Third Annual Customs Update Important Issues You Need to Know

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Third Annual Customs Update -- Important Issues
You Need to Know
Cohen Grigsby Customs Group
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Internal Controls and Compliance Manuals
Megan E. Finkelstein
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• Internal Controls

Compliance Manuals
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How does the Customs mission affect the
facilitation of trade and how does it directly
affect importers?
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• Customs mission prior to 9/11
• Collection of revenue
• Customs mission after 9/11
• Protection against terrorism and weapons of mass
  destruction

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U.S. Customs and Border Protection
Enforcement
Commercial Operations
Inspection
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Internal Controls

• Why are all Customs compliance programs based on
  the assessment of internal controls?
• Customs has determined statistically that
  internal controls are a good predictor of actual
  compliance

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What are Internal Controls?

• Policies
• Procedures
• An organized structure

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Why Do Importers Need Internal Controls?

• Expedite release of merchandise
• Participation in C-TPAT Program and other
  compliance programs
• Otherwise
• Expect delays and questions regarding security
  issues

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• Maintain compliance with Customs laws and
  regulations
• Valuation, classification, recordkeeping, etc.
• Take advantage of free trade programs, duty
  deferral programs and revenue saving
  opportunities
• GSP, TIBs, NAFTA, U.S./American goods returned,
  Drawback, etc.

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• Otherwise
• Costly penalties
• Failure to comply with conditions of the Customs
  Modernization Act Informed Compliance and
  Reasonable Care
• Rate advances
• Possible civil/criminal fraud investigation

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• Focused Assessment Audits (FA)
• Currently top 9000 companies being examined
• Customs regulatory auditors first request at the
  introduction phase of a FA will be to examine a
  companys policy and procedure manual that
  demonstrates their internal controls

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• Otherwise
• Expect entire FA exam
• Results of FA audit may lead to
• Additional collection of duties and fees
• Penalties
• Delays in release of merchandise at entry
• Possible civil/criminal fraud referral to Customs
  enforcement

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• Be pro-active
• Customs compliance requirement
• Increase efficiency ? reduce costs

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• Participation in Importer Self Assessment Program
  (ISA)
• Importers self-assess and assume compliance
  responsibility for their importing procedures
  without Customs oversight
• Must meet specific requirements/guidelines

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• Benefits of ISA Program
• Removal from Customs regulatory audit pool
• FA, Drawback, FTZ, etc.
• Enhanced prior disclosure procedures
• 30 days for submission
• Mitigation penalty factor

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• Greater business certainty
• More accurate data available
• Company control over process
• Less Customs intrusion
• Nationally coordinated through account
  manager/ISA team

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Five Components of Internal Controls

• Control environment
• Risk assessment
• Internal control activities
• Information and communication
• Monitoring

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Control Environment

• Management support
• Corporate Compliance Policy maintained in
  compliance manuals
• Import/export policy and procedure manuals
• C-TPAT manuals
• NAFTA
• Any critical business transaction that requires
  written internal controls

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Risk Assessment

• Evaluate strengths and weaknesses of
  organization/procedures
• Request Importer Trade Activity Request (ITRAC)
  through FOIA

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• Importer Trade Activity Requests are sent to

U.S. Customs and Border Protection Office of
Strategic Trade Analytical Development Division,
Room 901 (Shops) 1300 Pennsylvania Ave.,
N.W. Washington, D.C. 20229 ATTN FOIA Officer

• www.cbp.gov

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• Request must be made by authorized company
  officer or company representative on company
  letterhead and must include
• Importer
• Time period requested
• Indicate that request of made under FOIA
  regulations
• Name/address of third party authorized to receive
  information
• Approximate cost 250-300

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Internal Control Activities

• Compliance manuals
• Policies and procedures
• Must be company/importer specific
• Size dependent on operations and complexity
• AVOID excessive controls

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• Basic topics/control procedures for importing
  compliance manuals
• Corporate compliance policy
• Importing procedures
• Follow a transaction from purchase entry
  liquidation
• Classification
• Value
• Assists, royalties, proceeds, selling
  commissions, packing, freight, etc.

