA and is entitled or duty-free entry, right? Perhaps, but in many cases, No! In order to be eligible for NAFTA, the merchandise must:
1) qualify as “originating” under the Harmonized Tariff Schedule General Note 12,
2) AND qualify as a NAFTA origin good under the Marking Rules (19 CFR Part 102).
An importer or exporter has the legal duty to analyze its product’s NAFTA eligibility correctly before claiming NAFTA or issuing a NAFTA Certificate of Origin. One misstep can put big dollars in issue, both in duties and penalties.
This general rule applies to all Free Trade Agreements. And, compliance with any given FTA requires a complete understanding of the applicable law and the FTA-related facts (which oftentimes requires good cost accounting with a number of complex underlying decisions).
- Failing to stay on top of relevant antidumping (and countervailing duty) actions – Antidumping actions (and, to a lesser extent, countervailing duty actions) have become the favorite method for U. S. manufacturers to block or greatly reduce foreign competition. It is a great game played within the Beltway (D.C.), whereby allegations of “dumping” (selling to the U. S. at prices lower than in the foreign home market), coupled with good lawyering and a gullible or biased bureaucracy at the USITC and ITA oftentimes results in absurd, punishing rates of antidumping duties on imports. The law is extremely complex.
The importer must at all times monitor the status of antidumping actions which may affect its merchandise. Reliance on Customs brokers as its sole source of information is misplaced, because Customs brokers almost always rely on their ABI computer systems for warning – and these ABI systems rely primarily on HTSUS numbers to trigger warnings of antidumping. They are notoriously unreliable, not to mention that HTSUS numbers are used by the ITA for Customs guidance only. The language of any antidumping order is controlling, and that is a very subjective standard at best, with a lot of money riding on the outcome (it is not uncommon to see AD rates of 100% to 200%).
The importer must ensure that its big dollar imports are accurately monitored for AD/CVD developments.
- Underreporting value of imported merchandise (19 U.S.C. 1401a) – Importers are required to know and declare the legally correct value for imported merchandise, but there are a number of import scenarios where the unwary may easily underreport value. Since the bulk of import tariffs are assessed on an ad valorem basis, the declared value directly impacts Customs’ assessment and collection of the proper amount of revenue. The more common scenarios where value may easily be underreported include:
1) doing business with related suppliers, where the relationship may affect the price (related party transactions must be declared as such on the customs entry),
2) cost of “assists” provided to foreign suppliers that are not reflected in value declared to Customs (e.g., importer provides tools, dies, materials, pays for foreign engineering/design services),
3) value does not reflect pre-payments, indirect payments, or future payment obligations, etc.,
4) value is not determined in the context of an arms-length transaction and alternative valuation procedures are not followed, etc.
Misdeclarations of relationship, valuation errors, and value underreporting can go on for years, can cause substantial underpayment of duties, and can cause substantial, perhaps, crushing, accumulations of penalty exposure.
- Noncompliance with Customs recordkeeping law (19 U. S. C. 1509; 19 C. F. R. 163) – Importers (and exporters, carriers, and customs brokers) are required to keep their CBP entry records for five years from date of entry, or five years from the date of the activity that required the maintenance of the records. “Records” is any information made or normally kept in the ordinary trade or business pertaining to imported merchandise, the filing of a drawback claim, the issuance of a NAFTA export certificate, or re the payment of fees and taxes to CBP — whether or not Customs required their presentation at the time of entry.
Failing to produce, upon demand, an entry record enumerated in the Customs Regulations pursuant to 19 U.S.C. 1509(a)(1)(A), commonly known as the “(a)(1)(A) list,” may be subject to recordkeeping penalties. Recordkeeping penalties can be huge, with maximum penalties varying by whether the failure is due to negligence (the lesser of $10,000 or 40 % of the value for each release of merchandise) or willfulness ($100,000, or 75% of the value).
Customs has not widely used its power to penalize for recordkeeping violations – but it has done so in selected cases. Participation in Customs recordkeeping compliance program will greatly reduce or eliminate recordkeeping penalties.
OTHER COMMON FAILURES – Too many to detail in a listing of 10, they include failing to assign the correct tariff classification to imported products, failing to have formal Customs Compliance Manual and Procedures, failing to participate in the Customs-Trade Partnership Against Terrorism program, failing to participate in the Importer Self Assessment Program, and failing at various other Customs related obligations.
Needless to say, importers need a full time compliance person, with access to help when needed.