R.H. Huey & G. Husisian: “U.S. Customs and the New Administration: Your Top Ten Questions Answered”
* Authors: Robert H. Huey, Esq., firstname.lastname@example.org
, 202-295-4043; and Gregory Husisian, Esq., email@example.com
, 202-945-6149. Both of Foley & Lardner LLP.
[Editor’s Note: This is the second half of an item concerning this subject; part 1 was published in The Daily Bugle of Tuesday, 21 February 2017.]
(8) “What are the expected hot-button issues where Customs will be focusing its attention under the new administration?”
CBP is resource-challenged. Practitioners before CBP have horror stories of lost filings, requests for advisory opinions and protests that take years to resolve, and difficulties in achieving uniform rulings from port to port. Further, the port-by-port administration of CBP can make for great differences in the enforcement priorities, classification approach, and other issues encountered by individual importers. It is expected that the new Centers of Excellence program will take care of some of these issues, yet it will still be true that the issues of concern will vary by port.
Nonetheless, despite these uncertainties, we anticipate the following areas will see significant attention from CBP over the coming administration:
* Informed compliance letters. A recent development is the issuance of “informed compliance” letters by CBP. These letters often are issued to major U.S. importers to encourage them to review their recent entries and determine if they have treated entries correctly where they acted as the importer of record. These letters often are sent to major importers who have not been audited in the past decade or that are viewed as being at a higher risk for violations.
The receipt of an informed compliance notification letter means CBP has reviewed the data of an importer of record and likely identified specific problems with its import transactions, putting the company at an increased risk of a comprehensive audit. According to CBP officials, the expectation is that companies that receive these letters will soon be the subject of a “focused assessment” or other type of CBP audit in the near future. The letters, thus, are a way of encouraging major importers to enhance their compliance and file voluntary self-disclosures in anticipation of the audit.
To provide further encouragement, CBP has indicated that companies that do not follow up with a voluntary self-disclosure can expect that any subsequently discovered violations will be subject to higher-than-normal penalties. The letters warn not only of potential monetary penalties, but also the prospect of seizure or forfeiture of imported merchandise.
While the letters do not change the operative level of care expected of all importers (who are required to exercise “reasonable care” in the execution of their Customs obligations), the letters serve as a warning shot that the company needs to get its Customs house in order and should start:
– Preparing for a CBP audit
– Reviewing its Customs compliance policies
– Reviewing the care taken by its Customs brokers
– Conducting a risk assessment, including with regard to the issues identified in the letter
– Determining if its classifications are correct and supported by the product attributes
– Determining whether any post-entry adjustments are needed
– Determining whether free trade preferences are supported by FTA certificates of origin and appropriate regional content
– Evaluating whether off-invoice items such as royalties and assists are appropriately recognized
– Considering whether there are any other issues in the company’s import data to indicate compliance failures and penalty risks
While the assessment should start with the issues identified in the letter, the review should be comprehensive. CBP auditors have the authority to examine any areas where compliance may be lacking. If issues are found, the company should consider whether the issues are systemic. If the entries are too numerous to make a quick evaluation, statistical sampling can be used to help evaluate the scope of potential issues and the potential risk exposure. Further, the review also should cover the company’s Customs compliance program and the rigor of its compliance measures and training, as these are evaluated by CBP in an audit. Any errors should be documented and a plan put in place to strengthen the company’s compliance procedures and internal controls to prevent their recurrence.
The company also should strongly consider filing a prior disclosure. This can be accomplished using an initial marker, which merely informs CBP that an investigation of potential compliance lapses is ongoing. This locks in voluntary disclosure credit while buying time to complete a thorough investigation and to provide a subsequent full report.
* Forced labor in China. In 2016, Customs issued nationwide orders instructing U.S. ports to detain certain products produced by forced labor in China. The authority for these orders is found in 19 U.S.C. § 1307 (known as section 307), which authorizes CBP to issue orders prohibiting importation of merchandise mined, produced, or manufactured, wholly or in part, by forced labor. Although section 307 has been in place for years, the TFTEA enhanced the efficacy of the provision by removing certain restrictions on when the provision could be applied, thereby removing a loophole which provided that the provision only could be applied if the “consumptive demand” for those goods in the United States exceeded domestic production. Under the revised law, any interested party (including competitors and public interest groups) may request that CBP investigate whether an import was produced using forced labor in another country. If the investigation proves the charges, then any products found to be made in whole or in part using forced labor are subject to exclusion or seizure.
