Importers are chosen for a Focused Assessment (FA) audit by US Customs for any number of factors related to, inter alia (i.e., “among other things” in everyday language), the type of products imported, the gross dollar value of annual imports, or the way in which entry summary declarations have been prepared.
Where Customs finds that an “unacceptable risk” exists following the completion of the first part of an FA, known as the “Pre Assessment Survey” (PAS), it is not uncommon that it will recommend that the importer prepare a Compliance Improvement Plan (CIP). This plan is prepared by the importer and is supposed to address what types of corrective action the company will take in order to correct the deficiencies identified by Customs, as well as to ensure future compliance.
Examples of deficiencies that could be dubbed an “unacceptable risk,” include that of an incorrect classification, and hence, the issue regarding the payment of the correct amount of duties arises, the lack of inclusion in the dutiable value of something known as an “assist,” which could be the additional cost of a hanger provided to the foreign vendor by the importer, or a failure to have the requisite approvals in the entry packet for the usage of another company’s logo on a product.
The rule is that where an importer elects to implement a CIP, it has a conditional period of six months from the date of the audit report to implement the CIP. Be aware that although this is the rule, a CIP may be asked of an importer where only the draft conclusions to the PAS exists, and the importer is still awaiting the final results from the PAS.
Since Customs does not consider that unacceptable risks are necessarily eliminated until the CIP has been implemented and shown to be effective, preparing the CIP once deficiencies have been identified officially in the draft PAS, and more importantly, implementing internal control procedures once a “risk” area has been identified so as to resolve it, are both areas to promptly take action on.
For more information on customs audits generally, click here.
Questions/comments? Post below or email me at clark.deanna@gmail.com
Showing posts with label focused assessment. Show all posts
Showing posts with label focused assessment. Show all posts
Friday, December 30, 2011
Thursday, January 20, 2011
Welcome to a New Year of Customs Audits!
While just a few weeks into the new year, I can’t help but notice that US Customs is off to the races with its auditing programs, one of which I will write about here known as a “Focused Assessment.”
As shown by the definition above, and probably presumed by most importers when it receives the phone call indicating that an audit will be occurring in the (near) future, when US Customs comes in to do one, it already suspects some wrong doing on the part of the importer.
This does not mean, however, that an importer was knowingly or intentionally engaged in “risky behavior,” which can take many possible forms, such as classifying merchandise with an erroneous tariff number, or failing to add into the dutiable value of a product an item supplied by the importer (to its manufacturer) for incorporation into the merchandise ultimately imported, which is commonly referred to as an “assist.”
An example of this would be a women's sleepwear importer supplying bows to its vendor for attachment to robes or night gowns that it imports. Under US Customs regulations pertaining to “valuation” (which in everyday language, is the methodology for determining the dutiable value of imported merchandise), both the cost of the article supplied by the importer AND the cost of the freight to ship it to the vendor must be added to the invoice value of the imported merchandise. This of course, can be a tricky thing to calculate but alas, it is not the subject of this blog post so I will continue with my discussion on focused assessments. (If you have a valuation question, feel free to email me).
There are three (3) distinct phases to a focused assessment.
1. Pre-Assessment Survey: An evaluation of a company’s internal controls over US Customs related operations
2. Assessment Compliance Testing: “Transaction testing” used to measure compliance and/or to determine a loss of revenue (i.e., an amount of duties that the government believes should have been paid on certain importations), and
3. Follow-up Review: Verification of a company’s corrected action
The primary areas US Customs focuses on during an assessment are valuation, classification, anti-dumping/countervailing duties, transshipment and intellectual property rights. Secondary areas for assessment include, foreign trade zone activity, special trade programs, such as NAFTA (North American Free Trade Agreement) and special duty provisions, which are those found in Chapter 98 of the HTSUS (Harmonized Tariff Schedule of the United States).
Key features of a focused assessment include:
a) The identification of imports that represent the greatest risk of trade noncompliance
b) The evaluation of the adequacy of a company’s internal control system, and
c) Methods for improving future compliance by identifying risk and reducing it.
But how does US Customs go about evaluating the adequacy of a company’s internal control system? It does so by looking at the following five (5) specific components of a company.
The first is what US Customs refers to in its focused assessment literature as a company’s “Control Environment,” as this apparently “sets the tone of an organization, influencing the control consciousness of its people.” I must admit, even though US Customs attempts to keep importers informed, language such as this “control environment” definition leave little to be understood.
What it is really getting at however, is the question of “What procedures are in place to maintain checks and balances within a company across company activities?” And, given that US Customs is making this inquiry, this question is focused on a company’s import activities.
The second is “Risk Assessment,” that is, Customs recognizes that multiple external and internal risks are faced by each company, and that these risks must be identified and analyzed. It therefore wants to see that a company has made this identification of potential risks across company activities.
