Earlier this month, U.S. Customs and Border Protection (CBP) issued a memorandum to the ports to remind import specialists about the proper use of CBP Form 28 Request for Information and CBP Form 29 Notice of Action. The memorandum stemmed from the inconsistent use among the ports and misuse by import specialists who were issuing these notices for purposes for which the notices were not intended.
In the memorandum, the ports were advised that it was appropriate to issue a CBP Form 28 to an importer when there were questions about admissibility, classification or valuation of the imported goods. CBP can also request information about the imported merchandise, such as brochures, descriptive language, blueprints and samples. In addition, CBP can seek proof of payment information or affidavits about manufacturing to determine eligibility of special tariff program, for example. In other words, if the entry summary package contained insufficient information about the imported merchandise, CBP can request information by issuing a CBP Form 28 to the importer.
On the other hand, the ports were instructed not to continue to use CBP Form 28 for a variety of purposes. First, for example, the ports are not to issue a Form 28 to notify the importer that CBP commenced a formal investigation “as a matter of enforcement policy, not a matter of law.” Instead, CBP instructed the import specialists to notify an importer of such an investigation either by letter on CBP letterhead, or issuing a CBP Form 29.
Additionally, import specialists are not permitted to use Form 28 to request proof of a properly executed power of attorney. When requesting such proof of a valid power of attorney, the ports were advised to seek such proof in writing by submitting an individualized letter on CBP letterhead, or in person during a broker compliance visit.
Finally, the memorandum reminded the ports to avoid warning importers about penalties or investigations For example, CBP does not want import specialists to state that failing to provide the information requested could lead to penalties under 19 U.S.C. § 1592. Similarly, import specialists should not state that “this office is investigating the classification of…” when CBP has not really started an investigation. CBP is concerned that using this type of language will lead to fewer prior disclosures and defeat the goal of informed compliance.
Tuesday, June 28, 2011
Tuesday, June 21, 2011
Importer Needed Assist in Court to Help with His Half Million Dollar Assist Problem
On June 15, 2011, the U.S. Court of International Trade (CIT) found that both importer Trek Leather, Inc. and the company’s president and sole shareholder, Harish Shadadpuri, were grossly negligent in violation of 19 U.S.C. § 1592 for the failure to report fabric assists in the dutiable value of imported men’s suits. Although it is expected that the defendants will appeal the CIT’s decision, if the decision stands, the defendants are jointly and severally liable to U.S. Customs and Border Protection in the amount of $45,245.39 plus interest in unpaid customs duty and $534,420.32 in penalties. Maybe the defendants are lucky – Customs had sought damages in the amount of over $2.3 million for fraudulently omitting the value of the assists on the entry documentation.
How did we get here? Trek is an importer of men’s suits. Mr. Shadadpuri, through the corporate entity, purchased fabric that he provided to the foreign manufacturer who incorporated the fabric into the suits that were later imported by Trek into the United States. In August 2004, the import specialist investigated Trek and discovered that Trek consistently neglected to declare the assists in the transaction value of the imported suits. The problem for the defendants is that two years earlier, Mr. Shadadpuri had also failed to declare assists for another company he owned, Mercantile Wholesale, Inc. Mercantile had paid approximately $46,000 in unpaid duty and interest for its failure to include the assist in the dutiable value, but Customs did not seek penalties. Apparently, Mr. Shadadpuri did not learn his lesson.
Customs alleged that Mr. Shadadpuri, as the owner of both Mercantile and Trek, should have known to include the value of the assists in the value of the imported suits. In failing to do so, Customs instituted an action against Trek and Shadadpuri, alleging that (1) they committed fraud by knowingly and intentionally omitting the value of the assists, (2) in the alternative, they were grossly negligent in omitting the value of the assists and (3) that Shadadpuri could be held personally liable.
This decision is significant for several reasons. First, although Trek was the importer of record and is a corporation and separate entity from Shadadpuri, the court found that Shadadpuri as the sole owner of Trek was personally liable for the back duty and the penalties. That means that if his company does not have the money to pay the penalties, he must pay it personally with his own assets—his bank account, house, car—anything he owns to pay off the debt to Customs. It is one thing if the company you own goes out of business; it is entirely another thing when you are not protected by the corporate veil. This should serve as a wakeup call to small and privately-owned importers.
Second, not having internal controls in place to ensure that assists are captured in transaction value can lead to big problems with Customs. Even if Customs did not seek penalties in the amounts of $500,000 + (grossly negligent) or $2.3+million (fraud), paying $40,000+ in unpaid duty and interest in one lump sum, as opposed to over the course of shipments, is not always easy when a company may not have the cash flow. Moreover, the goods have already been sold, making it impossible to recoup the additional duty from the customer.
