HOW TO SET UP A CUSTOMS COMPLIANCE PROGRAM
AND KEEP YOUR SANITY
1995
In December 1993, NAFTA was signed into law. The second
half of that law dealt with the reform of Customs. Known as the Mod Act (Customs
Modernization and Informed Compliance Act), it has shifted the obligation for
correct classification, appraisement and admissibility determinations to the
importer, subject to double checks by Customs. See 19 USC '1484. It has been over a
year and the enabling regulations have yet to be published. The reasons for the
delay are many but focus primarily on the fact that while trying to implement
the Mod Act, Customs is also undergoing a major overhaul of its organizational
structure and its computer system. Decentralization of decision making is the
goal of the reorganization. When completed, it will give primary decision making
authority to the 301 Port Directors. One of the concerns of the trade is to
insure uniformity of decisions. Customs has been very receptive to input from
the trade so even the reorganization process has been altered during its
planning and implementation.
One thing which has not changed is the clear message from
Customs that importers are now going to be required to know what is expected of
them and to comply with those requirements. Because the regulations have yet to
be publicly released, we have no clear definition of what is expected. We do
know, from the language of the law, that importers will be expected to use
reasonable care. The Mod Act carries with it the standard of informed
compliance, i.e. Customs will inform the trade what is expected and then the
trade is expected to comply.
One inkling of how Customs is going to approach this whole
issue comes from the recent publication of revised mitigation guidelines
regarding certain types of penalties. In publishing these materials, Customs
defined reasonable care as requiring the importer to provide the classification
and value for merchandise along with furnishing sufficient information to allow
Customs to fix the final classification and appraisement. The importer is also
expected to take measures that will lead to and assure the preparation of
accurate documents and must also provide sufficient information about pricing
and finances to permit proper appraisement. Generally the failure to follow a
binding ruling is considered a lack of reasonable care - UNLESS there is a A good faith
professional disagreement@ AND so long as it has a A reasonable@ basis! [Neither term is
defined.]
The law also allows an importer to insulate himself from
liability if he has reasonably (there is that word again!) relied on expert
advice. The expert the importer relies upon (as defined in the legislative
history of the law) may be a customs broker, attorney, consultant or in house
people of similar talents and experience. In addition, the importer must have
made full disclosure of ALL pertinent facts to that expert for liability to be
diminished or eliminated.
Another provision in the law makes clear that an importer
can further insulate himself from liability if he participates in a Customs
approved record keeping program. Here again, we have no regulations on which to
rely, although a proposed record keeping manual has been released. As a result,
many companies are simply setting up their own compliance programs. What these
companies have discovered is that many parts of their operations do not
communicate with each other. As a result, proper information is not being
provided to Customs and/or other regulatory agencies.
Customs has also identified critical industries. These are
industries on which it will be concentrating its efforts. The critical
industries for fiscal year 1996 are: 1) automobiles and parts; 2) advance
displays, e.g. monitors, laptops; 3) telecommunications; 4) textiles; 5) steel;
6) production equipment, e.g. extruders, molding machines and things that make
other components and products; 7) agricultural goods; 8) quota goods (other than
textile), e.g. sugar, dairy; 9) footwear; and 10) critical components, e.g.
fasteners, bearings, bolts and other things that are critical to produce other
components and products.
If you engage in trade in one of the critical industries
named above, it is even more important that you set up a compliance program.
Such a program allows you to take steps to insure that what you report to
Customs is as accurate as possible. For the last few years, Customs has been
focusing on the changes the agency itself is undergoing. Those changes are about
to end. As a result, we can expect Customs to begin focusing more on enforcement
under the new rules of the Mod Act. If you are out of compliance, in the absence
of egregious violations, the first step Customs will take is to counsel. Failing
that, enforcement or penalty action can be expected. One word of caution coming
from Customs is that it expects to be more selective in issuing penalties, but
once issued, Customs is less likely to mitigate them.
