Is your company in a high-risk zone? Does it have the following risk characteristics?

Your company imports more than $10 million of goods.
You are mid-market: between $50 million and $2 billion in annual turnover.
Your company has experienced higher than average growth in revenues, personnel, or imports over the past 2 – 10 years.

If your company fits this profile, you may be at an elevated risk of customs violations. Many companies in this high-risk zone have outgrown their customs compliance function. Without knowing it, they may be creating violations and, since the statute of limitations is five years, they may not know about the violations until the government comes knocking on their door years after the fact.

Customs Is Looking

Several current developments are adding to the risk:

  • Importantly, U.S. Customs and Border Protection (CBP) has invested heavily in data mining tools that are tracking down customs violations in greater numbers than ever before.
  • During the pandemic crisis, hundreds of people and companies have begun importing equipment for the first time, or have expanded the range of their imports.
  • Imports of items manufactured in China (regardless of where they are being imported from) are drawing increased scrutiny. That scrutiny is, in part, increased enforcement related to tariffs on imports from China imposed under Section 301 of the Trade Act and Section 232 of the Trade Expansion Act.

The result is that CBP is identifying entries that raise red flags. One early warning sign is receipt of a CBP Request for Information (Form CF-28) or Notice of Action (CF-29).

NB: If your company has received either a CF-28 or CF-29, we recommend you seek advice of counsel immediately.

Those notices are not to be taken lightly. They may only require a simple response, however, they are often the thread that begins to unravel into multi-million dollar customs issues.

The Risk in Your Records

The compliance gaps that CBP may identify are all over the map, but if your company does not respond correctly in the first instance, you may find yourself defending all of your customs records. For the past half-decade. Some common compliance gaps include the following:

  • Missing documentation for free trade agreement qualification. In order to enjoy the benefits of reduced or zero duties under a free trade agreement such as the North American Free Trade Agreement (now called the USMCA) or the Korea-U.S. Free Trade Agreement (KORUS) or any number of others, your company must be able to document, on demand, that the items qualify under the relevant rules of origin. USMCA qualification even requires that the certifications from the foreign exporter be on file with the importer at the time of import.
  • Missed antidumping and countervailing duties. The U.S. Commerce Department regularly issues orders to combat dumping (selling at below-market price) or subsidies (government aid to exporters). Those orders typically impose large punitive tariffs on imports. If an importer neglects to pay the required cash deposits at the time of entry, the cost when the importer or Customs discovers them later can be enormous.
  • Incorrect valuation of imports. The invoice price does not always represent the correct value of an import for a customs entry. Many companies get tripped up because they have not accounted for dutiable additions to value, such as certain royalty payments, engineering costs, tooling, and dies. As a result, underpayment in duties can accumulate quickly.
  • Misidentifying Country of Origin. A product may arrive from one country, but it may have originated somewhere else. The difference in the country of origin could mean a difference in duty owed. A logistics chain adjustment, a change to a new vendor, or even a sourcing decision by a supplier could all result in a country of origin change that is missed by the importer.
  • Import misclassification. Every item imported into the United States must be declared under the correct U.S. Harmonized Tariff System (HTS) classification. We find that mid-sized companies often leave HTS classification to their brokers, or even to a foreign supplier. But the importer is legally liable for any classification errors.

Duties, Interest, Fees, and Penalties

Customs violations tend to multiply with time, like a virus. CBP has the authority to collect lost import duty revenue, plus interest, for the last five years of entries. But the bigger threat is that penalties can be imposed over and above duties and interests. Depending on the level of culpability alleged, CBP can impose penalties of up to to 100% of the value of the imported merchandise.

Find the Problem. Reduce the Costs.

Fortunately, there is a vaccine. Sophisticated importers conduct systematic, data driven reviews of their imports. Such reviews enable the company to identify and prioritize risk, so that they can identify and correct actions that are creating violations. And it empowers them to take advantage of the CBP “prior disclosure” program. Prior disclosure of violations protects the company against CBP penalties, effectively limiting the company’s exposure to duties and fees owed, plus interest.

In general, by conducting a quick assessment of Customs compliance risks, a company can save itself hundreds of thousands or even millions in potential penalties – as long as the company finds the problem before the CBP enforcers do.

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