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.”

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.

Footwear is Fun!

Having made a classification determination regarding the extent of textile fiber on the sole of a client’s shoe recently, I found myself trying on the example the company had sent me. As I admired this shoe on my small foot, I remembered why this case was particularly interesting.

I was exploring the proper classification of footwear which had a sole made out of a rubber and plastic combination. In making this determination, regard is to be given to the material of both the upper sole and the “outer sole,” which, in case it isn’t already obvious, means that part of the footwear (other than an attached heel) which, when in use, is in contact with the ground. [General EN (C) to Ch. 64, HTSUS]

The “outermost sole” of the shoe is the part directly exposed to abrasion and wear. It can consist of any of a variety of materials, inc. leather, rubber, plastic, cork, rope, crepe, wood, etc., have differences in thickness or degrees of flexibility, and have an infinite variety of surface designs. After reading this definition, I took a look at the winter boots I had worn to work and it turned out there was a felt covering on the bottom of the shoe. What a surprise!

Why cover an outermost sole with a textile anyway? Duty savings of course!

A favorable duty rate may be obtained where footwear has an outer sole of textile. In this example of a shoe with a rubber and plastic sole, upon importation it would be dutiable at a rate of 37.5% under HTSUS 6404.19.35. That is, for every $100 worth of shoes imported, $37.50 in taxes, i.e., duties must be paid to US Customs.

Contrast that to a shoe which, upon importation, has a textile material covering the outer sole. This would be dutiable at a rate of 12.5% under HTSUS 6405.20.90, and hence, only $12.50 would need to be paid in duties for every $100 worth of shoes imported. This rule also applies irrespective of the duration for which the textile material will continue to be in contact with the ground.

What matters to US Customs is that the product is introduced into the “stream of commerce” as “entered” (which in everyday language, means brought into the U.S. for consumption, i.e., sale, purchase, use, as opposed to temporarily coming in for say, a trade show), and is a commercial reality in its condition as entered. That is, it is not “entered” as one article in an effort to evade a higher duty rate, only to be modified into something else that will be “consumed.”

For some funny examples, check out Customs ruling HQ 965751 (11/18/02), which is where you will also find some greater detail into the definitions I’ve provided above.

In addition, US Customs is looking at which constituent covers the majority of the outer sole. In Customs ruling HQ 089600 (9/11/91), citing HQ 084713 (8/3/89), US Customs found that the outer sole which had the greatest external surface area in contact with the ground is what should predominate as the outer sole. In the ruling it dealt with plastic "dots" scattered across the sole, which nonetheless comprised the predominant material of the outer sole for tariff purposes due to their ubiquity. The shoe was therefore considered to have a sole made up of a rubber and plastic combination.

I enjoy analyzing footwear. Footwear is fun!

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

"Avoiding Cultural Missteps"

Please join me this afternoon for a presentation on how to avoid "cultural missteps" presented by the California State Bar Association.

This program will address avoiding cultural missteps when working with clients and lawyers in the Middle East, Asia, including China and India, and Europe. The speakers will address their experiences and describe how cross-cultural differences affect the practice of law and business relationships. Drawing on their experiences in international trade, in a Fortune 500 company, and with Sharia law, the speakers will illustrate some of the cultural differences practitioners may come across when working with international clients, partners, and opposing counsel. From this, participants will learn to recognize some potential cultural pitfalls.

Panelists include:

Deanna Clark
Leel Peesapati
Todd Gallinger

For more information and to register, please click here.

Customs Entry and Filing Procedures

Every importer knows that a lack of good entry procedures can lead to delayed, detained, or even seized shipments. Inadvertent classification declarations that lead to additional duty liability are common as well.

Action taken by Customs when this occurs may result in, for example, the issuance of a Notice of Action (Customs Form 29) whereby it applies what it believes is the correct HTSUS number and notifies the importer of the additional duties that must be paid.