The point to this article is why not take reasonable steps
to insure compliance with the Customs laws and regulations? If you take the
necessary steps, you keep cost down because when Customs does make inquiry, you
have the necessary and correct information at hand. The result is that you are
not deflected from the business of business. The list below is intended to be an
aid in setting up your own compliance program. Much like ISO certification, a
successful Customs compliance program will involve proper structure, on-going
training and constant updating. However, one benefit comes from not getting
unexpected duty increases long after your sales have been finalized. Another
benefit comes from the small amount of time it will take to respond correctly to
Customs inquiries when they come, as they inevitably will.
TIPS FOR SETTING UP A COMPLIANCE
PROGRAM
1) Get upper management committed to the idea of Customs
compliance -
compare the cost of compliance with the cost of
non-compliance in order to sell the idea -
- duty increases after sale of goods;
- penalties;
- reconstruction of records;
- lost sales due to detained shipments or late
delivery;
- may lead to the recovery of overpaid duties;
- get upper management to issue a written policy
statement about Customs compliance.
2) Decide where in the company to place the compliance
program -
compliance is a multi-disciplinary effort - all parts of
the company need to be involved -
- information systems;
- finance;
- accounting;
- purchasing;
- transportation;
- logistics;
- project management;
- production management;
- engineering;
- sales;
- legal;
- administration;
- to be successful, the program needs adequate staffing
-
- competent staff;
- extent of experience;
- professional development;
- incentives;
locate the organization where it can interface with all
parts of the company;
make sure the staff has adequate access to managers who
can and will insure Customs compliance is carried about by the various parts
of the company.
3) Develop, implement and monitor formal procedures
-
develop written procedures -
- do not confuse procedures needed for Customs with
those needed for ISO;
- develop written procedures;
- involve all concerned in developing the
procedures;
- give copies of the procedures to those involved and
those in management above them;
- classification;
- value;
- admissibility;
- duty preference programs (e.g. NAFTA, CBI,
GSP);
- record keeping;
- in house vs. outside experts;
- tie in upper management - perhaps through the
budget.
4) Develop standard contract (e.g. purchase order, letter
of credit) language -
standard contract language leads to fewer problems
-
- purchasing - complete descriptions lead to accurate
classification and value;
- suppliers - provide full details regarding products
and value;
- formalize what documents are needed and under which
circumstances;
- directives;
- written policies;
- --niformity of shipping papers;
- key in likely problem areas such as assists, currency
adjustments and intellectual property rights.
5) Training -
a key to success is training all concerned - at the
beginning and consistently thereafter -
- keep records of all who are trained and the
topics;
- such records help prove reasonable care;
- bring in all personnel involved, including
management;
- develop incentives;
- in house vs. outside experts.
6) Conduct internal reviews on a regular basis
-
make sure policies are followed -
- failure to follow written policies which are not
discovered by the company could be seen as a lack of reasonable care;
- promptly correct any failures to follow policies
-
- employee counseling;
- personnel action;
- communicate regularly within the company;
- communicate regularly with Customs? (always a tricky
situation)
7) Benchmark against other companies and organizations -
how are you doing based on others in your industry
-
- high risk goods;
- specific industries;
- attend seminars;
- attend trade association meetings to get the latest
information;
- use internal and external resources regularly.
is the record keeping program adequate when the company
performs internal audits?
- ease of retrieval;
- central repository;
- automation;
- accuracy of information recorded;
- keep old computer programs in order to be able to
retrieve information kept with older software programs.
work with Customs?
- rulings;
- Pre-Importation Review Program;
- contacts with local Import Specialist, Field National
Import Specialist or National Import Specialist;
- Automated Invoice Interface;
- ABI customs broker;
- automation of exports;
- review of product line by Customs.
While the above listing is intended to provide tips only,
importers should also consider that Customs is changing its approach to focus on
post-entry audits. Here are some factors to consider in this context.