CBP has been making the blockage of goods produced by forced labor a priority, as shown by CBP outreach
on the program [FN/19] and frequent press releases announcing detention orders for violations. [FN/20] Given the prominent role that criticisms of China played in the campaign, we expect this focus will increase, making it imperative that companies that import from China put in place enhanced due diligence and supply chain compliance measures, as described below.
* Trade security issues.
Since September 11, the enhancement of border security has been a priority of CBP, not only for immigration and visits to the United States, but also with regard to the movement of goods. We expect these efforts will accelerate under the new administration, as part of the anticipated Trump administration national security initiative. This likely will mean changes in the frequency of searches of incoming cargo, potentially impacting the time of clearance, especially at busy ports. It may also mean changes in the operation of, or eligibility to use, the C-TPAT program
, a voluntary program that allows certified importers, carriers, consolidators, licensed Customs brokers, and manufacturers to enjoy expedited processing and transit times at the border, reduced number of CBP examinations, and other benefits of being a trusted CBP partner. [FN/21]
We also anticipate that the money being spent on the Mérida Initiative, which was designed to help Mexico increase its border security in the broad sense of disrupting Mexican criminal activity and enhancing Mexican police capabilities, will be refocused on the issue of creating enhanced inspections of goods flowing between the two countries.
* Revenue collection issues. Although post 9/11 border security concerns have somewhat eclipsed what was long considered the main role of Customs – the collection of tariffs on entries – tariff collection still remains a core function of CBP. In particular, we are seeing a renewed emphasis by CBP on the issues of:
– The classification of goods
– The appropriate valuation of goods, especially with regard to off-invoice items (royalties and assists, and so forth)
– The correct country of enforcement
– The importer maintaining the appropriate support for regional content and maintaining free trade agreement certificates of origin at the time of importation
– The declaration of the correct country of origin based upon the appropriate rules of substantial transformation or tariff shifts (e.g., for NAFTA)
– The declaration of any payment of antidumping and countervailing duty tariffs.
Importers should review the way in which these issues are handled to ensure they are occurring in a compliant fashion.
(9) “Sounds scary. What can I do to cope?”
All importers should evaluate whether they need to enhance their compliance measures in the following ways:
Enhance/Implement a Customs compliance program. It is surprising that even large importers often do not have compliance programs in place, or have compliances measures that are dated or are not well adapted to current import patterns. Since the existence and effectiveness of a compliance program is one of the first items tested by CBP in an audit, a pro-active review of the compliance program is the starting point for enhanced Customs compliance.
Conduct a classification and valuation review. Importers should regularly review the items they commonly import and confirm the accuracy of HTS classifications. These classifications should be maintained in a tariff classification database that is available to Customs brokers or any other party responsible for ensuring correct entry. Importers also should review the methodologies that are used to calculate the ad valorem value of entries, paying particular attention to transactions with affiliates and to whether the valuation includes all off-invoice items, such as royalties and assists.
Antidumping and countervailing duties product review
. The collection of full AD/CVD tariffs and the prevention of circumvention of the hundreds of AD/CVD orders currently in effect is a priority of CBP. The TFTEA gives CBP the tools to fight antidumping and countervailing duty evasion, as discussed above. Companies that know they are importing goods subject to these orders should carefully review their entries to ensure they are occurring in good order with the payment of full duties, consistent declaration of the correct country of origin and coverage by the orders, and so forth. Importers should confirm their judgment that goods being declared as not being subject to AD/CVD orders are correctly classified. Where importers of record are importing goods that are covered by antidumping duty orders, they should confirm that they are in a position to certify that they have not entered into an agreement to receive, and have not in fact received, any reimbursement of antidumping duties. The importer should confirm that it is consistently following this requirement, as any failure to provide the required certification will lead both CBP and the Department of Commerce to presume reimbursement
, thereby doubling the duties to be imposed. [FN/22]
FTA claims. Importers should review any FTA or duty preference program instructions to determine their accuracy. Common issues to confirm are whether the regional content requirements are met, whether required certificates of origin are at hand at the time of entry, and that all required documentation to support claimed free-trade preferences is maintained for the appropriate period of time.
