“We're skeptical”
“If it's not documented it's a problem.”
– Alan Brosnick, US Customs Assistant Field Director, US Customs Office of Regulatory Audit
I recently went to a CLE (continuing legal education) seminar at the US Court of International Trade entitled, “The Do's and Don'ts of Customs Audits: A Practical Guide From Inside and Outside.” The comments by the auditors, Alan Brosnick and William Lynch, both Assistant Field Directors of US Customs Office of Regulatory Audit, shed some light on what US Customs is interested in finding out during an audit, and more importantly, it revealed their skeptical attitude towards importer compliance and disclosures.
A brief discussion was had on the array of audits that make up one half of US Customs audits, which includes (1) broker assessment audits, (2) agricultural audits (e.g., re FDA and USDA product recalls), and (3) compliance issue audits, such as an “inability to pay” audit (which is where an importer states that it does not have enough money to pay, e.g., a penalty, and Customs, not believing them, goes ahead and audits their financial records – which had likely already been provided to Customs when asserting an inability to pay claim...), and lastly, some upcoming audits not currently in effect, including the bonded warehouse and foreign trade zones audits dealing with inventory audits.
The majority of the discussion however, centered on “Focused Assessments,” an importer auditing procedure, that singularly comprises the other 50%.
US Customs began by explaining that it has roughly 400 auditors and 1000 attorneys, and the auditors are subject to what are known as “generally accepted government auditing standards.”
Prior to the commencement of an audit (i.e. prior to visiting an importer's premises), US Customs does a review of the last 3 years of an importer's activities, talks to the Import Specialist at the port(s) where the merchandise is typically entered, checks for prior penalty cases, and generally researches where any other problems may have been identified. This, together with the importer's operational history, is known as the “control environment,” and it sets the initial tone for the focused assessment.
One of the first steps involved is that an importer must fill out an auditing questionnaire. “Red flags” that may trigger concern on the part of an auditor is if an importer answers questions with responses such as, “Oh, my broker handles it,” especially if there are multiple brokers, or if Customs observes that the level of expertise on the part of the Import Manager is lacking. After all, as stated by Mr. Brosnick, US Customs is asking what type of knowledge does the Import Manager have? Does the company request binding rulings? Consult with legal counsel? Have monitoring activities?
US Customs wants to see that the design of an importer's internal control structure is adequate for its particular business.
A major area of importance regarding the control environment, is the way that an importer conducts its risk assessment and how it acknowledges those risks to US Customs. US Customs wants to see that an importer is aware of not just its identified risks, but also those which may be coming up due to a change, such as the use of a free trade agreement, an upcoming antidumping or countervailing duty rate increase on the imported product, or a new licensing issue. The identification of risks also involves health and safety issues. At the end of the day, US Customs expects that the risk control activities established by an importer are equal to the identified risks.
That being said, US Customs does not want to see in a company’s compliance manual a mere recitation of US Customs regulations and publications. A manual can be kept short, but it must be on point in terms of the company’s business and import activities.
Internal communications were also an important aspect highlighted by the US Customs auditors. The Import Department must communicate with the Logistics, Licensing and Legal departments, and especially so when considering a new product.
In terms of entries to audit, Customs chooses what are called “sample selections.” Customs tries to pick out shipments based on volume and, if possible, at least one shipment from each factory an importer purchases from. There is also a “matrix” Customs uses to identify risk areas and compares an importer's internal accounting against that of US Customs own importation records.
In addition, the auditors ask the Import Specialist where there have been importation issues in the past as Customs is concerned about any error it finds, especially where an importer claims to be monitoring its internal controls. This is because since US Customs views the sample selection as a “snapshot” of an importer's importing practices, it raises the question as to whether an error is a repetitive and systemic problem, or just an isolated incident.
If there is a misunderstanding between the auditors and the importer, it is recommended that the importer reach out to the Assistant Field Director.
The auditors made no bones about being skeptical of an importer generally, and even more so when errors were found. The auditors recommended that when one is found, to provide US Customs with a quick response. In addition, if the error is an old one which had been repetitive, they want to see that an importer took corrective action and that in implementing this course of action, the error either subsided or ceased altogether. When corrective is not taken, then Customs may consider doing a “statistical sample,” which is an audit of 50-200 samples where US Customs goes through all records (note – this is majorly invasive), as opposed to 15 to 20 samples like in a Focused Assessment.
In terms of time frames, the auditors claimed that while they try to get the audit done in a year, the time for completing an audit is based upon receiving a “quick response” from the importer. Of course, no mention was made of auditing time frames for a small importer versus a larger one…
Contrary to what the auditors said however, other speakers on the panel pointed out that focused assessments can go on for multiple years, with one being aware of a focused assessment going on its 6th year, with some issues still remaining outstanding - zoiks! I can tell you from my own experience with focused assessments, that a 1 year time frame is more of a fantasy than a reality.
A warning sign, according to another panelist (that assists importers through this process), was that a call from US Customs confirming the name and address of your location was a tip-off that a Customs audit would be commencing within a year. This panelist also suggested that in reference to the auditing questionnaire that must be completed, to expand the questionnaire into a broader format so that it can be passed around to different in-house departments, like Accounting, Production, Licensing, etc., so that problems can be identified prior to meeting with Customs, and coordination as between the departments can be made.
Additional advice was that at the opening conference with US Customs, you set out the framework for communications, time frames, and request that all responses be treated confidentially. Be sure to also insist that any questions US Customs has for you are provided in writing.
Want to avoid being the subject of a focused assessment? Check out US Customs Importer Self Assessment Program.
Questions/comments? Post below or email me at clark.deanna@gmail.com
