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IMPORTER COMPLIANCE PROGRAM
5/98

Customs has announced the Importer Compliance Monitoring Program (ICMP) which is intended as an importer self-governance program. ICMP provides an overview of a company's operations from a process and transaction point of view. 50 companies will be allowed to join the test program and may be large or small, whether or not they have been audited by Customs, but must all be in a primary focus industry. Each January companies will be allowed to apply. Final selections will be made by Customs each March based on yearly total entered values. A report about the results of the test program will be issued to the public.  Customs continues to tout as the benefits of compliance: better knowledge of operations, certainty of duty costs, less government intrusiveness and reduced cargo/transactional examinations. There are a number of steps a company will have to go through to participate. For more details, see the Customs web site at www.customs.ustreas.gov. Of general interest is the level of compliance Customs expects: a) classification - 95%; b) quantity - 99.5%; c) value - 99.5%; and d) record keeping - 95%.

OPERATION BRASS RING BEGINS SOON (1/98)

In Mid-January, U.S. Customs led law enforcement efforts to examine fresh approaches to drug interdiction. Operation Brass Ring is the result. What is clear is that drug interdiction has become the number one priority for the agency, to the point that Robert Trotter (Asst. Commissioner Field Operations) did not even utter the words "trade facilitation" during a recent luncheon speech before the trade community.

Customs' efforts will be focused on ports which are considered to be high risk points for drug smuggling. By definition, the U.S. southern border will be a focal point. However, the northern border is also impacted. Additionally, selected sea and air ports (L.A., New York and Miami for example) will also be affected. Both Customs and the Border Patrol state they have seized more shipments, but their aggregate quantities are down. Such a dilemma has left law enforcement to re-examine its current methods from the ground up. As a result, Customs has announced the use of specialized teams of individuals with different disciplines and from different locations who will come into a port area unannounced and select and target cargo and conveyances for intensive examination.

It is anticipated these efforts are likely to lead to disruptions in the flow of legitimate cargo and people. One factor to consider is Customs is already in its budget cycle. Therefore, funding to support this new effort will have to come from existing revenues likely leading to the elimination of overtime. Customs is attempting to minimize the impact of its efforts, but any time more cargo is targeted for examination, delays are inevitable. It may be coincidental, but at this same time Customs is also moving away from its informing the public mode to an enforcement mode in dealing with commercial cargo, import and export, and passengers.

These new teams are expected to be on site for only short periods of time and then move on. The affected ports are to prepare their local plans for Customs Headquarters consideration by the beginning of February, so we can expect the impact of Operation Brass King to be felt shortly thereafter. Local ports are to address better targeting and examination methods.

Customs is clearly implementing this new approach in part in response to criticism from elected officials who have complained not enough drugs are being interdicted. However, these same representatives are silent on the topic of solutions to stem the demand for drugs. We are, therefore, left to ask - if Customs steps up its efforts and substantially more drugs are not seized - what next?

COMPLIANCE RATES (12/97)

Interested in finding out how your company is doing in Customs' eyes? If so, contact your customs broker who can now obtain his own compliance measurement data. New York Customs is the first port to publish how brokers can obtain their information, although it is supposed to be available at every port. To obtain the information relative to specific ports a written request must be filed by the broker addressed to: U.S. Customs Service, Attn. Kevin Fox, Room 5.4AA, 1300 Pennsylvania Ave. N.W., Washington, D.C. 20229.

The only complete record currently available is for fiscal year 1996 and will consist of the filer code, number of lines, discrepancies, number of exams and the compliance measurement rate for that broker. However, since Customs' report will include entry numbers, many expect individual brokers to be able to extract specific importers' records. Information about individual importers will be available from Customs in the near future.

Records, Records, Who Has the Records!

"Reasonable care" and "informed compliance" have become the buzz words of the 1990s for importers. The second half of the bill which contained the implementing legislation for the North American Free Trade Agreement (NAFTA) (Pub.L. 103-182, 107 Stat. 2057 [December 8, 1993]) contained the Customs Modernization Act (the Mod Act). In a column printed on April 9, 1996, there was an explanation of the meaning of these terms, both of which appear only in the legislative history. In essence, these terms direct Customs to inform the trade community what is required of it (informed compliance). In turn, the trade community is to conform to those requirements and do so exercising reasonable care. The question now squarely facing everyone is what has Customs done since 1994 to make sure reasonable care is being exercised by the trade community?