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• Quantity controls
• Trade programs and special duty provisions
• i.e. NAFTA, USGR, TIB, Drawback, GSP, CIBA, etc.
• Recordkeeping
• Training
• Internal reviews/updates

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Information and Communication

• ALL departments within organization MUST
  communicate and share information
• Critical element for internal controls

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Monitoring

• Self policing of procedures
• Internal reviews of procedures and manuals
• Internal reviews - Work in Progress
• Document reviews and corrections

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• Does your company already have internal
  controls/compliance manuals?
• If so-
• Test system for strengths and weaknesses
• Complete risk assessment/analysis
• Importer Trade Activity Request
• Evaluate system/procedures
• Research Customs website and FA
  requirements/process - www.cbp.gov

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Customs Perspective
Less risk to Customs and a good predictor for
future compliance
Good internal controls

• Company gets blueprint for future compliance

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Business Perspective
Good internal controls
Overall better business performance
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Export Controls and Compliance Programs
Bruce H. Chiu, Esq.
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Export Control - Key Concepts

• Export is a privilege, not a right
• Government dictates if, and to whom, you may
  export
• Exporters are required to have a working,
  institutionalized knowledge of the Export
  Administration Regulations (EAR)

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Export Control - Two Main Regimes

• Specifically Designed or Modified for Military
  Use - ITAR/DOS-DDTC
• Dual-Use designed for non-military uses, with
  potential for military adaptation - EAR/DOC-BIS

• Specifically Designed or Modified for Military
  Use - ITAR/DOS-DDTC
• Dual-Use designed for non-military uses, with
  potential for military adaptation - EAR/DOC-BIS

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Four Export Control Analyses

• Dual-Use DOC-Administered Export Controls
• 1. Classification of Product, Service, Technology
• 2. End-Use Analysis
• 3. End-User Analysis
• 4. Destination Analysis

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Layers of Complexity

• Dual-Use DOC-Administered Export Controls
• 1. Classification of Product, Service, Technology
• 2. End-Use Analysis
• 3. End-User Analysis
• 4. Destination Analysis

End-Use Analysis End-User Analysis
Destination Analysis
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Layers of Complexity

• Example - End-User Analysis

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Post-9/11 World

• Cold War threats nation-centric
• Post-9/11 individuals and entities affiliated
  with causes, not nations
• Shifting focus of export-control
• Entity-centric, list-focused export control

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Entity Lists

• 1. Denied Parties List - DOC
• 2. Unverified List - DOC
• 3. Entities List - DOC
• 4. Specially Designated Nationals - U.S. Treasury
• 5. Debarrment List - DOS

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Entity Lists - Compliance Issues

• Fuzzy Matching
• Common Names
• Obligations May Differ Across Lists

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Compliance Programs

• Rising complexity - need better organization
• Establish internal mechanisms to provide checks
  and safeguards at identified key points in order
  processing system
• Enable consistent export compliance
• Streamline export control process and reduce time
  spent on compliance activities

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Compliance Programs

• Bottom Line
• Limit and reduce the risk of inadvertently
  violating export controls, whether they be based
  on end-user, end-use, or destination

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Compliance Programs

• Not a legal requirement
• Cannot be Window Dressing
• If you publish one, better be ready to comply
• Careful consideration and tailoring to the
  realities of your business - sales marketing,
  order processing, ongoing maintenance and support

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Compliance Programs - Key Elements

• Senior Management Commitment
• Establish Management Structure and Organization
  for Export Control
• Accountability / Responsibility
• Integrating with Order Processing at Appropriate
  Points
• Education
• Evaluation

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Compliance Programs - The Key

• Senior Management Commitment
• Establish Management Structure and Organization
  for Export Control
• Accountability / Responsibility
• Integrating with Order Processing at Appropriate
  Points
• Education
• Evaluation

Evaluation Planning
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Compliance Programs - Key Questions

• Types of international business activities
• What do you export?
• Where do you export?
• Deemed export?

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Compliance Programs - Structure

• 1. Administrative Elements
• 2. Screening Elements

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Compliance Programs - Structure

• 1. Administrative Elements
• 2. Screening Elements

1. Administrative Elements 2. Screening
Elements

• Statement of Management Commitment
• Identify Responsible Officials
• Record Keeping
• Training
• Internal Reviews
• Escalation Procedures

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Compliance Programs - Structure

• 1. Administrative Elements
• 2. Screening Elements

1. Administrative Elements 2. Screening Elements

• Product Classification/License Determination
• Entity Lists
• Specialty Screens
• Antiboycott Questions

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Links

• 1. BIS Export Management Systems Brochure
• http//www.bxa.doc.gov/exportmanagement
  systems/Brochure.html
• 2. Sample Audit List
• http//www.bxa.doc.gov/exportmanagement
  systems/pdf/EMSModuleV2.pdf