Coordinate with freight forwarders and Customs brokers. Importers should engage with their freight forwarders and Customs brokers to determine whether Customs requirements are being consistently followed and should coordinate required recordkeeping. Although it is acceptable to delegate responsibility for import responsibilities to third parties, the ultimate responsibility for the handling of entries is on the importer of record.
Conduct a Customs audit
. Larger importers, or importers that have not been chosen for an audit in recent years, should consider performing a Customs audit. A good starting point is found in the ” best practices of compliant companies
” on the Customs website; [FN/23] Customs specialists can help design a tailored audit that reflects the importer’s individual risk profile, goods imported, country sourcing of goods, and other patterns of importation.
As noted above, CBP is emphasizing the combatting of goods that benefited from forced labor (adult and children alike). With enhanced section 307 giving CBP the tools to block more imports, companies should be pro-active in monitoring and auditing suppliers for lapses that could lead to costly detentions by CBP. Measures to consider implementing include the following:
Monitor U.S. government intelligence. The U.S. Department of Labor, in consultation with the U.S. Departments of State and Homeland Security, publishes an annual list of products believed to be produced by forced labor. Importers should monitor this list to see if the U.S. government is flagging products they commonly import.
Review products where the company acts as the importer of record. Importers should be aware of all products where they commonly act as the importer of record, as doing so automatically makes them the responsible parties for dealings with CBP, including with regard to the issue of CBP forced labor inquiries.
Conduct a supply chain audit and perform supplier due diligence. Because the forced labor provisions are designed, by definition, to bring in outside parties, it seldom is a good idea to wait for any CBP inquiry, as it often will not be possible to put together a response within a tight timeframe where third parties are involved. Waiting until receiving a notice from CBP of a potential violation risks seizures, loss of the goods, penalties, lost business, and public relations issues. Pro-active due diligence on the supply chain will allow the importer to assess the risk of a violation, determine the types of products most likely to be implicated, identify suppliers and countries of concern, allow for the creation of an audit schedule of suppliers, and generally gather information to disprove any allegation of the use of forced labor. Visits to supplier sites and gathering knowledge about the sub-suppliers that also form a part of the supply chain can also forestall problems down the road.
Follow up on red flags. Importers that source from countries of concern, such as China, should monitor suppliers for potential red flags that might indicate sourcing issues. Importers that discover or reasonably suspect the use of forced labor should shift to alternative sources.
Implement a compliance program. All importers should have a comprehensive Customs/import compliance policy; any companies that do not should implement one. The program should be reviewed to ensure it addresses supply chain management, including provisions for limiting the potential for human trafficking and forced labor in the supply chain.
Gather certifications. Importers should review all supplier agreements to confirm that they contain an affirmative certification that the supplier is: (1) aware of the company’s Customs/import compliance policy; (2) abides by its terms; (3) specifically is not using any form of forced labor; (4) will cooperate with any investigation of same by the importer; and (5) will be punished if these provisions are violated, including through the requirement to cover the costs of an investigation and the termination of the supply arrangement.
Conduct training. Importers should incorporate training regarding forced labor requirements into Customs/import training not only for persons who directly handle import transactions, but also for employees who work directly with the company’s supply chain.
Consider joining the Customs-Trade Partnership against Terrorism (C-TPAT) program. C-TPAT is a voluntary supply chain security program, where companies work with CBP to improve the security of private companies’ supply chains. Although the provision is aimed at terrorism, becoming part of C-TPAT helps shore up the reliability and accountability of the company’s supply chain.
Review government contracts. Finally, government contractors should be aware that they have a potential second source of liability, which is Executive Order 13,627. That Executive Order, implemented into the Federal Acquisition Regulation, prohibits U.S. government agencies from acquiring products produced by forced or indentured child labor, while also implementing the requirement for government contractors to certify they neither use nor source from companies that use forced labor. The penalties for violating this prohibition include termination of the government contract, debarment, and civil and criminal punishment.
