Trade Compliance & Internal Trade Compliance & Internal Controls: Understanding the Keys Controls: Understanding the Keys

to Successful Importingto Successful Importing

Robert J. PisaniPisani & Roll PLLC1629 K St. NW Suite 300Washington, DC 20006Tel 1.202.466.0960Fax 1.877.674.5789rpisani@worldtradelawyers.comwww.worldtradelawyers.com

U.S. Customs & Border Protection (“CBP”) Mission*

• Guardian of the Nation’s Borders• Safeguard the Homeland at and beyond the

borders• Protect the Public against terrorists and

instruments of terror• Enforce the laws of the USA while fostering

lawful international trade and travel • Serve the public through vigilance,

professionalism and integrity

*Source: CBP Website: www.cbp.gov

CBP & Import Challenges

• 326 Sea, Land and Air Ports of Entry• Import Value in 2000 = @ $1.2 billion

Import Value in 2007 = @ $2.2 billion• Over 30 Million Customs Entries in 2007• 11.6 million container shipments

brought to the U.S. by over 1,200 carrier companies operating over 50,000 voyages

• Physical Inspection of Containers: Less than 5%

• Approximately 800,000 U.S. importers

CBP Priority Trade Areas

• Textiles/Wearing Apparel

• Intellectual Property Rights

• Trade Fraud

• Import Safety

• Agriculture

• Revenue

• Anti-Dumping/Countervailing Duties

44

Recent Customs Enforcement Initiatives (or “Importing is not for the meek!”)

Current CBP trend is toward greater tradeenforcement • Civil Penalties (19 USC § 1592) = $$$$• Focused Assessments (i.e., “Customs

audits”) may result in enforcement actions• Public Health & Safety Concerns • Intellectual Property Rights Enforcement • Free Trade Agreements: Complicated import

requirements can lead to non-compliance and penalties

55

How CBP Selects Import Audit Areas*

ELEMENTS OF A “RISK ASSESSMENT”

• Significance / Quantitative• Large dollar transactions• High volume of transactions

• Sensitivity / Qualitative• Priority Trade Issues• Political Impact

• Complexity • Highly technical in nature• Requires Extensive Documentation

• History of Non-compliance• Pre-entry• Post-entry

• Adequacy of Internal Controls

Source: Tom Jesukiewicsz (Sr. CBP Auditor – Long Beach CA)

66

Internal Controls: The Keys to Import Compliance

• Internal controls are the measures an importer adopts to foster adherence to CBP policies and procedures – incorporates risk management principles

• In a study of CBP audits, the agency learned that importers without internal controls had an average revenue loss of over $400,000 whereas the average loss of revenue for importers with internal controls was @ $45,000

• Importers with strong internal controls and a robust Import Compliance Program face fewer penalties and supply chain disruptions

CBP Areas of Compliance Interest

• Tariff Classification (e.g., Incorrect HTS and/or poor invoice descriptions)

• Valuation (e.g., Undervaluation & Undeclared Assists)

• Country of Origin (e.g., illegal transshipment)• Quantity Discrepancies (overages & shortages)• Preferential Trade Programs (e.g., GSP, NAFTA,

FTA’s)• Recordkeeping• Post Importation Price Adjustments• Retroactive Transfer Price Adjustments

88

How an Import Compliance Program Can Save You Money

CBP’s Compliance Best Practices for Importers:

1. Demonstrate Management Commitment

2. Establish Compliance Goals

3. Develop Formal Policies and Procedures (e.g., Manual & SOP’S)

4. Develop Training Program (Recurrent – keep logs!)

5. Conduct Internal Control Reviews (i.e., TEST controls!)

6. Create a Compliance Group or Department

7. Access to Management for Needed Resources

8. Develop compliance requirement for vendors

9. Develop a Recordkeeping Program

10.Partner with CBP (when appropriate)

99

Key Relationships that Affect Trade Compliance

Import Department

Accounting

Purchasing

Engineering

Tax

Receiving

OtherManufacturing

Distribution Services

Law

Export

Customer Service

Sales & Marketing

Sub-contractsContracts

1010

Steps to Building a Compliance Program: First Steps

• Request your Trade Data from CBP for the past 5 years (also called “ITRAC” or “OST Data” - may be requested from CBP via a Freedom of Information Request)

• Review the Trade Data (a gold mine of information about your imports!):

Basic trade data includes: HTSUS, Brokers, MID’s, Ultimate Consignee,

Quota/Visa, Entry Date, Transport Mode, Rulings, Ports, Value Quantity,

Origin, SPI, Duties Paid, Relationship and Entry Types

• Look for cost saving opportunities! (e.g., Are you claiming NAFTA

Eligible imports? FTA’s being used? Are you using too many

brokers?)

