The United States is the largest consumer of imports in the world. U.S. Customs and Border Protection (“CPB” or “Customs”) is charged with enforcing the laws that regulate these imports. CBP focuses its enforcement on four main themes:
- Accuracy of information supplied for tariff assessment purposes when goods enter the United States;
- Identification of product and payment sources to enforce anti-money laundering laws;
- Counter-terrorism measures; and
- Border enforcement of U.S. agency regulations on imports and exports.
A failure to act with “reasonable care” to comply with the laws that Customs enforces can lead to fines as great as four times the amount of the duty owed — and even seizure and forfeiture of imported merchandise.
Classic Customs Obligations
All imported goods must be declared to CBP upon importation. Duties owed on imports are usually based on the value of the goods and are owed to the U.S. government by the “importer of record.” Make sure you pay attention to who the importer of record is when you negotiate with foreign sellers, particularly in multi-party transactions, so you are not blindsided if you find that you are importing a product with a duty that just increased 300 percent because of an anti-dumping penalty. Duties are determined using the Harmonized Tariff Schedule of the United States (“HTSUS”) and based on three factors: the classification of the good, its value and its country of origin.
- Classification of the Good: Importers must classify all merchandise according to the HTSUS. Classification consists of designating the most appropriate and specific description of the imported good, as categorized by type, kind, composition or use, found in the HTSUS. Classifications are based on the Harmonized Commodity Description and Coding System, which is used by most countries. The classification assigned to a good is associated with specific rates of duty that apply to different countries of origin and, occasionally, to different circumstances of importation (like under a free trade agreement).
- Value of the Good: Importers are required to designate the values of their goods. Because most duties are assessed as a percentage of the value of the product, U.S. law requires importers to apply a uniform method of valuation. The most common form of valuation is the “transaction value” method, defined as the total price paid to the foreign vendor when a good is sold for exportation to the U.S., excluding actual international freight and insurance costs, but including commissions, royalties, assists, proceeds, and packing. Valuation of imported goods is critical for determining whether an import is subject to anti-dumping or countervailing duties, which are imposed on products being imported at prices that are unfairly low or particularly harmful to a domestic industry.
- Country of Origin of the Good: All imported articles must be legibly marked with country of origin, defined as the country of manufacture, production or growth. Depending on the country of origin, a good may qualify for free or reduced duty rates in accordance with a free trade agreement, such as the North American Free Trade Agreement or a bilateral agreement, or the Generalized System of Preferences, which benefits developing countries. Goods from certain countries are subject to quota restrictions or additional tariffs because of anti-dumping or countervailing duty penalties.
The Customs Modernization Act, passed in 1993, changed the landscape of customs law, shifting the burden of customs compliance to the importer. Importers must conduct due diligence and use reasonable care to accurately report the classifications, values and countries of origin of imported goods. Although customs brokers and other experts can assist in making these determinations, ultimately an importer’s responsibility to report accurately will not be discharged by its reliance on outside assistance. Importers are further obliged to maintain and make available information and records of customs-related activity for five years from date of entry.
In addition to requiring the payment of duties, CBP requires importers to file entry documentation. An importer has 10 days to file the required documents after Customs releases its goods. Because the importer determines and reports the classifications, values and countries of origin of goods, Customs may require post-entry verification of importers’ assessments.
The Sarbanes-Oxley Act of 2002 mandates that publicly traded companies have compliance systems in place that deal with the taxes that they pay. Federal law establishes that duties are taxes, so companies should implement the same level of compliance measures that are in place for internal revenue taxes to assure accuracy in duty payment.
Intellectual Property and Sanctions Enforcement
CBP’s expansive constitutional authority to search people and goods at the border presents a unique opportunity for law enforcement. CBP helps to enforce a lot of laws that are conveniently enforced at the border, including intellectual property rights and economic sanctions. This role is growing as more and more goods are imported from Asia, and U.S. companies are looking for ways besides litigation to prevent counterfeit products from entering the country. U.S. intellectual property holders can register trademarks with CBP for protection.
Intellectual Property Rights. Customs compares goods entering the country to a database of trademarks that businesses in the U.S. have registered and asked Customs to watch for in counterfeit goods. When Customs finds goods with counterfeit trademarks, CBP issues a seizure notice and the importer must petition to avoid destruction of the goods. These enforcement activities often accompany a search and seizure at the importer’s business. Often the importer is unaware of the violation if the importer ordered the goods through an agent or from a website. There are similar enforcement means to stop the importation of goods infringing trade names and copyrights. And, Customs can block goods infringing U.S. patents from entering the country pursuant to exclusion orders that patent holders obtain from the U.S. International Trade Commission.
Economic Sanctions. CBP also is charged with preventing goods that are subject to economic sanctions implemented by the Office of Foreign Assets Control (OFAC) in the Treasury Department from entering the U.S. Customs is skilled at identifying carpets from Iran, cigars from Cuba, and other products that are illegal to trade for foreign policy reasons, like certain rough diamonds.
Import Compliance Program Nirvana
In light of U.S. trade law’s emphasis on accuracy and compliance, companies that import regularly should establish a series of internal controls and policies to prevent inadvertent violations. A Company needs:
1. An internal or external audit of its policies and procedures to determine its risk level;
2. An updated Compliance Manual with procedures for employees to follow to ensure compliance;
3. A Corporate Policy to set the tone at the top and protect the company; the U.S. government believes this is a crucial element of any compliance program; and
4. Training so employees can spot potential violations. Training serves as a mitigating factor.