2023 is more than a brand-new year – it is an opportunity for your company to prioritize supply chain and customs compliance. For some companies, this means filing a prior disclosure with U.S. Customs and Border Protection (CBP). Companies that are frequent importers are seriously considering disclosing entry violations under the condition that Customs will not issue civil penalties against them.
How has your company grown or changed over the past year? How much turnover has there been in entry, logistics, or compliance? Does your company import products that could be classified under more than one of the recently updated HTS codes? What about one of the many variable Antidumping or Countervailing Duty Orders? Are you confident in the basis of the dutiable value reported to U.S. Customs and Border Protection (CBP) for the merchandise? Have you started receiving CF-28’s requesting information on classification, value, or more? You could have some discrepancies in your import reporting to CBP – and if so, the agency can legally go after you for the duties, plus interest, and additional Customs penalties that often reach into the millions for the past five years.
What are Customs Penalties?
The statute – 19 USC § 1592 – provides that Customs can issue civil penalties against an importer for any “attempt to enter or introduce any merchandise into the commerce of the U.S. by means of any document or electronically transmitted data or information, written or oral statement, or act which is material and false, or any omission which is material.” Under the statute, Customs can issue these civil penalties in addition to any loss of revenue to the government as a result of underpaid duties for the past five years, plus interest. The amount of civil penalties depends on the domestic value of the merchandise, the loss of revenue, and the level of culpability established by CBP.
An act or omission is fraudulent if a material false statement, omission, or act in connection with the transaction was committed (or omitted) knowingly, i.e., was done voluntarily and intentionally, as established by clear and convincing evidence, i.e., double invoicing. Customs may assess a penalty that is the domestic value of the merchandise. Note that the domestic value can be different from the entered valued under 19 USC 1401a; domestic value is the price that the merchandise or similar property is freely offered for sale at the time of entry, as described under 19 CFR 162.43.
Customs will find gross negligence where a violation results from an act or acts (of commission or omission) done with actual knowledge of or wanton disregard for the relevant facts and with indifference to or disregard for the offender’s obligations under the statute. This is highly fact specific and often different results on a case-by-case basis, i.e., companies have received gross negligent penalty assessments for lying to their Customs broker about the description of their merchandise that resulted in underpayment of Antidumping duties. Customs may assess a penalty that is the lesser of the domestic merchandise or four times the loss of revenue, or if no loss of revenue, 40 percent of the dutiable value of the merchandise.
Negligence results from an act or acts (of commission or omission) done through either the failure to exercise the degree of reasonable care and competence expected from a person in the same circumstances. In U.S. v. Optrex America, Inc., 560 F.Supp.2d 1326 (Ct Int’l Trade 2008), the U.S. Court of International Trade (CIT) held that the importer failed to exercise reasonable care when it disregarded legal advice from outside trade counsel to obtain a classification ruling regarding its LCD glass panels, resulting in classification errors. However, the CIT held that the importer did exercise reasonable care when it acted on classification advice from outside trade counsel regarding LCD Character Display Modules, where no ruling was advised. For negligence, Customs may assess a penalty that is the lesser of the domestic value or twice the loss of revenue, or if no loss of revenue, 20 percent of the dutiable value of the merchandise.
However, these penalties can be avoided if the company files a Prior Disclosure, as described under 19 USC 1592 and 19 CFR 162.74, where the company discloses any errors and tenders any unpaid duties to the government.
Why Should I Disclose My Customs Violations?
A careful and accurate prior disclosure has many benefits for importers, especially those that import various or complicated merchandise often. Firstly, if there were any errors for the past five years after a review of the company’s entries, a prior disclosure will allow the company to come to the agency first and establish a narrative of inadvertent and accidental error with an intent to comply. This process will not blacklist your company with CBP. Contrary, it will build a transparent relationship with the agency.
Further, the prior disclosure acts as a Customs penalty shield. When a disclosing party initiates the prior disclosure process by filing an initial prior disclosure that identifies the circumstances of a customs violation with CBP before CBP discovers the possible violation and notifies the party of the discovery of the possible violation, then CBP cannot assess the above Customs penalties and will not investigate the company for errors under 1592. More specifically, the party will receive reduced penalties under 19 USC 1592(c)(4)(A) and (B), depending on culpability and loss of revenue. If the violations did not involve fraud, then no penalties will be assessed for unliquidated entries, an If the violations involved fraud, then the Customs penalties that can be assessed are reduced to value of the loss of revenue (i.e., the value of the unpaid duties), or 10 percent of the dutiable value of the merchandise if there is no loss of revenue, which are assessed in addition to any loss of revenue and interest owed.
Prior disclosures to Customs can disclose any errors that could result in material misinformation to Customs regarding an entry of merchandise, such as value, classification, additional duties and application of duty exclusions, free trade agreements, and country of origin declarations. Customs penalties can result from any number of these matters, and the scope of a prior disclosure can include all of these potential violations, which act as a shield to mitigate duties and avoid the intense and costly hassle of a Customs investigation.
