Robert Allen, Field Director Regulatory Audit, Long Beach

1. Robert Allen, Field DirectorRegulatory Audit, Long Beach U.S. Customs and Border Protection “VALUATION: CBP AUDIT PERSPECTIVE”

2. CBP’s Approach to Value Compliance • Key to Value Compliance is for Trade to establish and implement INTERNAL CONTROLS (Brokers, Importers, FTZs, Warehouses, Etc.) • Why Internal Controls? • Mod Act requires reasonable care. Trade has the responsibility to use “reasonable care in…classifying and appraising merchandise… • Sarbanes-Oxley Act of 2002 (“SOX”) – Requires internal controls over financial reporting, operations, and compliance. • What are internal controls?

3. Key Elements of Importer Audits • Identify Risk Areas: • Value, Classification, 9801/9802, GSP, ADD, Transshipment, etc. • Evaluate Controls Over Value Risk Area: • Identify System Strengths & Weaknesses • Implement Controls Over Weaknesses • Good Internal Controls Over Value = Less Risk • Weak or No Internal Controls = More Risk & Potential Violations & More Potential Revenue Loss to CBP

4. Audit Checks on Value • Evaluate Acceptability of Basis of Appraisement • Verify that the Reported Invoice Values Correspond to Payment Records • Verify All Reportable Value Additions are Declared • Examination of Accounts for Reportable Items (Selling Commissions, Royalties, Assists, Packing Costs, Proceeds) • Review Non-dutiable Deductions from Value • Commissions, Int’l Freight & Insurance, Etc • Test Deductive or Computed Value Computations

5. Audit Methodology to Test Value • Method – Use the Audit Trail in Company Records • What is an Audit Trail? • An Audit Trail is the accumulation of source documents and records that allow an organization to trace Customs transactions to their initiation/origin and the reverse.

6. TJ LC, Payables, Etc. Entry Summary Entry Package Value Audit Trail Customs Records Entry ACS Line Items Product/Article Commercial Invoices/Purchase Orders Accounting Transactions General Ledger Financial Statements Tax Return Importer's Records Accounting Records CBP related account activity to financial statements and trial balance to verify completeness 6

7. Macro Test of Value – Is it in the Ballpark? • To provide an overall ballpark reconciliation of value and to determine the potential significance of any undeclared value & assess the reliability of supporting documentation • Importer vs. Customs • Importers foreign merchandise receipts, payments, payables vs. Customs import value • Importer vs. Importer • Importers foreign merchandise receipts vs. it’s own financial statements and supporting documents • Importers G/L account activity vs. it’s own financial statements and supporting documents

8. Review of Declared Invoice Price – Entry to Books Test • Our review is generally focused on a three part evaluation: • Determine if the declared invoice price was paid or payable. • Review the effect of currency fluctuations. • Review accuracy of deducted Non-dutiable Charges (NDCs). • Declared value errors are typically updated prices, NDC overstatements, lack of support for NDC, currency fluctuations, & clerical errors. Accounting Records

9. The following accounts are examples of some but not all of the accounts that should be reviewed. All companies will not have all these accounts and companies may use other names Freight on Piece Goods Machinery & Equipment Molds Tooling Commissions Design Costs Research & Development Royalties Accounts to Review - Books to Entry Test • Management Fees Inter- & Intra-company Accounts • Interest Expenses • Quota-Payments • Loan accounts • Other

10. Value – Typical Findings • Lack of Documentation to Substantiate Claims of Non-dutiable Charges Such As Buying Commissions and Freight • Price Paid or Payable Is Not Fully Reported • Non-dutiable Charges (NDC) Are Not Actual • Revised Invoice Prices Not Reported to Customs • Failure to Include Assist Costs in Import Values

11. Value – Typical Findings • Additional Payments to Sellers in Excess of Prices Listed on Invoices • Failure to Invoice Dutiable Charges Such As Royalty Costs and Selling Commissions • Multiple Invoices for Shipment • CF 7501 Does Not Include One or More Invoices