Third, this case cautions an importer that once Customs discovers you have made a material error, particularly one that affects the value of goods and thereby the amount of duty collected, an importer would be wise not to make the same mistake again! The reason Customs and the court threw the book at the importer in this case was because Shadadpuri made the same mistake just two years earlier and admitted to the import specialist that he knew that Trek should have declared the assists. Shadadpuri’s credibility was questioned.
Finally, Customs is stepping up enforcement of importation activities. Customs considers assists a red flag issue for importers and will continue to pursue those that do not declare them. Customs has shown that it will even go after an importer for fraud, if the facts support it. This could lead to penalties large enough to put a company out of business and if nothing else, also leads to large legal bills that probably could have been avoided.
Moral of the story: declare assists, put internal controls in place and if Customs calls saying it is investigating you, say nothing and immediately contact customs counsel.
The case can be found at:
"http://www.cit.uscourts.gov/slip_op/Slip_op11/11-68.pdf">
How did we get here? Trek is an importer of men’s suits. Mr. Shadadpuri, through the corporate entity, purchased fabric that he provided to the foreign manufacturer who incorporated the fabric into the suits that were later imported by Trek into the United States. In August 2004, the import specialist investigated Trek and discovered that Trek consistently neglected to declare the assists in the transaction value of the imported suits. The problem for the defendants is that two years earlier, Mr. Shadadpuri had also failed to declare assists for another company he owned, Mercantile Wholesale, Inc. Mercantile had paid approximately $46,000 in unpaid duty and interest for its failure to include the assist in the dutiable value, but Customs did not seek penalties. Apparently, Mr. Shadadpuri did not learn his lesson.
Customs alleged that Mr. Shadadpuri, as the owner of both Mercantile and Trek, should have known to include the value of the assists in the value of the imported suits. In failing to do so, Customs instituted an action against Trek and Shadadpuri, alleging that (1) they committed fraud by knowingly and intentionally omitting the value of the assists, (2) in the alternative, they were grossly negligent in omitting the value of the assists and (3) that Shadadpuri could be held personally liable.
This decision is significant for several reasons. First, although Trek was the importer of record and is a corporation and separate entity from Shadadpuri, the court found that Shadadpuri as the sole owner of Trek was personally liable for the back duty and the penalties. That means that if his company does not have the money to pay the penalties, he must pay it personally with his own assets—his bank account, house, car—anything he owns to pay off the debt to Customs. It is one thing if the company you own goes out of business; it is entirely another thing when you are not protected by the corporate veil. This should serve as a wakeup call to small and privately-owned importers.
Second, not having internal controls in place to ensure that assists are captured in transaction value can lead to big problems with Customs. Even if Customs did not seek penalties in the amounts of $500,000 + (grossly negligent) or $2.3+million (fraud), paying $40,000+ in unpaid duty and interest in one lump sum, as opposed to over the course of shipments, is not always easy when a company may not have the cash flow. Moreover, the goods have already been sold, making it impossible to recoup the additional duty from the customer.
Third, this case cautions an importer that once Customs discovers you have made a material error, particularly one that affects the value of goods and thereby the amount of duty collected, an importer would be wise not to make the same mistake again! The reason Customs and the court threw the book at the importer in this case was because Shadadpuri made the same mistake just two years earlier and admitted to the import specialist that he knew that Trek should have declared the assists. Shadadpuri’s credibility was questioned.
Finally, Customs is stepping up enforcement of importation activities. Customs considers assists a red flag issue for importers and will continue to pursue those that do not declare them. Customs has shown that it will even go after an importer for fraud, if the facts support it. This could lead to penalties large enough to put a company out of business and if nothing else, also leads to large legal bills that probably could have been avoided.
Moral of the story: declare assists, put internal controls in place and if Customs calls saying it is investigating you, say nothing and immediately contact customs counsel.
The case can be found at:
"http://www.cit.uscourts.gov/slip_op/Slip_op11/11-68.pdf">
Friday, June 10, 2011
CBP Finalizes Harmonized Data Set for Automated Commercial Environment
On June 9, 2011, U.S. Customs and Border Protection (CBP) announced the final Participating Government Agencies (PGA) Message Set for the Automated Commercial Environment (ACE). ACE is the U.S. commercial trade processing system designed to (i) automate border processing, (ii) enhance border security, (iii) expedite international trade and (iv) provide a platform for information sharing between industry and government. The PGA Message Set is a harmonized set of information needed by federal agencies to allow imported cargo to enter the country.
