U.S. Customs Audits/Focused Assessment – Insight from 2 US Customs Assistant Field Directors

“We bring out the facts”
“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

Duty-Free Shopping and the Bonded Warehouse

Duty-free shopping is something I have indulged in around the world, including in Holland, Egypt, Russia, and more than a dozen other countries. It's not that I am a shop-a-holic, in fact I am far from such a person. The reason I like it is because of the savings I incur by making these purchases, such as I had done with the Burberry socks I happen to be wearing right now.

It turns out that a Duty-Free Store (DFS) is a bonded warehouse, which means that I have had some familiarity with a bonded warehouse long before I was aware of its technical term. A DFS is used for selling conditionally duty-free merchandise for use outside of the Customs territory, that is sold or owned by a proprietor, and delivered to an airport for exportation by individuals departing from the Customs territory or foreign destinations. The same holds true when departing a country by boat as well, which I experienced when I left Estonia for Finland.

Conceptually a bonded warehouse is similar to that of a Foreign Trade Zone, albeit, on a different scale and with certain differences, such as a time limitation of 5 years, unlike that of goods placed in an FTZ, which may remain there indefinitely.

A Customs bonded warehouse is a building or other secured area in which imported dutiable merchandise may be stored, manipulated, or undergo manufacturing operations without payment of duty for up to 5 years from the date of importation.

I had not been aware of the multitude of different classes of bonded warehouses until recently. It turns out that there are 11 different classes which include:

1. A premises owned by the Government for the placement of imports subject to examination or seizure, or those pending final release from Customs custody;

2. An importer's private warehouse whose exclusive use is for the storage of goods belonging, or consigned to, the proprietor;

3. A public bonded warehouse whose exclusive use is for the storage of imported merchandise;

4. Bonded tanks for the storage of imported bulk liquids, bonded sheds or yards for keeping bulky or heavy goods, or corrals/stables that provide limited enclosure of imported animals;

5. Warehouses for the smelting and refining of metal-bearing materials for domestic consumption or exportation;

6. Warehouses for the repacking, sorting, or otherwise changing the condition (but not manufacturing) of imported goods, done at the expense of the proprietor under Customs supervision;

7. Bonded bins, elevators or sections of a building for purposes of storing grain;

8. Warehouses for the manufacture of articles made up of imported materials (in whole or in part) subject to internal revenue tax, and those for the manufacture of cigars, whether for exportation or domestic consumption, made in whole of tobacco imported from one country.

9. Duty Free Stores;

10. Bonded warehouses for merchandise sold conditionally duty-free on board an aircraft (like those cute toy commercial airline models), otherwise known as international travel merchandise; and,

11. Those bonded warehouses established for the storage of merchandise not claimed or entered for 15 days after the arrival in the U.S., which are otherwise known as “General Order” goods.

Since duty is not collected on merchandise in bonded warehouses until withdrawn for consumption, an importer may have better control over its money until the duty is paid upon its withdrawal. In addition, if no domestic buyer can be found, the merchandise can be exported without any obligation by the importer to pay duties.

In order to establish a bonded warehouse, a written application must be made to the local Customs port that describes the premises, the class of warehouse to be established, and its location. An application must be accompanied by a blueprint of the space to be bonded, along with a certificate verifying that it is a suitable warehouse for fire insurance purposes, signed by the President or a Secretary of a board of fire underwriters.

Authority for establishing a Customs bonded warehouse is set forth in 19 USC §1555 with the corresponding regulations in 19 CFR Part 19.

Questions/comments? Post below or email me at clark.deanna@gmail.com

Vessels Arriving at U.S. Ports to Face New Laws Mandating the Use of Cleaner Fuels

As an avid environmentalist, I thought it would be interesting to share what I learned about vessel emissions and upcoming changes to air pollution regulations to address the threat of increasingly toxic ports and worsening coastal conditions.

I attended this program which was led by Laurie Sands, Esq., of Wolff & Samson P.C., fellow member of the Maritime and Admiralty Law Committee at the New York County Lawyers Association.

Laurie explained that thanks to Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL), countries that are members of the International Maritime Organization (IMO) can choose to designate Emission Control Areas (ECA) in an effort to reduce the impact of air pollution on its coastal areas.

ECA designation means that countries have direct control to regulate nitrogen oxide (NOx) and sulfur oxide (SOx) air pollution emissions from vessels that come into its territorial waters and pull into its ports.

The U.S. and Canada made a joint application last year, which has been approved, and has a tentative effective date in August 2012.