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Links

• 3. Denied Persons List
• http//www.bxa.doc.gov/dpl/Default.shtm
• 4. Unverified List
• http//www.bxa.doc.gov/Enforcement/
  UnverifiedList/unverified_parties.html
• 5. Entity List
• http//www.bxa.doc.gov/Entities/Default.htm

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Links

• 6. Specially Designated Nationals
• http//www.treas.gov/offices/eotffc/ofac/sdn/
  index.html
• 7. Debarred List
• http//pmdtc.org/debar059intro.htm

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NAFTA How Can NAFTA Be of Benefit to Your
Company!
V. Susanne Cook, Esq.
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• NAFTA

• Key Benefit
• Preferential Duty Treatment available to those
  that qualify under the NAFTA rules of origin as a
  good of the United States, Canada or Mexico

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Burdens

• Record Keeping Requirements
• NAFTA Country-of-Origin Analysis
• Due Diligence and Meeting the Standard of
  Reasonable Care

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A Few Definitions

• Originating means an import qualifies under the
  NAFTA rules of origin as a product of the United
  States, Canada or Mexico
• Good refers to a product that may be
  originating
• Material refers to an input item that is used
  in the production of a good
• Example Refrigerator is the good and the
  refrigeration coil purchased from supplier is the
  material

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How does a good become an originating good?

• Wholly obtained or produced entirely in the NAFTA
  territory (Preference Criteria A generally,
  minerals, scrap, plants and animals).
• Warning Never assume that a material purchased
  in the United States from a U.S. Company may or
  may not be a good of the NAFTA territory.

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How does a good become an originating good?

• Examples
• Copper wire recovered in Canada from scrap
  telephone or electrical wires is wholly obtained
  or produced in Canada regardless of where it was
  originally produced.
• Silver jewelry made in the United States from
  silver mined in Mexico is wholly obtained or
  produced in the NAFTA territory because it is
  made exclusively of a mineral good in Mexico.

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How does a good become an originating good?

• Other Methods
• Tariff Shift in accordance with the NAFATA rules
  of origin
• Tariff Shift plusRegional Value Contact (RVC)
• Made from originating materials (either purchased
  from others or made by the producer)
• Other (e.g. kits plus RVC)

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Tariff Shift
To qualify as originating 1) The
non-originating materials must be properly
classified under the Harmonized Tariff Schedule
when imported into the NAFTA territory 2) While
in the NAFTA territory such material shifts to
another tariff classification sufficient under
the applicable country-of-origin rule and 3) Is
exported to another party in the NAFTA territory.
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Wrinkles De Minims Rule

• Most goods 7 of transaction value of the good
• Some goods 0 foreign value
• Mere dilution (e.g. with water) without
  materially changing the characteristics of the
  good

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Tariff Shift

• Some rules require tariff shift only
• Example Frozen pork meat (HTS 02.03) is
  imported into the United States from Hungary and
  combined with spices imported from the Caribbean
  (HTS 09.07-9.10) and cereal grown and produced in
  the U.S. to make pork sausage (HTS 16.01). The
  Annex 401 rule of origin for HTS 16.01 statesA
  change to heading 16.01 through 16.05 from any
  other chapter.

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Tariff Shift
Since the imported frozen meat is classified in
Chapter 2 and the spices are classified in
Chapter 9, these non-originating materials meet
the required tariff change. One does not
consider whether the cereal meets the applicable
tariff change since it is originating -- only
non-originating materials must undergo the tariff
change.
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Tariff Shift Plus RVC

• Some rules require tariff shift plus RVC
• Some rules require tariff shift only and offer
  RVC rule as an alternative if the tariff shift
  rule is not met

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Definitions for RVC Calculation

• Transaction Value of Exported Good TV
• Included Selling commissions, brokerage fees,
  foreign inland freight and insurance, packing,
  assists, royalties, proceeds of subsequent resale
• Excluded Buying commission, post-importation
  costs, international freight and insurance

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• Value of Non-Originating Materials Used to
  Produce Exported Goods
• Included freight, insurance, packing and all
  other costs to ship product (e.g. duties, taxes,
  fees
• Excluded generally, value of non-originating
  materials used to produce originating materials

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Transaction Value of RVC Calculation
RVC TV-VNM x 100 TV

• TV Method Not Eligible If
• There is no TV (e.g. leasing operation)
• Over 85 of sales are to a related party
• Certain products (e.g. automotive goods)

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Transaction Value of RVC Calculation

• Exporter uses accumulation (rules that allowed
  the producer reduce the value of the
  non-originating materials used in the production
  of the good, by taking into account the
  originating input items incorporated into these
  non-originating materials)
• The good is an intermediate material
• TV is otherwise non acceptable