The late payment of duties is another common occurrence, so much so that Customs has what I like to call a “parking ticket” approach to addressing the oversight of late payment. This is typically done through an assessment of liquidated damages whereby Customs demands a seemingly large amount of money, or alternatively, allows you to pay a much smaller amount, say $250, provided that it is paid within 60 days of the date of Customs’ notice to the importer. This is known in Customs-ease as the “Option 1” mitigation alternative to payment of the larger liquidated damage amount. This payment may be made through the customs broker or importer.

To give you an overview of Entry Filing, think about it as a two step process. (19 CFR Part 141).

Step 1: Filing an entry that seeks the Immediate Delivery/Release of the shipment (CF 3461), which is done with the shipment Waybill, commercial invoice (or a pro forma invoice when the commercial invoice cannot be produced), packing lists, and such other documentation as is necessary to determine merchandise admissibility.

Keep in mind that while required to produce certain documentation to the Customs Broker, and to Customs on request, most information is transmitted to Customs electronically through the Automated Broker Interface (ABI).

This must be done within 15 calendar days after the arrival of the importing carrier, but will usually be done earlier on vessel shipments (5 days before arrival) and on air shipments, “wheels up” from the foreign airport.

Step 2: Filing a ‘Follow Up’ Entry Summary (CF 7501) that provides greater detail about the shipment along with the duties preliminarily determined to be due (estimated duties.).

This must be filed within 10 working days after the time of entry/release of the goods for delivery under the CF 3461.

For more information on how to fill out the Entry Summary, click here for instructions published by Customs earlier this month.

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

Protecting Intellectual Property: US Customs and Gray Market Goods

Preventing the importation of merchandise that infringes on the intellectual property rights of a United States trademark or copyright owner is one of US Customs’ mandates that it takes very seriously.

Determining who is authorized to import products that have on it the design, labeling, words, or other “work” that belongs to a non-importing party can be tricky. This is because, under most licensing agreements, a party (known as the “licensee”) is only given a limited right to use the “work” of another (known as the “licensor”) on its merchandise. Limitations may include use within a limited timeframe, or on certain types of products only.

Another limitation arises from distribution rights. These provide for the sale and/or distribution of a product within a certain geographical area.

Making a determination as to who has the authority to import articles upon which a protected “work” has been used can therefore become all the more complex when you add to these facts the following additional circumstances:

The lawful production of an article in one location which is then subsequently
(a) sold, and
(b) exported to another location outside of the limited licensed-for zone.

To give you an example in everyday language, this means that if I have permission to sell a good that has party “AA’s” logo on it in the European Union (EU) only, then in theory, I am precluded from selling it in another territory.

Okay, easy enough. But what if that product is lawfully sold within the EU and then that buying party decides to sell it for export to the United States?

Now we’re entering the “gray market” zone… (“doo-do-do-dooo, doo-do-do-dooo…” anyone out there remember the “Twilight Zone”© theme song?)

While preventing the importation of an outright counterfeit article (see the definition below) is a relatively easy concept to grasp, a lesser known concept, known as “gray market goods,” are another type of import that US Customs is on the look out for to intercept and prevent its importation.

A counterfeit trademark is a spurious mark that is identical with, or substantially indistinguishable from, a federally registered trademark. Merchandise imported into the United States bearing marks that are “counterfeit” of a federally registered trademark recorded with CBP shall be seized pursuant to section 526(e) of the Tariff Act of 1930 (19 U.S.C. §1526(e)), as implemented by 19 CFR § 133.21.

An easy way to think about the definition of a “gray market good” is to think of it as a “parallel good,” that is, it is

1) A genuine product (i.e., not a fake or counterfeit)
2) Lawfully made (typically overseas)
3) With the permission of the owner of the “work”
4) Which bears a copyright, trademark, or trade name, and
5) Is imported into the United States
6) Without the authorization of the United States trademark or copyright owner.

US Customs will protect gray market goods of only those copyrights, trademarks, and trade names that are recorded with its agency. This protective status commences from the time of recordation with US Customs of the “work.”