Operation of the ECA (for the U.S.) means that vessels will have to switch from the lower grade fuel used for the long journey across the high seas to a cleaner fuel when 200 miles off of the territorial sea baseline in waters adjacent to the Pacific, Atlantic, Gulf Coast and Hawaiian Islands. I was curious to know if switching fuels via this pumping method that Laurie described might raise new water pollution issues, but it did not seem to be an area of concern (yet).

What was, and is, at issue however, are the increased costs of doing business on the part of the vessel operators and the parties that use them. Other issues such as adequate time to switch fuels, given the exigencies of trans-ocean carriage and delivery deadlines on shore, not to mention the potential need to purchase additional engines or equipment, were also causes for concern.

I inquired as to whether there had been any discussion regarding enforcement of the fuel change at the line of demarcation, as I know that US Customs together with the US Coast Guard conduct this type of activity (for other enforcement reasons) on vessels out on the territorial seas of the U.S. No one at the event had as yet heard of any such dialogue, however, it would not surprise me if it did become an enforcement activity as the ECA regulations develop more fully (which are likely to be promulgated under the Clean Air Act).

As for other ECA designated territories, the Baltic Sea and North Sea are the only others. While not an official ECA, the EU likewise has standards in place for reduced sulfur fuels at its ports.

Not surprisingly, California already has state regulations that require ships to change to cleaner fuels off the California coast - go Cali! (it’s my home state). I’ll be looking forward to developments as summer of 2012 approaches on this both interesting and important topic.

Questions/comments? Post below or email me at clark.deanna@gmail.com

OWIT-NY Event This Monday: Climate Change & Trade

As Vice President to the Board of the NY Chapter, I'd like to invite you to attend the Organization of Women in International Trade's upcoming event entitled, "CLIMATE CHANGE: PICKING UP THE PIECES AFTER COPENHAGEN."

Come listen to a panel discussion featuring international environmental policy makers and conservation experts:

Norine Kennedy
VP, Energy and Environmental Affairs for the
U.S. Council for International Business in New York

and

Duncan Marsh
Dr of International Climate Policy for the
Nature Conservancy in Washington, DC.

(As detailed in our published flyer about the event):

Two years of U.N. negotiations to develop comprehensive international action on climate change after 2012 hit a brick wall in Copenhagen last December, with Heads of State managing to salvage a political agreement in the desperate final hours. Climate change remains a pressing issue, and the business community continues to seek predictability for its long term investments in cleaner technologies and energy sources in developed and developing countries. Making the transition to more climate friendly and efficient forms of energy clearly depends on the right market signals, policies and engagement on the part of all sectors of society.

How will the international community resume the difficult task of finding a workable and adequately resourced framework for post 2012 initiatives to reduce GHGs, adapt to climate change impacts and boost innovation and funding, particularly for large developing countries?

What roles can the U.S. and other major economies play in pushing a “reset” button in the international negotiations, or through alternate channels?

Where can environmental organizations and the business community add the most value in designing and supporting an ambitious and workable framework for international action in the years ahead?

Date: Monday April 5th, 2010

Time: Networking and refreshments at 6:00pm

Program commences at 6:30 pm and concludes by 8:00pm.

Location: Law offices of Baker & McKenzie at the Grace Building, 1114 Avenue of the Americas (between Fifth and Sixth Avenues), New York, New York. The entrance is on 42nd Street directly across from Bryant Park.

Cost: $20 for OWIT-NY members*, students, and government employees

$25 non-members

*MEMBERS PLEASE NOTE: Any OWIT-NY member accompanied by an importer, exporter, or freight forwarder will be awarded a free pass (valued up to $25) to a future OWIT-NY event.

To register for this event please CLICK HERE.
Online registration is available up to 24 hours before the event. If you miss the on-line registration, you can choose to pay by cash or a check at the door provided there is still space available. Please note that the event is limited to 45 people.

Stay tuned for more OWIT-NY event invites:

May 17 - 21 World Trade Week NYC

June 9th: "Processing Cargo at the Port of New York/Newark" featuring U.S. Customs and Border Protection Chief Kevin H. McCabe.

Don't forget to keep up to date with OWIT-NY activities and international trade news onTwitter.com/OWITNY


OWIT-NY takes photographs at its events and may post those photographs on its website and publish the photographs in its newsletter. If you do not want your image used in this fashion, please send an email to me at owitnysecretary@gmail.com with Photo Exclusion in the subject line.