Miscellaneous items. Finally, importers should look into the following housekeeping issues, which can lead to compliance lapses and, potentially, costly penalties:
Request ITRAC data. It is a good idea periodically to request an Importer Trade Activity (ITRAC) Report from CBP for the last five years as a way of gathering a copy of all data held by Customs regarding entries for the company as an importer of record. Such information can be used for compliance purposes and, in the event of a Customs-focused assessment or voluntary self-disclosure, as a complete record of all imports where the company acted as importer of record. Since CBP is transitioning to the Automated Commercial Environment (ACE) in 2017, ITRAC data will eventually be discontinued, making it important to gather a copy of the ITRAC data while it is still available.
Request Census Bureau data. The Export Administration Regulations (EAR) require that exporters maintain certain information regarding exports for a period of five years after the time of exportation. To help comply with this requirement, it is a good idea to request Census Bureau data for the prior twelve months once a year.
Sign up for ACE. Importers that have not signed up for ACE should do so. Advantages include the elimination of paper entry summaries, decreased administrative costs, enhanced ACE report capabilities, and remote location filings for entry summaries.
Bond sufficiency. CBP monitors the sufficiency of continuous entry bonds to determine if the bond covers likely import activity. CBP determinations of inadequacy can result in increases in the bond amount over a short period of time (15 days). Failure to comply can result in CBP declaring the bond insufficient, thereby forcing the use of more expensive single entry bonds.
Listing multiple principals on the same bond. Companies should consider whether it makes sense to include multiple entities on the same bond. While doing so allows for bond savings, each entity is jointly and severally liable and responsible for paying any claim regardless of which entity is at fault. Any one of the entities can terminate the bond at any time, which can cause problems if the management of the bond is not coordinated.
Customs broker dealings
Custom broker powers of attorney. Although it is common to grant a Customs powers of attorney to Customs brokers, these grants should be monitored to ensure they are accurate and there are no unnecessary legacy authorizations in place. Reviewing ACE or ITRAC data allows for the ready identification of all Customs brokers who have made entries on behalf of an importer of record by reviewing the filer codes on the entries. Any unneeded powers of attorney should be revoked.
Entry clearance items
Update names and addresses on file with CBP. Under new procedures, CBP now maintains an importer-of-record program that seeks to more closely monitor companies that import, as a means of preventing fly-by-night importers who seek to evade duties (particularly antidumping and countervailing duties). CBP uses name and contact information from Form 5106 to communicate with importers. Importers should review the information on file with CBP to ensure the accuracy of all information and that it meets new importer tracking requirements.
Manifest confidential treatment. Much of the information filed as part of the entry process is available for review by companies such as PIERS, which gather it together and sell it, including to competitors. By filing a government confidentiality request and keeping it up to date, importers can take steps to keep import data confidential.
Confirm your reconciliation items. Companies that participate in CBP’s Reconciliation Prototype Program should ensure they (or their Customs brokers) are appropriately flagging entries, as CBP will no longer allow a blanket flag as of January 14, 2017. A monitoring program can help ensure the reconciliation process occurs appropriately, with reconciliation being used to reflect post-importation value additions and adjustments for such items as retroactive transfer price adjustments, assists, royalties, and other value elements that are unknown at the time of entry.
– Partner Government Agencies (PGAs)
. There are at least sixteen partner government agencies, ranging from the Department of Agriculture to the Department of Commerce to the Environmental Protection Agency that work with CBP
to effectuate specialty requirements, such as for the importation of food and medicine, and a wide range of other products. [FN/24] Importers who are impacted by these specialty requirements should ensure that they are adhering to all regulations issued by the partner agencies and effectuated as they impact cross-border transactions through CBP regulations and control.
Updated certificates of origin. FTAs, including NAFTA, often impose a requirement to have Certificates of Origin (COO) for anticipated duty preference claims. If these COOs are not in hand at the time of entry, then the entry is not eligible for duty preference, even if the rules of the FTA otherwise are met. Importers should work with their Customs brokers to ensure they have all required COOs on hand.
Steel entry requirements. In 2016, CBP instituted special procedures for the more than 100 steel products covered by antidumping and countervailing duty orders. These “live entry” procedures are designed to require the filing of electronic paperwork and upfront duties before the release of steel products subject to these orders. Importers of steel products should ensure they are correctly classifying steel entries, declaring the goods to be covered by these orders where appropriate, and that they are adhering to the “live entry” procedures.