1) A determination of informed compliance is different for
each company but the key is - how does the company get information to the
department handling its Customs transactions?
those subject to audit include -
- Importers
- importers' agents (brokers)
- user fee payers
- claims for duty preference
- exporters (because of NAFTA)
can the company produce the records for a particular
entry on demand?
is the amount shown as the cost of goods on the
company=s
financial statements the same as the entered value of its
merchandise?
2) Enforcement will be primarily post-entry once goods are
released -
- goal is verification - inspections, data reviews and
audits;
- Office of Field Operations - selectivity;
- Office of Strategic Trade - domestically
focused;
- Customs Assessment Team (CAT) Review.
3) The purpose of audits will no longer be to
generate revenue but rather to measure compliance and help importers be
compliant!
- 318,000 importers were audited in 1994;
- 1,000 importers accounted for 61% of the value of all
imports in 1994;
- will focus on critical industries;
- Customs will -
- check internal controls;
- assess record keeping;
- test automated systems;
- the focus will be trade priority areas -
- duty reduction/preferential programs;
- dumping duty;
- countervailing duty;
- trade statistics - Census data;
- origin determinations;
- classification;
- value;
- admissibility;
- harbor maintenance fees - depending on court
results;
- be audit ready in advance -
- great inconvenience, difficulty and cost is
incurred if a company has to prepare Aunder the
gun;@
- assists;
- royalties;
- currency adjustments;
- post-entry adjustments;
- all are potential problem areas if the books are
not properly set up and the record keeping program is inadequate.
4) Full audits vs. mini-audits -
- CAT reviews;
- Performance Improvement Plan (PIP);
- will identify problem areas and make
recommendations;
- importer needs to make corrections;
- return visits by Customs to confirm corrections in
place and being implemented;
- key gaps -- audits;
- historically for every $1 spent conducting an audit,
Customs has collected $7 through prior disclosures, underpaid duties,
liquidated damages and penalties [criminal and civil actions];
- GAO and acceptable random sampling procedures;
5) Benefits -
Demonstrates reasonable care;
Reduces costs for the
company;
Reduced penalties for the importer if he is part of the Customs
record keeping program;
Improves efficiency and communications within the
company;
Hastens verification for Customs and other purposes upon demand by
the agency.
In deciding whether or not to set up a compliance program,
bear in mind that Customs will shortly be publishing a list of the documents an
importer will be required to have available in his records on demand (referred
to as the a1a list). Publication of this list is in accord with another
provision of the Mod Act. The penalty for failure to have the required documents
is, in many ways, worse than if there is a substantive violation.
If the failure to produce the records is based upon
negligence, the penalty is $10,000 or 40% of the value for each release of
goods. In the case of willful failure to produce records, the amounts rise to
$100,000 or 75% of the value. In addition, if entries are unliquidated and a
special rate of duty (e.g. free) was claimed, the entries will be liquidated at
the column 1 (or most favored nation) rates of duty. If the entries were
liquidated within two previous years, they can be reliquidated at the column 2
rates!
Assessment of a record keeping penalty is in addition to
all other forms of penalty, except those under 19 U.S.C. '1592,, the fraud
statute. There is a violation of '1592 if the importer (or
exporter in a NAFTA context) makes a material omission or a material false
statement in the course of importing or attempting to import (or export)
goods.
Given that Customs has changed it focus by placing the
obligation on the importer to insure that classification, appraisement and
admissibility determinations are properly made prior to entry of goods, it makes
good business and common sense to make sure that you have all the facts you need
before you make a declaration to Customs. The stories are legend about companies
that thought they were doing things correctly, only to find out an outlying
sales office had arranged credits and debits with a supplier but the department
handling Customs transactions knew nothing about it. American business now
generally takes the approach of operating with as lean a staff as possible. The
theory is that it makes for efficiency and lowers the cost of goods. With profit
margins constantly under attack, it makes good sense to take steps to avoid
costly surprises. A Customs compliance program is one large step in that
direction.
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