In September 2014, Arent Fox reported about a US court case with which every corporate officer of a company doing business in the United States should become familiar. The decision involves responsibility for compliance with US import regulations which has typically been relegated to a company’s customs and logistics divisions.
The Trek Leather decision rendered by the US Court of Appeals for the Federal Circuit found that a corporate officer of an importer of record could be personally liable for gross negligence penalties where the importer understated the value of the goods.
Which company personnel are potentially subject to this liability? It’s any employee, in addition to senior executives, who creates documents or facilitates documents being used to enter goods into the US commerce. And potential liability extends beyond grossly negligent acts involving imported goods. Under the US customs penalty statute, mere negligent acts with respect to actual entries as well as attempts to introduce goods into the United States are covered. The risks presented by the court decision have been compounded by two recent administrative actions in Washington initiated by US Customs and Border Protection (CBP).
Certain Sensitive/Private Information Proposed to Be Required of Importers of Record
The first action is CBP’s proposal (made in October 2014) to expand the type of information required by a company that has decided to act as an “importer of record” for US import compliance purposes. Many Canadian resident companies exporting into the United States choose this import status for a number of valid reasons, including having more control over the import process and its import transactions. However, Canadian companies should be reminded that this status renders them legally responsible for ensuring that legal goods are imported in accordance with US import laws, including the filing of all required import documents and payment of any duties, taxes, or fees.
The proposed changes to Form 5106 would expand the type of information required to be submitted by importers of record in order to capture far more detailed and sensitive company information about the company structure and its corporate managers. The new form would request information on the company’s banking relationships, such as the title and contact information, as well as passport number and Social Security numbers for its corporate officers.
The purpose of the changes is to provide CBP better information to track down importers that do not honour their customs obligations, including the payment of customs duties and fees owed. It also has not gone unnoticed that more personal data is being requested for corporate officers at a time when the Trek Leather decision reveals that individuals are potentially subject to personal liability for errant customs transactions.
The business community has expressed serious concerns about this proposal as an overreach on the grounds of privacy issues and the consequences if sensitive and proprietary company and officer information regarding both the company and individual officers were compromised or hacked. In response to the proposed changes, there has been some discussion regarding creating a “two-track” system, where non-resident US importers would be required to disclose more information than their US resident importer counterparts. While companies located in high-risk countries, such as China, are the intended targets of this suggestion, Canadian non-resident importers could be affected depending on the wording of any such change.
Changes to Customs Audit Procedures
The second issue is the recent changes to the CBP audit program, all of which should be fully implemented for audits commencing in 2015. Since 2003, CBP has conducted regular onsite audits of a company’s transactions and practices relating to its US import transactions under the same basic format. In 2014, CBP announced changes to its audit format and highlighted certain priorities. Last month, CBP formally rolled out the use of the “import surveys,” which purportedly will be streamlined audits regarding only particular issues but, for all intents and purposes, should be considered as audits by the companies that are selected for such reviews.
What are CBP auditors now focusing on as a result of these changes? Their new audit framework will continue the assessment of a company’s systemic approach to US import compliance, but will utilize more entry sampling to do so. The audits also will place more emphasis on the five key areas within a selected company’s organization — control environment (e.g., the knowledge level and support within a company); how or whether a company assesses its import risk points; deployment of control activities through policies and procedures; how a company communicates knowledge of US import regulations within the organization; and how a company institutes test controls internally. While the two major audit areas have traditionally covered tariff classification and customs valuation, the emphasis has been expanded to include matters that CBP has identified as Priority Trade Issue (PTI) areas, which include:
- Free trade agreements (FTAs)/duty preference programs;
- Intellectual property rights (IPR) protections;
- Antidumping/countervailing duties (AD/CVD); and
- Textiles and wearing apparel.
If an importer is shown to demonstrate high volume activity or poses significant risk in one or more PTIs, such importer faces an increased likelihood that it will be selected for a custom audit by CBP. PTIs may also be the subject of the aforementioned import surveys if CBP believes a company’s import profile presents a high risk for a particular PTI.
For many importers that have experienced a US customs audit, however, the most burdensome aspect has been the production and analysis of a company’s financial records. CBP has emphasized in its rollout of the new audit format that an importer’s financial records will continue to be an integral part of demonstrating the company’s compliance with US customs laws for its import transactions. In making this evaluation, CBP auditors pay particular attention to a company’s accounts, including those that relate to imports and some that may not appear to relate to imports at first blush.
A company tapped for a customs audit can expect a thorough examination of its accounting and financial records. CBP auditors must identify potential cost elements affecting value by obtaining an understanding of the nature of transactions with foreign vendors and the prices paid for items imported from them. The auditors will also examine whether there are other payments that impact the declared value and the circumstances under which they are made, how payments and other activities are accounted for, and which accounts are used to record transactions that are relevant to value and whether/how transactions can be traced at the customs entry level.
The risk exposure to a company facing a customs audit can mean monetary penalties, increased inspection rates at the border, and disruption of supply chains and more audits in the future, if non-compliance is discovered. In addition, non-compliance can lead to a tarnishing of a company’s corporate brand in the US marketplace. Washington policymakers recognize that companies now are more global and that trade rules have become more complex. This complexity often results in unintended non-compliance, even if importers have developed internal processes and procedures to address these risks.
The Arent Fox International Trade practice can work with companies to conduct an internal import risk assessment review to best position a company before any audit decision is taken by CBP. Our approach is to work with a company and all its relevant service providers to determine vulnerability or risk exposure and to best position the company towards compliance with US import regulations.