CUSTOMS AND INTERNATIONAL TRADE

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