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Compliance: what are the trade risks (Part 2)

by [email protected]

In 2008, while I was still working for U.S. Customs Border Protection (CBP) on international trade enforcement, information kept arriving from other governments, as well as from the U.S. import community, alleging that textile products were being undervalued on the entry documents submitted to Customs.

Some importers were buying products from foreign suppliers at well below the market price. Producers were able to provide deflated prices in collaboration with importers to under-invoice products for Customs duty purposes. Simply stated, lower invoice prices meant lower duties paid the U.S. government. This undervaluation also put compliant companies at a significant disadvantage, in some cases to the point of bankruptcy. They simply could not compete in this fraudulent environment.

Approximately 40% of the duties collected by CBP involve textile products. The incentive to cheat by circumventing the payment of duties is high because, with the exception of products under anti-dumping orders, textile products have some of the highest applied duty rates.

The challenge for my team was to validate these allegations. Since companies in China collectively represent the largest supplier of textile products to the U.S. market, we started by isolating data for shipments declaring China as the country of origin. Once the data was gathered, a scientific statistical sample was created.  This sample was then analyzed and 180 companies were identified for site visits. In addition, a selection of two of their import transactions were subjected to review and audit.

Deployment of Customs personnel to company premises resulted in highlighting several problems with the importing process. In approximately 55% of the companies visited, serious compliance problems were identified. These included:

— Non-existent companies acting as importers;

— Identity theft;

— Counterfeit documents;

— Lack of documentation to support claims;

— Significant undervaluation; and

— Customs broker violations

The projected loss of revenue was difficult to assess because of the lack of documents, and because some of the “companies” actually did not even exist. However, the statistician approximated the loss of revenue at $1 billion.

In addition, without a real corporate presence there was no way to take any enforcement action. It is impossible to penalize a ghost. It is also hard to feel comfortable that the supply chain is secure, under such circumstances.

Almost ten years later, these dynamics continue. The Trade Facilitation and Trade Enforcement Act, enacted in 2015, focuses on closing some of the enforcement loopholes. Specifically, the legislation:

— Requires CBP to strengthen internal controls and develop criteria for assigning importer-of-record numbers, establishing an accurate database of importer of record numbers, and improving the accuracy of existing numbers.

— Provides CBP with the authority to strengthen internal controls over “new importers” to ensure collection of revenue through risk-based bonding for duties, fees, and penalties.

— Requires customs brokers to collect information on the identity of importers, with penalties for failure to comply.

— Requires CBP to collect additional information and levy financial requirements on “nonresident importers” to increase revenue protection.

Only time will tell if this legislation provides the necessary focus and clarity to effectively address the fraudulent practice of undervaluing merchandise being entered into the U.S. market.