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Net Cost Method of RVC Calculation

• Net Cost of Exported Product NC cost of all
  materials, labor and overhead
• Included Freight, insurance, packing and other
  costs to get material to producer, entry costs
  (duty, taxes, fees)
• Excluded Sales promotion, marketing after sales
  service, certain interest expenses, packing and
  shipping exported product

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Transaction Value of RVC Calculation
RVC NC - VNM x 100NC
Example An electric hair curling iron (HTS
8516.32) is made in Mexico from Japanese hair
curler parts (HTS 8516.90). Each hair curling
iron is sold for US 4.40 the value of the
non-originating hair curler parts is US 1.80.
The Annex 401 rule of origin for HTS 8516.32
states
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A change to subheading 8516.32 from subheading
8516.80 or from any other heading or A change to
subheading 8516.32 from subheading 8516.90,
whether or not there is also a change form
subheading 8516.80 or any other heading, provided
there is a regional value content of not less
than (a) 60 percent where the transaction
value method is used or (b) 50 percent where
the net cost method is used.
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Transaction Value of RVC Calculation
The first of these two rules is not met since
there is no heading change, therefore the
producer must verify if the curling irons can
qualify under the second rule. In the second
rule the required subheading change is met (from
HTS 8516.90 to 8516.32) so one proceeds to
calculate the regional value content. The
regional value content under the transaction
value method is (4.40 - .80) x 100 59.1
4.40 The hair curler is not considered an
originating good under this method, since the
required regional value content is 60 percent
where the transaction value is used.
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Made from Originating Materials
Example Company imports whole raw bovine skins
(HTS 41.01) into Mexico from Argentina and
processed them into finished leather (HTS 41.04).
The finished leather is then purchased by
Company B to make leather eyeglass cases (HTS
4202.31). The rule of origin for HTS 41.04
states A change to heading 41.014 from any other
heading, except from heading 41.05 through
41.11. The finished leather originates in Mexico
because it meets the Annex 401 criterion.
Assuming the eyeglass cases do not contain any
non-originating materials, they originate since
they are made wholly of a material that is
originating.
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Kits
Example Bicycle kits from Germany are assembled
in Canada and sold in the NAFTA territory. The
bicycles would qualify as originating goods if
they regional value content requirement is met.
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Intermediate Materials

• Refers to
• Self-produced materials
• Meet rules of origin
• Incorporated into the final good

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Common Questions

• Can I switch the RVC Method?
• Exporter may switch from TV to NC (60 days after
  NAFTA verification)
• Exporter may not switch from NC to TV

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Common Questions

• 50 of a key input item is originating and 50 is
  non originating and blended in one storage tank
• Solution Inventory Management System
• Goods or material are fungible
• Must choose specific method
• LIFO
• FIFO
• Specific Identification
• Averaging

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Common Questions

• How do I know that my analysis is correct?
• Advance Ruling System of
• United States - 120 days
• Mexico
• Canada
• Appeal Procedure

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What happens if NAFTA benefits are inaccurately
claimed?

• Level of culpability fraud, gross negligence,
  negligence
• Penalties
• Civil (generally)
• Seizure
• Monetary penalties, depending on level of
  culpability, ranging from

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• Fraud Maximum penalty an amount equal to the
  domestic value of merchandise
• Gross negligence Maximum penalty an amount
  equal to the lesser of (i) domestic value of the
  merchandise or (ii) 4x the duties or if the
  violation did not affect the assessment of
  duties, 40 of the dutiable value of the
  merchandise
• Negligence Maximum penalty an amount equal to
  the lesser of (i) domestic value of the
  merchandise or (ii) 2x the duties or if the
  violation did not affect the assessment of
  duties, 20 of the dutiable value of the
  merchandise.

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What happens if NAFTA benefits are inaccurately
claimed?

• Criminal (generally)
• Maximum of 2 years imprisonment
• Fines
• Seizures
• Prior Disclosure under NAFTA

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NAFTA Enforcement

• Producer/Supplier Verifications
• Questionnaires
• Customs Request for Information
• Red Flags
• Preference Criteria A
• Change from prior origin claim
• Supplier fails verification

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NAFTA Benefits

• Micro Level
• Duty reduction/elimination
• Macro Level
• 1993-2003 U.S. exports to Canada/Mexico
  increased from 142 to 263 billion
• However Trade deficit with Mexico increased
  each year reaching 37.1 billion in 2002

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Recent Developments

• Singapore
• Chile

Future Outlook
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QUESTIONS AND ANSWERS