Informed Compliance Customs Penalties Recordkeeping Texas Brokers Forwarders

Informed Compliance, Customs Penalties & Recordkeeping Texas Brokers & Forwarders Annual Conference El Paso, Texas September 25, 2008 Robert J. Pisani & Roll PLLC 1629 K St. NW Suite 300 Washington, DC 20006 Tel 1. 202. 466. 0960 Fax 1. 877. 674. 5789 rpisani@worldtradelawyers. com www. 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 2

CBP & Import Challenges • • • 326 Sea, Land 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 3

CBP Priority Trade Areas • • Textiles/Wearing Apparel Intellectual Property Rights Trade Fraud Import Safety Agriculture Revenue Anti-Dumping/Countervailing Duties 4

Recent Customs Enforcement Initiatives (or “Importing is not for the meek!”) Current CBP trend is toward greater trade enforcement • 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 5

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 6

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 7

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) 8

Key Relationships that Affect Trade Compliance 9

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? ) 10

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 11

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 12

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 13

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) 14

“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 15

Penalties & Prior Disclosure: Handling Discovered Errors Good Internal Controls minimize errors. . . . But EVERYONE makes mistakes. . . 16

Customs Enforcement Actions • Customs inspections and examinations of entry documentation and/or merchandise • Detention of merchandise • Seizure of merchandise • Civil Penalties – Primary enforcement tool = 19 USC § 1592 – Penalties apply regardless of revenue impact – Not exclusive remedy • Liquidated Damages • Criminal Penalties 17

Elements of a 19 USC § 1592 Violation (Civil Penalty) • • • Entry or attempted entry False statement, omission or act Materiality – No longer simply revenue impact – Trade statistics are material Culpability – fraud, gross negligence, or negligence – Fraud = A knowing and willful material false statement, omission or act – Gross negligence = Actual knowledge of, or a wanton disregard for the offender’s obligations under the statute – Negligence = A failure to exercise the degree of reasonable care expected from someone in similar circumstances Five-year statute of limitations (19 USC § 1621) 18

Prior Disclosure • • An elective procedure that permits a party to disclose a violation of section 1592 to obtain reduced penalties. A valid disclosure involves full disclosure of the circumstances of a violation before or without knowledge of the commencement of a formal Customs investigation of the disclosed violation. The Mod Act requires that commencements be evidenced by a “writing. ” A “formal investigation” is defined as commencing on the date recorded in writing by a Customs officer - i. e. , the date on which the Customs officer had reason to believe that a violation exists. Section 162. 74 of the customs regulations provides specific definitions for commencement of the formal investigation as well as what is meant by “knowledge of the investigation. ” 19

Prior Disclosure What is A Prior Disclosure? • It is an Elective Procedure to Minimize or Eliminate section 1592 or section 1593 a 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 20

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 21

Recordkeeping Requirements and Customs’ Authority to Review

Does Customs Have Authority To Request Records Related To An Entry? Pursuant to 19 USC § 1509 • Customs may legally examine, or cause to be examined, upon reasonable notice, any record that — – Is required by law or regulation for the entry of merchandise (regardless whether presentation was required for entry). • Recordkeeping 101: – 5 years retention period – What records are required? – How must they be stored/maintained? – What if we don’t have a required record? 23

What Type Of Records Must Be Maintained? • Records that pertain to importation and are made or kept in the normal course of business, including records relating to the: – entry of merchandise into the customs territory of the U. S. ; • tariff classification, valuation, and country of origin – transportation and storage of merchandise; – drawback claims; – All duty preference claims (GSP, CBI, IFTA, ATCA, etc. ) – NAFTA claims (including NAFTA Certificates of Origin); – Chapter 98 special program declarations; – payment records or other financial records supporting the declared value of imported merchandise – any other relevant import documents (EPA, FDA, USDA, etc. ). 24

Description Of Records To Be Maintained • All records or information required for the entry of merchandise or otherwise relating to the customs laws must be maintained, including: – statements, declarations, documents; – books, papers, correspondence; – accounts and financial data; – technical data and product information; – electronically stored or transmitted data and information; – computer programs needed to retrieve electronically stored data and information; and – other “(a)(1)(A)” list records. 25