Destination control statement (DCS). Exports require a Destination Control Statement, which appears on export documentation. The language being used should be reviewed to ensure it meets current regulatory requirements, even for EAR99 products.
Denied parties screening/end use/end user controls. The Office of Foreign Assets Control and the Bureau of Industry and Security restrict exports to certain persons who have been determined to have taken actions contrary to U.S. foreign policy. Exporters should confirm they maintain screening protocols that are consistently followed to prevent such dealings. Companies should also ensure that they consistently follow up on red flags indicating that goods are potentially being used/diverted for use by inappropriate end users/inappropriate end uses, such as for the support of terrorism or the proliferation of weapons of mass destruction.
Controlled goods. Exporters should be certain that they have not fallen into “EAR99” mode, automatically classifying all exports as EAR99 where they are, in fact, controlled under the ITAR or the EAR. Even commercial goods can become subject to the ITAR, for example, if they are modified to meet military specifications or for military use. Companies that have not undertaken a classification review in recent years should consider performing one, particularly if they are known to export goods that are controlled by the ITAR/on the U.S. Munitions List or controlled by the EAR/have an Export Control Classification Number (ECCN).
Trademark and trade name protections. As noted above, CBP has the ability to help bar entries that violate trademarks and trade names that are registered with the CBP. Companies that believe they are seeing infringing imports should consider taking steps to protect their intellectual property through the registration process or should consider whether seeking section 337 import protections is appropriate.
Training. Importers should train all compliance stakeholders annually on Customs requirements. This allows updating all relevant personnel regarding changes to CBP regulations, which often change, especially in the current environment when CBP is reflecting new statutory changes.
(10) “Are there any money-saving opportunities?”
The TFTEA contains certain provisions that can aid importers. Among these are the increase of the de minimis entry threshold from $200 to $800, which increases eligibility for duty-free entries without the requirements of a formal entry; the expansion of the American Goods Returned program (HTS 9801.00.10) to certain goods that are not of U.S. origin, but were at one time in the United States; duty-free treatment for certain goods from Nepal; and enhanced duty drawback rules (available beginning in February of 2018).
Companies also should consider whether they can benefit from ways to process or import goods outside the Customs territory of the United States or otherwise without needing to pay duties, such as through the use of Free Trade Zones, the use of Customs bonded warehouses, or through use of Temporary Importation under Bond procedures. Although the exact circumstances where such measures would apply requires individual consideration, a Customs expert may be able to identify significant money-saving opportunities.
Finally, importers of record should realize that audits of imports can result in the discovery of areas of missed opportunities under free trade agreements. Chapters 89 and 99, the potential use of FTZs, TIBs, customs bonded warehouses, and other areas where there may be money-saving opportunities. An importer can perform reviews of entry data to capture opportunities of duty overpayment. If these exist, importers may be able to file requests for refunds using section 520d claims or post-summary corrections.
As shown, the landscape under the new administration is uncertain. Missteps by importers can lead to costly seizures and penalties. Fortunately, there are a great many steps that importers can take to sharply reduce their risk of a Customs audit or inquiry, or to secure a good outcome if an audit, in fact, does occur. The compliance advice outlined above is a good starting point for any importer, but a Customs specialist will be able to design a program that is tailored to the company’s individual products, import patterns, and business profile.
[FN/19] See CBP, “Forced Labor” (2017), available at here
[FN/20] See CBP, “CBP Commissioner Issues Detention Order on Stevia Produced in China with Forced Labor,” (2016), available at here
; CBP, “CBP Commissioner Issues Detention Order on Potassium Products Produced in China with Forced Labor” (2016), available at here
; CBP, “CBP Commissioner Issues Detention Order on Chemical, Fiber Products Produced by Forced Labor in China” (2016), available at here
[FN/21] See CBP, “C-TPAT: Customs-Trade Partnership Against Terrorism” (2016), available at here
[FN/22] See CBP, “Guidance for Reimbursement Certificates,” available at here
[FN/23] See CBP, Best Practices of Compliant Companies
(2013), available at here
[FN/24] See CBP, “Partner Government Agencies (PGAs) Involved with BIEC,” available at here