In implementing the Mod Act, Customs took into account a number of factors including those pointed out in various General Accounting Office (GAO) evaluations which criticized Customs for not being able to accurately determine whether a given company's transactions were in accord with the legal requirements. In looking at its work load, Customs came to realize that on average each year there are about 370,000 importers filing transactions. However, the 1,000 largest importers account for about one half by value of all of the Customs' transactions. Taken together with the next approximately 6,000 importers, those 7,000 companies together account for approximately 60% by value of Customs' work load. Additionally, Customs determined that together these importers tended to be in what later became referred to as the "critical" or "primary focus" industries. The list of these industries has remained stable since it was first published in 1994 - textiles, steel, autos and auto parts, critical components (e.g. fasteners and bearings), advanced displays (e.g. CRTs and flat panels - computer monitor screens), telecommunications, production equipment and agriculture. On the watch list (i.e., not critical but being carefully monitored) are chemicals and petrochemicals.

How was Customs to respond to an ever increasing work load and, at the same time, try to insure compliance with the letter and spirit of the new law? Not surprisingly, Customs decided it needed to do a better job with outreach. It began by putting notices of interest on its Electronic Bulletin Board in a more timely fashion (703-440-6236). It also established a web site (http:\\www.customs.ustreas.gov). Between these two sources alone, just about everything Customs publishes can be timely obtained by interested parties, albeit often in unofficial form because publication in the Federal Register is still required to make regulatory reforms official.

In addition, Customs has posted publications which are topic specific to its Electronic Bulletin Board. Called reasonable care publications, the topics covered include value, cotton, NAFTA textiles, buying and selling commissions, fibers and yarns, mushrooms, textile and apparel rules of origin, marble, peanuts, bona fide sales and sales for exportation, granite, caviar, piston engines, vehicles and bolts, nuts and screws (not a complete list).

Customs has also continued to publish its rulings (binding decisions) through a diskette service.  How long that service will remain of interest is questionable because many of these same rulings (and more) are now available through Customs' web site.   Another publication Customs continues to issue is its Value Encyclopedia, a manual which by topic summarizes past Customs' decisions on a host of value questions.

Customs also readily acknowledges that its work force is not likely to appreciably increase, although its work load continues to do so. There is a popular misconception that as the duty rates decrease, there is less trade. Quite the contrary is true. By way of comparison, in 1993 Customs collected $18 million in duties generated by approximately $75 million in trade; and it had only about 17,207 employees. In the year 2000, it is expected that duty collections will rise to $3 billion and trade to $1.4 trillion, but Customs personnel will remain at approximately 17,000.

Perhaps the newest and most far reaching innovation by Customs has been the step of making sure that importers are in compliance with the law through the use of Compliance Assessment Team (CAT) audits. Responding directly to GAO criticism regarding not being able to objectively determine the compliance rate of a given importer, Customs has developed a CAT audit package and, in the first three (3) years, has completed about 200 of these audits. Performed through the Regulatory Audit division, Customs has devoted the people power of approximately 400 of its personnel. Currently, these auditors are devoting approximately 60% of their time to CAT audits, another 20% to NAFTA audits and the remaining 20% to all other types of audits.

CAT audits are designed to focus on these top 1,000 importers. The universe of companies which will be the subject of these audits is, however, more than just these 1,000 top importers. Looking at the critical industries, Customs has started to break down the eligible industries and companies even further. Customs began by sub-dividing the critical industries and then figured out which were the top 250 importers in each sub-divided industry group. By way of example, in the textile field, fabric importers are treated separately from apparel importers, wholesalers from retailers and so on.  In the electronics field, computer importers are treated separately from fax machine importers. Domestic auto makers are treated separately from those which import foreign made automobiles.

The most current version of the CAT Kit is available from Customs' Electronic Bulletin Board. It is important for importers to obtain a copy of it because it explains not only what Customs will be doing during such an audit but it also contains the latest version of the (a)(1)(A) list, see 19 U.S.C. §1509(a)(1)(A).  While the statute makes clear that Customs may demand that an importer produce in a timely fashion those records related to his import operations, the actual list of documents an importer must maintain has yet to be officially published. Therefore, obtaining the working (unofficial) copy in the CAT Kit is critical to an importer's ability to determine whether he has all the documents he is required to retain.