12. What TRADE Can Do - Value • Check CBP Web Site: www.cbp.gov • Guidance on Internal Controls Over Value (TIPS) • Best Practices • Red Flags • Internal Control Checklist • Model Internal Controls Guide • Audit Program • Guidance - Compliance Improvement Plans • Regulatory Audit Contacts

13. What TRADE Can Do - Value • Assess Risks of Value Noncompliance • Ensure Internal Control Procedures are Written & Detailed • Periodically Assess Internal Control, Look for Strengths & Weaknesses, Make Adjustments • Test Value Transactions for Accuracy & Make Corrections When Needed

14. What TRADE Can Do - Value • Make Sure All Control Procedures Performed are Documented • Provide Sufficient Training/Resources to Staff • Contact CBP for Further Guidance When Needed • Self-Review & Prior Disclosure Before Audit Commencement

15. Questions

16. Examples of Value Violations • Different Types of Value Violations • How Violations were Discovered and How RAD Documented Them Based on CBP and Company Records • Actions Taken by CBP

17. Commission Payments Improperly Claimed as Nondutiable Buying Commissions • Importer Paid Commission Costs of 7% on Separate Invoices & Did Not Include the Costs in Import Values • When Found by the Auditor, the Importer Stated the Costs Were Nondutiable Buying Commissions; but, the Company Had No Buying Agent Agreement. • Auditor Found Evidence - Payments Were Made to Selling Agent; thus, Cost are Dutiable Commissions • Prior Disclosure Vs. Investigation Opened, Importer Notified, Impact of Violation Quantified via CBP & Company Records ($1.2 Million) • Penalty Issued – Interest Only Vs. Multiple of Revenue Loss per Quantification & Culpability

18. Failure to Include Foreign R&D Assist Costs in Import Value • Import Invoice from Related Foreign Manufacturer Had Item – Indirect Costs • Auditor Pursued Costs & Importer Made $8 Million Prior Disclosure Re: Foreign R&D Costs Used to Make Imports • Prior Disclosure Vs. Investigation Opened, Importer Notified, Impact of Violation Quantified via CBP & Company Records • Penalty Issued – Interest Only Vs. Multiple of Revenue Loss per Quantification & Culpability

19. Related Party Transfer Prices Not Acceptable as Transaction Value • Importer & Related Foreign Manufacturer Set Transfer Prices for Imports that Fail to Cover Product Costs and Profit • Auditor Finds Importer Unaware of Import Value Requirements and/or Set Transfer Prices to Lower Duty Liability • Prior Disclosure Vs. Investigation Opened, Importer Notified, Impact of Violation Quantified via CBP & Company Records ($5 Million LOR) • Penalty Issued – Interest Only Vs. Multiple of RevenueLoss per Quantification & Culpability

20. False Invoices with Intentional Low Values to Gain Duty Fee Treatment • High Values Used on Dairy Products When Quota Was Open on Imports • When Quota Closed, Importer Lowered Values & Quantities for Lower Duty Liability • Import Specialist Found Fraud in Reviewing Entries, Opened Case, Notified Company, Obtained True Higher Invoices via ICE Agent • Auditor Quantified LOR of $3.5 Million • Importer Pleaded Guilty in Court – 1 Yr Jail, Agreed to Pay $3.5 Million LOR & $2.1 Million Penalty

21. Failure to Include Tooling Assist Costs in Import Values • Payment for Series of Invoices from Related Foreign Manufacturer – Some Invoices for Non-Merchandise Costs • Auditor Pursued Audit Trail in Importer Records to Find – $1.1 Million of Tooling & Other Assists • Prior Disclosure Vs. Investigation Opened, Importer Notified, Impact of Violation Quantified via CBP & Company Records • Penalty Issued – Interest Only Vs. Multiple of Revenue Loss per Quantification & Culpability