Customs Update: What is Customs to do?
7/01
Published in the Journal of Commerce on July 6, 2001
by Susan Kohn Ross
In 1994, the ground rules between Customs and the trade community changed dramatically. With the advent of the Mod Act, it was no longer Customs' responsibility to figure out the correct classification, value and admissibility standard for a given shipment. That responsibility now fell to the importer. Customs clearly retained the right to confirm the accuracy of the importer's conclusions and impose enforcement action appropriate to the circumstances if there are errors, but the first decisions became the importer's to make and make correctly.
The most serious criticism leveled against Customs prior to enactment of the Mod Act came from the GAO which quite correctly pointed out that up to that time, Customs could not say with any degree of accuracy which importer or which industry was in compliance or its level of compliance. Acknowledging that shortcoming, Customs changes its outlook and approach. One major change was the creation of Compliance Assessment Audits, which Customs relies upon to determine a company's degree of compliance.
From the outset, Customs had trouble completing these audits because the methodology originally used was derived from then existing audit techniques. The first CAT audits were reported to take up to three years to complete and were tremendously cumbersome. Importers complained about the length of time they took. Importers also complained about the cost to respond to Customs varied requests for information and documentation.
Importers and Customs also vigorously disagreed whether a specific discrepancy was major or minor, resulting in even more delays and frustrations for all concerned. To Customs' credit, changes were made and continue to be made. Also to Customs' credit, the entire handbook used to conduct a CAT audit is available at http://www.customs.ustreas.gov/impoexpo/impoexpo.htm.
For those of us located on the West Coast, one of the more interesting features of the March 2001 CAT Kit is the section entitled "Common Importer Errors Identified During Compliance Assessments." The listing is of particular interest to us because we have had the benefit of a list of common "snafus" which were first disseminated in the mid1980s by the Regulatory Audit branch of the then Pacific Region.
That list of snafus reads:
The West Coast auditors were quite frank in stating the way they found most of these violations was the result of conversations with employees of a company in departments other than import-export. In particular, the information associated with many of the costs listed above were maintained in engineering, accounting and sales, and were often not communicated to the import-export department. In many cases the information was requested but the request was ignored because the recipients did not think there was any consequence to not providing it. Under those circumstances, one can imagine a company's shock when presented with large demands for payment of additional duty.
- 1.
Failure to include assist costs in importer values;- 2.
Additional payments to foreign manufacturers, in excess of prices on invoices, not included in product values; - 3.
Transfer prices on imports between related parties fail to cover all cost and profit; - 4.
Improper claims of foreign components as nondutiable American components on products imported under HTSUS 9802.00.80 (formerly 807); - 5.
Lack of proof of origin on American components claimed as nondutiable for imports under HTSUS 9802.00.80; - 6.
Lack of documentation to substantiate claimed nondutiable buying commissions; - 7.
Failure to include dutiable quota costs in import values; - 8.
Products imported duty free under GSP fail to meet 35% foreign cost criteria; - 9.
Understatement of dutiable values on imports with CIF prices due to unsupported deductions for nondutiable international freight and insurance; and - 10.
Failure to include dutiable royalty costs in import values. - 11.
Understatement of dutiable values on imports with CIF prices due to unsupported deductions for nondutiable international freight and insurance; and - 12.
Failure to include dutiable royalty costs in import values.
Apparently, things have not changed much because the common problems listed in the latest CAT Kit read quite similarly:
Whether working from the old "snafu" list or the new "common problems" list, one thing is clear. Those importers who set up solid internal controls will have the fewest problems. In fact, when CAT audits started, importers could pass them without having written procedures, but no longer.
- 1. Manufacturing assists;
- 2. Supplemental payments;
- 3. Nondutiable costs;
- 4. Merchandise classification;
- 5. HTSUSA Chapter 98XX;
- 6. Related-party transactions;
- 7. Buying commissions; and
- 8. Record keeping.
Customs now insists on a company not only having those written procedures but also proving they are actually the procedures being employed in the day-to-day transaction of business. It is amazing how many companies have written procedures but the procedures reduced to writing have nothing to do with how the company actually operates. Customs will not consider inaccurate written procedures to be satisfactory.