What Is The (a)(1)(A) List? • The Mod Act, 19 U. S. C. § 1509(a)(1)(A), required Customs to compile a list of all entry records required by law. • The (a)(1)(A) list is comprehensive, and some records are entry and circumstance specific. • Customs has provided an Informed Compliance Publication (“ICP”) entitled “What Every Member of the Trade Community Should Know About: Records and Recordkeeping Requirements. ” • A copy of the (a)(1)(A) list is included with the Recordkeeping ICP and is included in 19 C. F. R. Part 167. 26

Who Is Subject To Recordkeeping Requirements? • Generally, any owner, importer, consignee, importer of record, entry filer, or other person who: – imports merchandise into the customs territory of the United States, – files a drawback claim, – transports or stores merchandise carried or held under bond, or – knowingly causes any of the above. 27

Who Is The Responsible Party(ies) for Recordkeeping? • Customs Focused Assessment guidelines suggest that the Import/Customs Compliance Manager, Finance and Accounting Department Managers, Engineering and R&D, and Transportation and Warehouse Managers are all responsible for ensuring some Customs entry records and information. • Audit trail – Customs expects an importer to be able to track and tie import entry records to financial and payment records, and back again. 28

How Long Must Records Be Kept? • Unless otherwise required, all records must be kept: – for five years from the date of entry, or – for five years from the date of the activity which required creation of the record. • Notable EXCEPTIONS: – records relating to drawback shall be kept for three years from payment of claim; – records relating to informal entries shall be kept for two years from the date of entry; and – other agency recordkeeping requirements (e. g. , FAA, FDA). – reconciliation entries, to be kept a period of five years from the date of the reconciliation entry, or approximately 6 1/2 years from the date of the original entry. 29

Must Original Documents Be Kept? • Unless a recordkeeper has adopted an alternative storage method pursuant to 19 C. F. R. § 163. 5 (and provided written notification to and received approval from Customs), the recordkeeper must maintain original records. • “Original” records are records in the condition in which they were made or received (whether they are paper or electronic). • Regardless of how documents are kept, all records must be capable of production upon lawful request from Customs. – For example, care must be taken in system updates or changes to maintain integrity and accessibility of past records. 30

What is an Original Record? • HRL 115616, dated April 8, 2002 • Whether a customs broker who receives a power of attorney via facsimile may store and produce the faxed document as an original? • Because the term “original records” is defined in 19 C. F. R. § 163. 1(h) as “records that are in the condition in which they were made or received by the person responsible for maintaining the records, ” documents received in facsimile format qualify as “original records. ” 31

Should My Customs Broker Keep My Records? • As a general rule, no. • Customs will allow the appointment of a thirdparty recordkeeper only if: – designated third-party is an authorized agent of the importer (mere relationship as customs broker is insufficient and importer remains fully responsible), and – the duly authorized agent has otherwise received certification that its recordkeeping systems meets all statutory and administrative requirements for certification under the program. 32

May a Related Company Maintain an Importer’s Records? • HRL 115248, dated August 28, 2001. • Casio Corporation of America (CCA) stored the entry records of its related sister corporations that entered goods under their own import identification number. • Customs held that it was permissible for CCA to store the other companies’ records provided that the records are produced in a timely manner. • Any penalties would be issued to each importer, not CCA. 33

Time for Production of Records • Generally, an importer is requested by Customs to retrieve and produce any record within 30 calendar days of receipt for the demand or within any shorter period prescribed by Customs when the records are required in connection with a determination of admissibility or release of the merchandise. • If the demand for record production cannot be met timely, the importer must notify Customs in writing, before the expiration of the production period. • Include an explanation for the inability to comply and time period of extension requested. • Request for documentation can come in the form of an informal oral request, or in a written request for information or administrative summons. 34

Penalties For Failure To Comply With Demand For Records • For a willful failure to produce records upon request, the penalty per release will be the lesser of $100, 000 or 75% of appraised value. • For a negligent failure, the penalty per release will be the lesser of $10, 000 or 40% of appraised value. • Plus, Customs may deny duty-free or duty reduced status. – Customs can reliquidate an entry if within 2 years notwithstanding the finality of liquidation. NOTE: There is no prior disclosure provision in the recordkeeping penalty statute. 35

Non-penalty Violations • Penalties will not be issued if: – Records were lost as a result of an Act of God or other natural disaster – Requested information is substantially complied with by the submission of other documentary evidence – Requested information was previously presented and retained by Customs. 36

Questions? Robert J. Pisani & Roll PLLC Tel 202. 466. 0960 Fax 877. 674. 5789 rpisani@worldtradelawyers. com www. worldtradelawyers. com