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A new report from JPMorgan lays out common — but costly — customs mistakes.
Marie Leone, CFO.com | US
February 22, 2008
U.S. Customs laws are fairly straightforward. But that hasn't helped the myriad companies that have run afoul of U.S. Customs requirements — and wind up paying millions of dollars in fines and sometimes losing trade privileges as a result — says a new report by JPMorgan Global Trade Services, the bank's logistics and trade finance consulting arm.
Ever-changing importing regulations already keep corporate compliance teams busy, says Susan Pomerantz, vice president of the unit's Trade Management Consulting practice. Add stepped-up efforts to crack down on violators to the mix, and watch company resources stretch significantly.
As an example, consider the heightened scrutiny over the textile and apparel industry. In 2007, U.S. Customs authorities conducted 66 audits on textile importers — a 57 percent increase in audit activity — and recommended additional revenue collection of $5.6 million. Meanwhile, the government initiated 1,905 reviews of entry documents, resulting in 959 detained shipments and 314 seized shipments worth $48 million just for violating China quota restraints.
While many companies understand some of the financial risk of importing, "the majority do not understand the compliance aspects of trade and how such regulations can impact their business," Pomerantz told CFO.com. In the past, import compliance efforts focused more on elements such as product classification, country of origin, and product value. But given the global focus on terrorism and product safety, compliance concerns have been compounded with new security and safety regulations, she adds.
Still, companies are tripped up on basic compliance tenets. Witness a recent agreement struck between the American government and a U.S.-based camera maker. According to the report, the camera company paid $20 million to settle violations stemming from $60 million worth of imports that were incorrectly labeled as "Made in Hong Kong." The goods, it turns out, were manufactured in China.
Companies often mistakenly believe that their exposure is limited to the customs duties, writes Pomerantz in her report. "But that's just not the case. Customs takes a very different view."
She explains that U.S. Customs authorities use the value of the imported merchandise when determining liability, and then sometimes assess penalties based on that amount. That means that an importer paying a 2 percent duty faces a maximum potential liability of 102 percent, assuming no criminal sanctions are levied.
Companies also are unclear about the statute of limitation regarding material misstatements or omissions made to U.S. Customs authorities. That's because of a misconception about what it means to release cargo. The report contends that cargo is often released with minimal information when a Customs broker files a so-called "immediate delivery permit" and posts a bond. After that, it can take several months for authorities to process detailed information and accept the cargo as filed (a process called liquidation).
But if the government identifies a long pattern of improper behavior on the part of the importer, agents may revisit previously liquidated imports and assess additional duties or penalties for up to five years after the release of the imports. So, for example, a company that pays a 2 percent duty and imports $10 million of product per year could, in theory, face $51 million (five years of value plus duty) in potential exposure.
Many companies never fully grasp the idea that importers are responsible for what is reported on the customs entry — regardless of what is recorded on the invoice. It is not uncommon for a mismatch to occur between the invoice amount and the transaction value, says Pomerantz. For instance, overseas suppliers could undervalue invoices, thinking that they are doing their customer a favor. Or the importer may have provided tooling or molds to their supplier that may increase the value beyond what is stated on the invoice.
Whatever the reason, U.S. Customs officials are more interested in the transaction value than what is printed on the invoice, asserts Pomerantz. In an audit, Customs authorities will look at an importer's accounting records to see what payments were made to overseas suppliers and reconcile those with the amounts reported on the entry documents. And don't expect the government to levy penalties against the seller that prepared the invoice because U.S. regulators don't have much power outside of the United States, says Pomerantz.
Similarly, an importer remains fully accountable for submissions made on its behalf by brokers. A customs broker does not share responsibility or liability with the importer, and in virtually all cases, the broker is the importer in the eyes of U.S. Customs authorities. As a result, the importer is fully responsible for the work — including the mistakes — of the broker. What's more, importers should not rely on brokers to keep entry records. In fact, companies are required to keep a copy of all correspondences related to their import transactions for five years.