The third is known as, “Control Activities,” which are the policies and procedures in place to ensure that management directives are implemented.
The fourth area US Customs is looking at is categorized as “Information and Communication” wherein the identification and summation of information that supports all other control components is communicated throughout a company’s personnel and those entities it works with (that have reason to be communicated to, with respect to “controls.”)
The fifth and final area, is that of “Monitoring,” which evaluates a company’s internal systems.
An evaluation of these five components occurs in the pre-Assessment Survey portion of the focused assessment. Depending on the results of this survey, determines where US Customs goes next with its auditing actions.
In my experience, these audits are time consuming, disruptive to regular business, and may leave an importer in a sleep deprived state. All the more reason to stay both informed and on top of US Customs compliance guidelines.
Questions/comments? Post below or email me at clark.deanna@gmail.com.
The Focused Assessment program is a systematic risk-based approach to auditing in which the auditing team evaluates a company’s Customs and Border Protection (CBP) related internal controls to determine the likelihood of non-compliance and assess “risk.”
As shown by the definition above, and probably presumed by most importers when it receives the phone call indicating that an audit will be occurring in the (near) future, when US Customs comes in to do one, it already suspects some wrong doing on the part of the importer.
This does not mean, however, that an importer was knowingly or intentionally engaged in “risky behavior,” which can take many possible forms, such as classifying merchandise with an erroneous tariff number, or failing to add into the dutiable value of a product an item supplied by the importer (to its manufacturer) for incorporation into the merchandise ultimately imported, which is commonly referred to as an “assist.”
An example of this would be a women's sleepwear importer supplying bows to its vendor for attachment to robes or night gowns that it imports. Under US Customs regulations pertaining to “valuation” (which in everyday language, is the methodology for determining the dutiable value of imported merchandise), both the cost of the article supplied by the importer AND the cost of the freight to ship it to the vendor must be added to the invoice value of the imported merchandise. This of course, can be a tricky thing to calculate but alas, it is not the subject of this blog post so I will continue with my discussion on focused assessments. (If you have a valuation question, feel free to email me).
There are three (3) distinct phases to a focused assessment.
1. Pre-Assessment Survey: An evaluation of a company’s internal controls over US Customs related operations
2. Assessment Compliance Testing: “Transaction testing” used to measure compliance and/or to determine a loss of revenue (i.e., an amount of duties that the government believes should have been paid on certain importations), and
3. Follow-up Review: Verification of a company’s corrected action
The primary areas US Customs focuses on during an assessment are valuation, classification, anti-dumping/countervailing duties, transshipment and intellectual property rights. Secondary areas for assessment include, foreign trade zone activity, special trade programs, such as NAFTA (North American Free Trade Agreement) and special duty provisions, which are those found in Chapter 98 of the HTSUS (Harmonized Tariff Schedule of the United States).
Key features of a focused assessment include:
a) The identification of imports that represent the greatest risk of trade noncompliance
b) The evaluation of the adequacy of a company’s internal control system, and
c) Methods for improving future compliance by identifying risk and reducing it.
But how does US Customs go about evaluating the adequacy of a company’s internal control system? It does so by looking at the following five (5) specific components of a company.
The first is what US Customs refers to in its focused assessment literature as a company’s “Control Environment,” as this apparently “sets the tone of an organization, influencing the control consciousness of its people.” I must admit, even though US Customs attempts to keep importers informed, language such as this “control environment” definition leave little to be understood.
What it is really getting at however, is the question of “What procedures are in place to maintain checks and balances within a company across company activities?” And, given that US Customs is making this inquiry, this question is focused on a company’s import activities.
The second is “Risk Assessment,” that is, Customs recognizes that multiple external and internal risks are faced by each company, and that these risks must be identified and analyzed. It therefore wants to see that a company has made this identification of potential risks across company activities.
The third is known as, “Control Activities,” which are the policies and procedures in place to ensure that management directives are implemented.
The fourth area US Customs is looking at is categorized as “Information and Communication” wherein the identification and summation of information that supports all other control components is communicated throughout a company’s personnel and those entities it works with (that have reason to be communicated to, with respect to “controls.”)
The fifth and final area, is that of “Monitoring,” which evaluates a company’s internal systems.
An evaluation of these five components occurs in the pre-Assessment Survey portion of the focused assessment. Depending on the results of this survey, determines where US Customs goes next with its auditing actions.
In my experience, these audits are time consuming, disruptive to regular business, and may leave an importer in a sleep deprived state. All the more reason to stay both informed and on top of US Customs compliance guidelines.
Questions/comments? Post below or email me at clark.deanna@gmail.com.
Monday, April 26, 2010
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?
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.
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
“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
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