Also included in the CAT Kit is a copy of the General Questionnaire each importer is expected to complete and present to Customs before the CAT audit begins. While U.S. Customs has had the ability to require an importer to undergo an audit for a number of years, the concept behind a "regular" audit is stated by the agency to be much different from that behind a CAT audit. The stated purpose of a CAT audit remains to review the importer's transactions for accuracy as in a regular audit. However, another major consideration during a CAT audit is for the auditors to review and approve the importer's method of handling his imports. If both the transactions are accurately stated and the importer's methodology is sound, the importer is deemed to be in compliance.  

Beyond the obvious benefit of knowing that his transactions are correctly stated, why would an importer care about being found in compliance? According to Customs, the benefit to an importer is supposed to be a lower examination rate leading to the quicker release of his goods. There are some attempts being made to develop a program for shipment release which will also require the submission of less paperwork at the time the initial release is requested, but that program is still in the development stage.  In short, if an importer is in compliance, Customs is looking for ways to allow him to speed his shipments through the release process. Of course, spot checking goods through selected examinations will continue.

Inevitably, things do go wrong despite the best of intentions and efforts. Therefore, importers always need to be concerned about possible Customs penalties. One of the reasons importers want to be found in compliance with the law is because they are supposed to be able to "get a break" if something does go wrong, so long as it is not the result of fraud. In the case of fraud, Customs has already made clear that the fullest penalties under the law will be imposed. Otherwise, if the importer has joined a certified record keeper program and something does go wrong, instead of a penalty, he can expect a warning letter. 19 U.S.C. §1509(f) authorizes Customs to establish such a program. The specifics of the proposed program are contained in the CAT Kit available from Customs, but in essence the importer has his record keeping program audited and approved by Customs and so long as he complies with the approved program, he is in accord with the law. What is controversial about the proposal is the importer's obligation to report any violations to Customs. While self-audit and self-correction are to be expected, what has many uncomfortable is the language in the current draft which seems to suggest that the importer is obligated to report the error even before he corrects it and/or calculates whether there is any loss of revenue to the government.

19 U.S.C. §1509(g) contains the penalties which are to be imposed if an importer is unable to produce the required records in a timely fashion. Exactly how these penalties will be applied is still being developed by Customs. Nonetheless, the law makes clear that a willful failure to produce records can lead to a penalty of up to $100,000 or 75% (whichever is less) of the appraised value of the goods involved on a per transaction basis! If negligence is found, the penalty can be up to $10,000 or 40%. In addition, if the importer has taken advantage of a duty reduction program, that benefit may be canceled and full duties imposed. Additionally, if the entries have been finalized (liquidated), they may also be recalculated at the higher rates of duty which apply where most-favored nation status does not! With the exception of a couple of categories of penalties, these record keeping penalties are in addition to any others which might apply. If the first penalty under a record keeping program is a slap on the wrist, one can understand why importers might be interested in joining the program. However, a careful reading of the record keeping program requirements has raised the ire of many importers who feel that to comply with its requirements is too costly when measured against the likelihood of a penalty being imposed. Their logic is that by having a self-createdprogram which is carefully monitored, the additional steps required to comply with Customs' idea of a record keeping program are simply too costly and a properly monitored program is not likely to result in frequent penalties in any event.

Given the number of CAT audits Customs expects to conduct, it is easy to understand how the current process is a fluid one, as well as a learning experience for all concerned. Those companies which were the first ones to undergo these audits have complained long and loud about how difficult they were. Their complaints focused in two areas: 1) the auditors were having a tough time determining what constituted a material error; and 2) they took to long to complete. In actuality, Customs commences a CAT audit by sending an importer a letter requesting the location of his import records. Right now it is taking approximately a year from the date of that letter before the audit actually starts. Once it starts, it takes on average about 12 to 18 months to complete. Even once completed, it takes quite some time for the audit report to be completed and a copy given to the importer. It should also be noted that if Customs commences a CAT audit and finds serious problems with the importer's transactions, the CAT audit is converted into a regular audit.