According to the ACE 101 Publication dated June 2011, 26 PGAs currently use ACE. The June 9th press release did not specifically name the final PGAs. We submitted an inquiry to CBP and will report the list of final PGAs once we receive confirmation from CBP. However, according to the International Trade Data Service, the following are examples of the federal agencies slated for ACE integration:
• Animal and Plant Health Inspection Service (APHIS) of the Department of Agriculture
• International Trade Administration-Import Administration (ITA) of the Department of Commerce
• Food and Drug Administration (FDA) of the Department of Health and Human Services
• U.S. Fish and Wildlife Service (FWS) of the Department of Interior
According to Cindy Allen, Executive Director of the ACE Business Office, “The PGA Message Set will expedite legitimate trade by providing a single window through which the trade community can efficiently supply required data electronically through the Automated Commercial Environment.” She also touted the progress made on ACE, since its inception, during the American Association of Exporters and Importers (AAEI) Annual Conference in New York on June 6th. For example, CBP introduced a link from the ACE Portal to the Importer Security Filing (ISF) Portal for importers, brokers, carriers and surety accounts. CPB has established approximately 20,000 ACE portal accounts since June 2003.
Currently, data is submitted manually to PGAs through paper forms, rather than electronically or automatically. The submission of paper to an agency is obviously labor intensive and less efficient in time and money than submitting information electronically. Once the technology is completed, likely at the end of 2011, information that is now provided only to CBP will also be provided electronically to PGAs. The PGA Message Set is expected to streamline data submission.
General information about ACE, can be found at http://www.cbp.gov/xp/cgov/trade/automated/modernization/ace/.
According to the ACE 101 Publication dated June 2011, 26 PGAs currently use ACE. The June 9th press release did not specifically name the final PGAs. We submitted an inquiry to CBP and will report the list of final PGAs once we receive confirmation from CBP. However, according to the International Trade Data Service, the following are examples of the federal agencies slated for ACE integration:
• Animal and Plant Health Inspection Service (APHIS) of the Department of Agriculture
• International Trade Administration-Import Administration (ITA) of the Department of Commerce
• Food and Drug Administration (FDA) of the Department of Health and Human Services
• U.S. Fish and Wildlife Service (FWS) of the Department of Interior
According to Cindy Allen, Executive Director of the ACE Business Office, “The PGA Message Set will expedite legitimate trade by providing a single window through which the trade community can efficiently supply required data electronically through the Automated Commercial Environment.” She also touted the progress made on ACE, since its inception, during the American Association of Exporters and Importers (AAEI) Annual Conference in New York on June 6th. For example, CBP introduced a link from the ACE Portal to the Importer Security Filing (ISF) Portal for importers, brokers, carriers and surety accounts. CPB has established approximately 20,000 ACE portal accounts since June 2003.
Currently, data is submitted manually to PGAs through paper forms, rather than electronically or automatically. The submission of paper to an agency is obviously labor intensive and less efficient in time and money than submitting information electronically. Once the technology is completed, likely at the end of 2011, information that is now provided only to CBP will also be provided electronically to PGAs. The PGA Message Set is expected to streamline data submission.
General information about ACE, can be found at http://www.cbp.gov/xp/cgov/trade/automated/modernization/ace/.
Thursday, June 2, 2011
It’s How Much in Duty?
Many importers believe mistakenly that the price of their goods is simple to determine: cost of goods (manufacture plus materials), general expenses, profit, duty and fees. What happens when the duty bill turns out to be higher than anticipated and the goods are already sold? This can happen in three common ways:
(1) the importer did not know that there was anti-dumping duty on the products imported;
(2) the importer brought the goods in conditionally duty-free under a duty preference program, but then the duty-free treatment was denied by Customs and
(3) the importer misclassified the products.
How do we avoid these problems? Due diligence and internal controls.
First is the situation where an importer ships goods that are subject to an anti-dumping duty order (ADD) and the importer did not realize it at the time of entry. How can this happen? Here is an example. There is an ADD order on petroleum wax candles from China. An importer contracts with a Chinese manufacturer for soy wax candles, assuming that soy wax candles are outside the scope of the ADD order. Post entry of the soy wax candles, Customs sends a CBP Form 28 Request for Information, asking for a sample and description of the candle. Customs tests the sample and determines that the candles are 99% soy wax and 1% petroleum wax. Because the candles contain petroleum wax, and are Chinese-origin, they are subject to ADD.
You may ask how this happened. The importer relied on the manufacturer’s oral guarantee that the candles were 100% soy wax. However, the importer never tested the candles prior to importation—he simply accepted the manufacturer’s statement. The importer should have tested the candles prior to importation to ensure that they were 100% soy wax. If the importer knew that they were not 100% soy wax, he could have (1) priced the candles to account for the ADD, (2) sourced the candles from a different country or (3) prepared and submitted a scope ruling request to the Department of Commerce to try to obtain a ruling stating that candles that contain only 1% petroleum wax, which is considered de minimis, should not be within the scope of the order.
