| This white paper highlights the common misconceptions regarding import compliance and the resulting risk exposures for businesses engaging in cross border trade.
To improve the speed and certainty of goods clearing customs at the border, companies need to demonstrate a good performance record for compliance.
Despite the many parties involved in an importing transaction, the importer is ultimately responsible for the goods that enter into a country and must know the true value and origin of the goods to ensure they are in compliance with country rules and regulations. There is no exception to the importer's responsibility and liability — and the consequences for violating import compliance are much higher and more damaging than most CFOs, CEOs and other executives of global trading companies realize. This white paper will dispel some of the popular myths that surround import compliance and help guide companies to adhering to the best practices of import compliance.
Implications of Non-compliance
Although a company may realize the significant benefits of a global business, such as cheap working rates and low-priced goods, many organizations are not fully aware of the risks and challenges when trading in the global market. The entire transaction is burdened heavily with documentation requirements, tax issues, multiple currencies and different government regulations. Compiling accurate paperwork and timely entry filing can make or break a competitive global business.
In addition, the impact of a negligent compliance program can have resounding effects on a company's business and abilities to remain competitive. If customs determines that a company is not fulfilling its legal responsibilities and does not have adequate systems to ensure future compliance, the consequences can be dire, including:
> Loss of trade privileges
> More frequent customs audits and excessive inspections of goods
> High financial penalties
> Increased post-entry activities
Understanding the risks involved in global sourcing and importing is crucial to maintaining a good reputation with Customs that will help ensure fast clearance of imported goods. Unfortunately, several myths abound that mislead importers with regard to their legal responsibilities and liabilities. Misunderstanding government and Customs' reporting, documentation and filing requirements can be highly detrimental to a company's cross-border trade operations.
Demystifying Import Compliance
Compliance with U.S. Customs law is not difficult. All it takes is a clear understanding of the roles and responsibilities of all parties involved in an import transaction. Contrasting five frequently perpetuated myths with the reality of U.S. Customs law highlights where confusion typically exists for many importers.
Importer's Financial Exposure
Myth: "Our exposure is limited to the Customs duties."
Often in business, risk is assumed to correlate closely with cost. An importer may feel that 2% duty is within the range of acceptable risk and not pay much attention to compliance and the accuracy of his importing. But Customs takes a very different view. They aim to protect the revenue, that is, the duty payments. But they are also mandated to protect the interests of numerous other government agencies. In fact, Customs is often more concerned with details that have no duty impact whatsoever.
A large camera maker agreed to pay a $20 million Customs' penalty on $60 million of imports for something as seemingly benign as an incorrect country of origin labeling on some camera equipment, which incidentally was duty-free. The label showed "Made in Hong Kong" when it was actually made in China. And that $20 million was just the out-of-court settlement.
U.S. Customs includes the value of the imported merchandise when determining liability and can assess penalties based on that liability. Otherwise, what penalties could they issue on a duty-free product? For most products, liability is based on the import value plus the duty. So our importer who was paying 2% duty actually faces a maximum potential liability of 102%, assuming no criminal sanctions are invoked.
Reality Number 1: An importer's financial exposure is equal to the value of the imported goods plus duty.
Timeline of Risk for Cleared Goods
Myth: "Customs released our shipment, so we're out of the woods."
The only experience most people have with Customs is when they travel internationally. They get off the plane, claim their bags, go through Customs and meet their loved ones. The whole affair takes less time than it took to board the plane in the first place. It's understandable that they expect cargo to be processed as quickly and easily. But cargo is not processed like people. For one, people are not dutiable.
Cargo is released with minimal information when the Customs broker files for an Immediate Delivery Permit and posts a bond. The actual entry with its full details is filed separately, and often later, along with payment of the Customs duties. And it doesn't end there. It can usually take several months for Customs to accept the entry as filed, a process called liquidation. And if concerned about a long pattern of improper behavior, Customs can revisit previously liquidated entries and assess additional duties or penalties up to five years after the release of those entries. And that bond, which is in the importer's name, remains active the entire time.