New CBP Policies and Practices to Consider Before Filing a Prior Disclosure
CBP has begun to change its procedures and treatment of prior disclosures in practice and policy. CBP issued Internal Directive No. 5350-020A on November 17, 2021, which implemented a number of internal changes in the way that CBP processes prior disclosures and treatment of claims made therein.
- Offsetting Loss of Revenue
When calculating the loss of revenue in a prior disclosure, parties are permitted to offset overpayments of duties against underpayments in certain circumstances. When parties file a disclosure, CBP is now directed to provide a number of documents, one of which is an offset notice with boilerplate language that all disclosing parties must receive according to the new Internal Policy, which states:
“As 19 U.S.C. § 1509(b)(6)(A) requires all entries to be finally liquidated when used for offsetting, CBP will not allow any entry that is not finally liquidated upon date of receipt of this prior disclosure [insert the date of receipt of the prior disclosure] to be used for offsetting (when offsetting is applicable).”
“Entries requiring correction(s) that are not finally liquidated upon receipt of this prior disclosure should be corrected via a Post Summary Correction (for unliquidated entries) or a formal protest (for entries that have been liquidated for up to 180 days).”
“Furthermore, if using statistical sampling to calculate lost duties, taxes, and fees or lost revenue for the purpose of prior disclosure, mixed liquidation status of entries impacts the final approval of offsetting and may invalidate the statistical sampling projections of loss of revenue.”
. More critically, in certain instances where unliquidated entry payments are used to offset the loss of revenue in a proposed statistical sampling, Customs might outright deny the statistical sampling method. Further, any offsetting claims in a prior disclosure are now always referred to RAAAS (Regulatory Audit and Agency Advisory Services). RAAAS may also deny offsetting on any entry that is not liquidated These policies are a detriment to the self-review process, cause a chilling effect on the desire to file disclosure and are mathematically frustrating to maintain an accurate statistical sample of segregated liquidated entries – a sample that changes daily.
We disagree with CBP’s new approach regarding offsetting and question its legality. The statute, 19 USC 1592, does not limit disclosures to only liquidated entries but allows the disclosing party to include unliquidated entries in a disclosure. This requirement places a heavier burden on both the importer and CBP to process numerous entries under possibly three administrative avenues instead on one.
- Statute of Limitations (SOL) – Waivers
CBP prefers that disclosing parties sign SOL Waivers, stating that the party will not raise the SOL defense while CBP reviewed the potential errors disclosed. Pursuant to an update from Internal Policy, in the event that a disclosing party, or any other liable party such as sureties, declines to execute an SOL wavier, the Center is directed to expedite the prior disclosure review and notify the responsible Fines, Penalties, and Forfeitures Office (FPFO) of the results so that the FPFO, in turn, can expedite administrative proceedings. Additionally, if a disclosing party returns to FPFO a SOL Waiver that is modified from CBP’s template SOL Waiver, then the FPFO is directed to escalate the SOL Waiver to Legal Counsel.
Gone are the days of requesting extensive extension of time for a prior disclosure perfection. 19 CFR 162.74 provides that prior disclosures must be completed within 30 days of the initial prior disclosure, with the option of additional 30 day-extensions. However, the activities necessary to effectuate a prior disclosure of 1592 errors requires an intensive documentary and evidentiary review of a company’s entries over a 5-year period, including related records such as proof of payment, contracts, transportation documents, and more, which takes months and even years – especially if an internal ruling request is involved or a complex statistical sample. Nonetheless, CBP modified its extension requests process.
The current directive authorizes FPFO to grant one extension of 60 days without further approval from the Center. Extensions beyond 60 business days must be approved by the Assistant director of Field Operations, Trade. Further extensions requests, even if based on reasonable estimates of efforts and activities necessary to make a complete and accurate disclosure, are under critical review by CBP. In experience, we have seen cases where further extensions under this review have been denied. Companies should seriously consider the timeline restrictions of a prior disclosure that may be developing within the policies of CBP. The biggest takeaway is, after a prior disclosure is initiated, the company should work quickly and diligently to gather the information necessary to justify the claims in the disclosure or alter its timing by filing one perfected prior disclosure. Of course, waiting could be risky because it gives CBP more time to discover the violations.
- Possible disclosure process for CTPAT partners regarding Forced Labor
CBP Director CTPAT Program Manny Garza in a CTPAT-Forced Labor Trade Webinar on January 27, 2023, mentioned that CBP is considering a prior disclosure process for the Customs-Trade Partnership Against Terrorism program members to report forced labor errors with an effective penalty mitigation shield similar to a prior disclosure under Section 1592. Note that CBP can issue penalties under 19 USC 1595a for entries of merchandise that were made using forced labor, which cannot be mitigated by a prior disclosure under Section 1592.
Conclusion
In light of potential or discovered Customs violations in your supply chain, you should seriously consider submitting a prior disclosure to mitigate penalties and avoid investigations. There have been a number of changes in CBP’s policies for treatment of prior disclosures, which should be understood before initiating a disclosure. Before submitting a prior disclosure, companies should consult the advice of outside customs and trade counsel.