Next is the situation where an importer brings the goods in duty-free under a duty preference program, but then the duty-free treatment is denied by Customs. Let’s say the importer is a jewelry company that sources jewelry in India. Some jewelry imported from India is conditionally duty-free under the Generalized System of Preferences (GSP).
Customs issues a CPB Form 28 Request for Information, asking for an explanation of the manufacturing process in India, including information about where the gold is sourced and the processing steps taken in India. The jewelry company cannot obtain this information from the Indian manufacturer. Customs denies the GSP claim. Jewelry that was duty-free under GSP is no longer entitled to the duty preference and thus, the importer must pay duty on the imported jewelry. The importer could have avoided this situation had the company obtained the proper records from the manufacturer at the time it purchased the jewelry. Recordkeeping is an important part of good internal controls.
Last is probably the most common situation—the importer misclassified the goods. A supplier of rolls of polyurethane misclassified the goods, thinking the goods were duty-free only to find out after the goods were imported and sold that they were classified under a different provision that had 6.5% duty. The potential liability is large: (1) the importer owes duty plus interest on the previous entries; (2) the importer may be subject to penalties and (3) the goods have been sold and thus, the importer cannot recoup any of the increased duty costs.
This can occur when an importer does not conduct annual internal reviews of the company’s import operations and does not conduct regular post entry reviews. Both annual review and post entry reviews are considered best practices by Customs and are a necessary part of the exercise of reasonable care.
Don’t be surprised and find yourself asking, “It’s how much in duty?”
(1) the importer did not know that there was anti-dumping duty on the products imported;
(2) the importer brought the goods in conditionally duty-free under a duty preference program, but then the duty-free treatment was denied by Customs and
(3) the importer misclassified the products.
How do we avoid these problems? Due diligence and internal controls.
First is the situation where an importer ships goods that are subject to an anti-dumping duty order (ADD) and the importer did not realize it at the time of entry. How can this happen? Here is an example. There is an ADD order on petroleum wax candles from China. An importer contracts with a Chinese manufacturer for soy wax candles, assuming that soy wax candles are outside the scope of the ADD order. Post entry of the soy wax candles, Customs sends a CBP Form 28 Request for Information, asking for a sample and description of the candle. Customs tests the sample and determines that the candles are 99% soy wax and 1% petroleum wax. Because the candles contain petroleum wax, and are Chinese-origin, they are subject to ADD.
You may ask how this happened. The importer relied on the manufacturer’s oral guarantee that the candles were 100% soy wax. However, the importer never tested the candles prior to importation—he simply accepted the manufacturer’s statement. The importer should have tested the candles prior to importation to ensure that they were 100% soy wax. If the importer knew that they were not 100% soy wax, he could have (1) priced the candles to account for the ADD, (2) sourced the candles from a different country or (3) prepared and submitted a scope ruling request to the Department of Commerce to try to obtain a ruling stating that candles that contain only 1% petroleum wax, which is considered de minimis, should not be within the scope of the order.
Next is the situation where an importer brings the goods in duty-free under a duty preference program, but then the duty-free treatment is denied by Customs. Let’s say the importer is a jewelry company that sources jewelry in India. Some jewelry imported from India is conditionally duty-free under the Generalized System of Preferences (GSP).
Customs issues a CPB Form 28 Request for Information, asking for an explanation of the manufacturing process in India, including information about where the gold is sourced and the processing steps taken in India. The jewelry company cannot obtain this information from the Indian manufacturer. Customs denies the GSP claim. Jewelry that was duty-free under GSP is no longer entitled to the duty preference and thus, the importer must pay duty on the imported jewelry. The importer could have avoided this situation had the company obtained the proper records from the manufacturer at the time it purchased the jewelry. Recordkeeping is an important part of good internal controls.
Last is probably the most common situation—the importer misclassified the goods. A supplier of rolls of polyurethane misclassified the goods, thinking the goods were duty-free only to find out after the goods were imported and sold that they were classified under a different provision that had 6.5% duty. The potential liability is large: (1) the importer owes duty plus interest on the previous entries; (2) the importer may be subject to penalties and (3) the goods have been sold and thus, the importer cannot recoup any of the increased duty costs.
This can occur when an importer does not conduct annual internal reviews of the company’s import operations and does not conduct regular post entry reviews. Both annual review and post entry reviews are considered best practices by Customs and are a necessary part of the exercise of reasonable care.
Don’t be surprised and find yourself asking, “It’s how much in duty?”
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