The liability on an import continues for five years beyond actual release of the shipment. Suppose our favorite importer with the 2% duty imports $10 million of product per year. Five years of value plus duty is a theoretical potential exposure of $51 million. Obviously, penalties are mitigated according to determinations of negligence and fraud. But even the simplest of negligence would exceed most duty rates.
Reality Number 2: The statute of limitations is five years after the material misstatement or omission was made to Customs.
Importer's Risk for Inaccurate Submission to Customs
Myth 3: "The seller prepared the invoice, so mistakes are not our fault."
Often there is more to an international transaction than meets the invoice. Sometimes, an overseas supplier will undervalue the invoice, thinking they are doing their customer a favor. Or the importer may have provided tooling or molds to their supplier that may increase the value beyond what is on the invoice; this is known as a dutiable assist. Or the importer may have later paid additional amounts for a promised level of business that was never met. These are all activities that can constitute a difference between the invoice amount and the transaction value. Customs is more interested in the transaction value.
Not long ago, the Court of International Trade (CIT, the authority above U.S. Customs) found theU.S. subsidiary of a maker of subway trains negligent for reporting incorrect dollar amounts on entry documents and for failing to report escalation payments. Those dollar amounts came from the shipping invoices of the parent company. The company had to pay $1.5 million in penalties and $96,000 in additional duties.
To Customs, the invoice is just the starting point. In an audit, they would look to an importer's accounting records to see what payments were made to overseas suppliers and reconcile those with the amounts reported on the entries. They would not levy penalties against the seller who prepared the invoice because they do not have much power outside of the United States. Instead, Customs will go after the importer who is right in their backyard.
Reality Number 3: The importer is responsible for what is reported on the Customs entry, regardless of what the invoice shows.
Who Resolves Errors on a Customs Declaration?
Myth 4: "Our Customs broker does all the work, so if there's a problem, he will fix it."
Most people think of the Customs broker as they do most service providers. They assume that by doing the work, the broker takes on the responsibility and liability for that work. If you hire a service to mow your lawn and one of the workers loses control of the lawn mower in your favorite azaleas, then you'll certainly expect the company to buy you new flowers. But the Customs broker isn't so much working for the importer as he is representing the importer, acting as the importer. To Customs, the broker practically is the importer.
A responsible Customs broker will only file entries on behalf of an importer when that importer has granted the broker the power of attorney to do so. Almost any representation made by the broker to Customs is considered by Customs to be coming directly from the importer. This is really no different from the accountant you hire to do your taxes. Even if the accountant makes a mistake, you are accountable to the IRS. Likewise, the importer is fully responsible for the work — including the mistakes — of the Customs broker.
Reality Number 4: The importer remains fully accountable for submissions on his behalf by the broker.
The Importance of Record Keeping
Myth 5: "Our Customs brokers keep all entry records, so we don't need to."
Although Customs brokers must maintain records pertaining to import transactions, the responsibility for production and retention of import-related documents still resides with the importer. As part of the record keeping requirement, importers must retain a copy of all correspondence related to their import transactions for five years. The key point to keep in mind is that the broker is merely acting on behalf of the importer. As far as Customs is concerned, the broker is the importer, so the importer — not the broker — is held responsible for keeping accurate records of all entries and duty reconciliation.
Reality Number 5: Importers are required to keep a copy of all correspondence related to their import transactions for five years.
The complex world of global trade is rife with myths and can be daunting for organizations new to the import arena. However, the benefits of global sourcing typically outweigh the "costs" of navigating U.S. import regulations and requirements. To avoid penalties and risk exposure, it is important to understand the following realities of import compliance:
1. An importer's financial exposure is equal to value plus duty.
2. The statute of limitations is five years after the material misstatement or omission was made to Customs.
3. The importer is responsible for what is reported on the Customs entry, regardless of what the invoice says.
4. The importer remains fully accountable for submissions on his behalf by the broker.
5. Importers are required to keep a copy of all correspondence related to their import transactions for five years.