Where US Customs has conferred gray market protection, imported merchandise bearing the protected “work” will be detained and is subject to potential seizure, forfeiture, and of course, penalties, so you want to be sure to have all of your paper work in order to prove that you have been given permission to import products of this kind into the U.S. so that your shipments do not get held up at the border.

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

Happy Holidays!

In case I have any regular readers, I wanted to both wish you all a happy holidays as well as explain where the heck I have been!

Last month I came down with three (3) consecutive colds, one of which included a bout of laryngitis, and all of which, left me out of work for multiple days. I am finally feeling 99% again, but it has been slow coming, and not helped at all with this below-freezing cold weather here on the east coast.

Between dealing with the illnesses, practicing law full time and teaching at F.I.T., I simply did not have much energy left over to dedicate to the blog. This will cease being the case however, come January 2011.

Next month I have a couple of exciting projects I’ll be involved in. One is with the CA State Bar Association as part of their “Cyber Institute,” where myself and two California based attorneys will be speaking in a 1 credit continuing legal education (CLE) program called “Avoiding Cultural Missteps” on January 13, 2011.

The second is with Lawline in New York City on January 14, 2011, also a 1 credit CLE program, where a panel of attorneys will be discussing the Supreme Court’s affirmation this week of the 9th Circuit’s decision in the Omega S.A. v. Costco Wholesale Corporation case dealing with gray goods and copyright protections. I will soon be posting an article describing what “gray goods” are, what the issues had been in the 9th Circuit Court of Appeals, and why it matters to importers. As of the time of this posting, the Supreme Court has yet to release a final revised decision.

Till then, I wish you all a wonderful rest of the year!

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

Customs Brokers and Client Confidentiality

Customs brokers are the intermediary between the importer and the government. They report information about import transactions to US Customs on behalf of an importer, and treat such information as confidential in accordance with 19 CFR Part 111 and under the authority of 19 USC §1641.

Customs brokers have a fiduciary duty to protect client information and are subject to certain record keeping requirements in order to maintain client confidentiality, including:

• The maintenance of records of transactions (19 CFR 111.21)
• To retain records (19 CFR 111.23)
• To make records available for official Customs inspection (19 CFR 111.25)
• To exercise responsible supervision and control over the transaction of customs business (19 CFR 111.28(a)) (see also 19 U.S.C. 1641(b)(4))
• To exercise due diligence in handling customs business matters (19 CFR 111.29(a)); and
• Precluding a broker from entering into an agreement with an unlicensed person to transact customs business if the fees generated from the transaction would inure to the benefit of the unlicensed person (19 CFR 111.36(b))

The current general rule is that without the client’s consent, under 19 CFR §111.24, a broker may not disclose client information to third persons except when required to by a court.

Under the current customs regulations, a broker may not disclose client information to third persons except when given permission to do so by it’s client (by way of a written release), or when ordered to by a court. Should a broker release client information, it is subject to disciplinary action for violating the confidentiality requirements of 19 CFR Part 111.24.

US Customs is now proposing amendments that would allow a broker to engage in information sharing with affiliated third party business entities related to the broker that offer non-customs business services to the broker’s clients. This allowance would be subject to the condition that the client provides its express consent in a written authorization.

Any written authorization must specify exactly what information the broker is allowed to share outside of the brokerage with affiliated entities, or with a party bound by contract to the broker.

Approved services ancillary to “customs business” would include photocopying and scanning for the broker, and messenger/delivery services.

US Customs is accepting comments until December 27, 2010 regarding these proposed amendments. Interested parties must identify each submission by the Docket Number, which is USCBP-2010-0038.

Comments may be directed as follows:

- Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments via docket number USCBP–2010–0038

- Mail: Trade and Commercial Regulations Branch, U.S. Customs and Border Protection, 799 9th Street, NW (Mint Annex), Washington, DC 20229–1179.

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