1111

Steps to Building a Compliance Program: Internal Controls

• Corporate Compliance Statement – shows upper management’s buy in

• Customs Compliance Manual – shows awareness of rules and regulations

• Process Map of Customs Operations – shows thoughtful consideration of the totality of an import transaction

• Written Procedures – shows systemic, institutional approach to compliance

• Periodic Internal Reviews (Self-Assessments) – shows commitment to ongoing improvement

• Compliance Training – Ongoing commitment – reduces risk of non-compliant transactions

1212

Written Procedures Should Be:

• Developed for all departments maintaining information relevant to the import process

• Developed in cooperation with the import department and based on feedback from other departments

• User-friendly, easy to follow, and readily available

• Incorporated into normal training regiment• Tested and updated periodically

1313

Self-Testing Of Import Operations Should Confirm:

• What you declared to Custom was accurate– Tariff classification– Duty–preference program– Value (method and seller/buyer

relationship)– Origin– Quantity– Non-dutiable charges

1414

Self-Testing Of Import Operations Should Confirm: (cont’d.)

• What you declared to Customs was complete– Invoice requirements– Statutory additions to transaction value

– Additional payments outside commercial invoice

– Documentary requirements

1515

Sample Review Findings: Value

Common Valuation Issues Discovered by CBP:• Lack of Documentation to Substantiate Claims of Non-

dutiable Charges Such As Buying Commissions and Freight• Price Paid or Payable Is Not Fully Reported• Non-dutiable Charges (NDC) Are Not Actual• Revised Invoice Prices Not Reported to Customs• Failure to Include Assist Costs in Import Values• Additional Payments to Sellers in Excess of Prices Listed on

Invoices • Failure to Invoice Dutiable Charges Such As Royalty Costs

and Selling Commissions• Additions: Royalties, Commissions, Packing, Proceeds of

Resale, and Assists (E.g., Freight Not Included in Assist)

16 16

“It’s all about the $$$”

• A CBP Audit will include a review of Financial Accounts • A good Compliance Program includes periodic review of

such accounts. (This serves to check to ensure all elements of

value are reported to CBP at the time of entry)• Typical accounts to review include:

– Freight on Piece Goods - Interest Expenses– Machinery & Equipment - Quota Payments– Molds - Loan Accounts– Tooling - Mgt. Fees – Commissions– Design Costs– Research & Development– Royalties

17 17

Penalties & Prior Disclosure: Handling Discovered Errors

Good Internal Controls minimize errors....

...But EVERYONE makes mistakes.....

1818

Prior Disclosure

What is A Prior Disclosure?

• It is an Elective Procedure to Minimize or Eliminate section 1592 or section 1593a Penalties by parties involved in import or drawback non-compliance (not applicable to record-keeping non-compliance)

• Operative statute: 19 USC § 1592(c)4• Operative regulation: 19 CFR § 162.74

1919

Civil Penalties & Disclosure

Without Prior Disclosure With Prior Disclosure

Fraud:• up to 100% of the domestic value

Fraud:Penalties for Revenue Loss Violations• 1 times the loss of duties

Gross Negligence:Penalties for Revenue Loss Violations • The lesser of 100% of the domestic value or 4 times the loss of duties

Penalties for Non-Revenue Loss Violations • 10% of the dutiable value

Penalties for Non-Revenue Loss Violations • 40% of the dutiable value

Gross Negligence & Negligence:Penalties for Revenue Loss Violations • Interest on any loss of duties

Negligent Violations:Penalties for Revenue Loss Violations • The lesser of 100% of the domestic value or 2 times the loss of duties

Penalties for Non-Revenue Loss Violations • No penalties

Penalties for Non-Revenue Loss Violations • 20% of the dutiable value

2020

Questions?

Robert J. PisaniPisani & Roll PLLCTel 202.466.0960Fax 877.674.5789

rpisani@worldtradelawyers.comwww.worldtradelawyers.com

2121