CAT Audits have also required importers to more closely monitor their inventory procedures. One issue which has been a thorn in the side of both importers and Customs is quantity discrepancies. In the real world, most companies consider a variance of 5% or less to be tolerable and of no consequence, because sometimes there are shortages and sometimes there are overages, but usually shortages. However, for Customs the requirement is 100% accuracy. If there are overages, they must be reported. If there are shortages, they, too, must be reported. The problem for both the trade and Customs is the format in which those changes are to be reported.
Customs Chief Counsel's office has interpreted the law to mean that any quantity discrepancy is a matter of admissibility and so cannot be reported through reconciliation. Customs is hoping the PostEntry Amendment process recently enacted will be adopted as the reporting mechanism of choice, but initial reports indicate few companies are using this mechanism. Instead, the very procedure Customs was trying to eliminate by adopting reconciliation has continued individual importers working with local Import Specialists and reporting these changes in an ad hoc manner.
When CAT audits first started, importers were generally placed in one of three risk categories, high, medium or low. Presumably the risk category (or "bucket" as it was sometimes referred to) dictated the frequency of exams. Importers have argued long and hard with Customs saying examination of goods has nothing to do with the adequacy of documentation, correctness of classification or completeness of value, and so the choice of enforcement tool is simply a waste of time for both sides. Hampered by the lack of truly effective enforcement tools in this context, Customs has clung to inspections as the option of choice simply because it drives up the importer's cost of doing business. However, the buckets have been refined to now include, low, standard, moderate and high. The differences between one risk bucket and another is not great and often only a matter of interpretation. However, one thing obviously sticks out. If a company lacks documented internal controls, it is placed in a higher risk category.
In other words, regardless of the accuracy of its operation, a company better get its import/export procedures reduced to writing.
One noticeable difference between the old "snafu" list and the new "common problems" list is the addition of record keeping, something also required by the Mod Act. While quite a bit has been said about record keeping in a variety of contexts, the summary criteria applied by the auditors is perhaps the best short explanation one can give. Are the records accurate? Are they easy to retrieve? Are they easy to understand? Do their entries correlate from one to the other? If a company cannot answer yes to all of these questions, it will have trouble with a Customs audit (and likely an audit by any other agency or entity as well).
The question asked most often is, "Why did my company get selected for an audit?" Customs previously announced that the top 1000 importers by value will be the subject of CAT audits. Similarly, the top 250 importers in each of the critical industries, e.g. advanced displays, agriculture, auto parts, autos, bearings, chemicals and petrochemicals, circuit boards, fasteners, footwear, production equipment, retailing, steel, telecom, textiles, and wearing apparel, will be similarly audited. Beyond those reasons, importers are most often targeted for audit by disgruntled exemployees or exspouses; competitors; Customs employees who see violative goods in stores; search warrants; computer research/trend analysis; cargo examinations and samples; Customs officers' knowledge regarding commodities; importations from a new source or a new country; a large voluntary tender or prior disclosure (no specific dollar amount has been publicly identified); and a visit by Customs to one importer who identifies errors by others in his industry.
Additional audit triggers come in the form of what Customs considers red flags, such as invoice notations stating "For Customs Purposes Only" or "No Commercial Value;" invoices with information crossed out or whited out; goods made in one country but shipped from another; related transactions and those involving transfer pricing; lower or higher than usual prices; assists; and royalties. Customs also finds red flags with copyright, trademark or patent possibilities; quota restrictions and sanctioned goods or sanctioned countries.
Since most importers trigger at least one of these red flags, the question becomes where is Customs most likely to invest its time and energy to get a worthwhile return? Generally, its focus has been the large corporations. However, it is not unusual for companies of all sizes, especially small ones, to receive Requests for Information which lead to further enforcement activities by Customs, such as requests for samples and/or documentation, seizures, penalties and the like. The bottom line for all companies is to make sure their transactions are properly documented and properly declared from the outset. Being required to pay more duty long after the fact is the fastest way to lose money on a deal!
S.K. Ross & Assoc., P.C.
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