One of the problems about which CAT auditees complain is that the change in culture has not yet been absorbed by all the auditors. Under the old system, the function of the auditors was to generate revenue. In fact, Customs used to proudly announce that for every dollar it spent conducting an audit, it generated $7.00 in revenue. Early on, importers were finding that the auditors had yet to adopt the CAT audit mentality of being there to assist companies to improve their processes rather than to impose penalties and raise revenues. That complaint has lessened over time but is something which periodically continues to rear its ugly head.

Importer complaints about what constitutes an error is a problem with which Customs continues to grapple. Is it one error or 100 if an importer makes one mistake but that same mistake is repeated over 100 transactions? Should the type of error make a difference? For example, in determining the duty rate, should a mistake which results in no revenue loss (because the dispute involves something statistical) be treated the same as a mistake which involves the importer under paying the duties due? Recognizing that this remains a controversial issue within the trade and the agency, Customs management is in the process of developing guidelines to answer the question of what is a material versus a minor error? How this answer is framed will be critical since the goal of Customs is a 95% rate of accuracy for all importers by the year 2000, something which even Customs admits may be too ambitious.

Then there is the question of timing. In order to insure there is uniformity in the decision making process, all CAT audit reports are finalized by a special team at Customs Headquarters. By definition, transferring data and reports back and forth between the field site where the audit was conducted and Headquarters takes time. A decision is further delayed if there is any unsettled issue which requires referral to the attorneys who work for Customs for a decision. 

Perhaps the most interesting phenomenon which has come out of these CAT audits so far has been the insistence by Customs that every importer must have a written procedures manual. More than one importer has passed the audit with flying colors operationally and on an accuracy basis but has still been criticized for not have written policies and procedures regarding his import operations. While this article has addressed only importing, exporters who engage in making or supporting NAFTA claims are also subject to these record keeping regulations.

GOING AFTER ATTORNEYS
8/97

It is generally felt that the way in which Customs relates to brokers is quite different from the way it interactions with the Customs Bar. Proving that things are not always as they seem, in Los Angeles, Customs recently sought to compel certain attorneys to appear as witnesses against their client before a Grand Jury. The defendants sought to quash the subpena. The government opposed on the ground that the attorneys had participated in the fraud (the crime-fraud exception to the attorney-client privilege) arguing that, from the surrounding circumstances, the attorneys knew or should have known that the importer was engaging in a tax evasion scheme and so in filing the prior disclosure, the attorneys were perpetuating that fraud. The judge found the importer used its lawyers to make false statements but the lawyers did not know the statements were false. The appellate court agreed, finding that the attorneys could be required to testify only about the facts related to the prior disclosure itself and nothing else.

THE STAKES GET HIGHER
4/97

Relations between the U.S. and China have been in the spotlight in the last few years. There have been a number of problems including textile goods and quotas, intellectual property rights and arms. Now the focus is on campaign finance issues. Against this backdrop, the American Textile Manufacturers Institute (ATMI) has filed suit in Los Angeles federal court against a series of wearing apparel importers under the False Claims Act. Stepping into the shoes of the government, ATMI claims in its lawsuit that these importers have violated the law in importing goods from China by employing materially false statements, misbranding merchandise and otherwise failing to meet the attendant legal standards. The case was filed under seal while the government was given the opportunity to decide whether it would intervene. Now that it has declined to do so, ATMI is touting the evidence it claims to have which was supposedly ignored by U.S. Customs. If the lawsuit succeeds, the resulting damages are split between the government and ATMI. Defendants include such prominent companies as The Limited, Victoria's Secret, Abercrombie & Fitch, Lane Bryant, Tarrant Apparel Group and Mast Industries.

2/97

At a recent industry function, Customs released preliminary information about 1996 compliance results. Customs had 73,800 lines examined with an overall compliance rate of 82%. The primary focus industries had 84% compliance, with 93% compliance at the entry summary stage.

Country of origin compliance rates - these countries constitute 75% of the compliance measurement activity -

The most compliant trading partner is Mexico. The reason is the professionalism of the Southern border brokers and the sophistication of the transactions, e.g. 9802 and related parties.

Copyright © 1999-2002 S.K. Ross & Assoc., P.C. The materials provided herewith are for informational purposes only and do not constitute legal advice. As the materials on this web site are generally time sensitive, for the most up-to-date information on a given topic you should be sure to contact us for more details.