Trade Compliance & Internal Controls: Understanding the Keys to Successful Importing

1. Trade Compliance & Internal Controls: Understanding the Keys to Successful Importing Robert J. Pisani Pisani & Roll PLLC 1629 K St. NW Suite 300 Washington, DC 20006 Tel 1.202.466.0960 Fax 1.877.674.5789 rpisani@worldtradelawyers.com www.worldtradelawyers.com

2. U.S. Customs & Border Protection (“CBP”) Mission* • Guardian of the Nation’s Borders • Safeguard the Homeland at and beyond the borders • Protect the Public against terrorists and instruments of terror • Enforce the laws of the USA while fosteringlawful international trade and travel • Serve the public through vigilance, professionalism and integrity *Source: CBP Website: www.cbp.gov

3. CBP & Import Challenges 326 Sea, Land and Air Ports of Entry Import Value in 2000 = @ $1.2 billion Import Value in 2007 = @ $2.2 billion Over 30 Million Customs Entries in 2007 11.6 million container shipments brought to the U.S. by over 1,200 carrier companies operating over 50,000 voyages Physical Inspection of Containers: Less than 5% Approximately 800,000 U.S. importers

4. CBP Priority Trade Areas 4 • Textiles/Wearing Apparel • Intellectual Property Rights • Trade Fraud • Import Safety • Agriculture • Revenue • Anti-Dumping/Countervailing Duties 4

5. Recent Customs Enforcement Initiatives (or “Importing is not for the meek!”) Current CBP trend is toward greater trade enforcement Civil Penalties (19 USC § 1592) = $$$$ Focused Assessments (i.e., “Customs audits”) may result in enforcement actions Public Health & Safety Concerns Intellectual Property Rights Enforcement Free Trade Agreements: Complicated import requirements can lead to non-compliance and penalties 5 5

6. How CBP Selects Import Audit Areas* 6 ELEMENTS OF A “RISK ASSESSMENT” • Significance / Quantitative • Large dollar transactions • High volume of transactions • Sensitivity / Qualitative • Priority Trade Issues • Political Impact • Complexity • Highly technical in nature • Requires Extensive Documentation • History of Non-compliance • Pre-entry • Post-entry • Adequacy of Internal Controls Source: Tom Jesukiewicsz (Sr. CBP Auditor – Long Beach CA) 6

7. Internal Controls: The Keys to Import Compliance • Internal controls are the measures an importer adopts to foster adherence to CBP policies and procedures – incorporates risk management principles • In a study of CBP audits, the agency learned that importers without internal controls had an average revenue loss of over $400,000 whereas the average loss of revenue for importers with internal controls was @ $45,000 • Importers with strong internal controls and a robust Import Compliance Program face fewer penalties and supply chain disruptions

8. CBP Areas of Compliance Interest 8 Tariff Classification (e.g., Incorrect HTS and/or poor invoice descriptions) Valuation (e.g., Undervaluation & Undeclared Assists) Country of Origin (e.g., illegal transshipment) Quantity Discrepancies (overages & shortages) Preferential Trade Programs (e.g., GSP, NAFTA, FTA’s) Recordkeeping Post Importation Price Adjustments Retroactive Transfer Price Adjustments 8

9. How an Import Compliance Program Can Save You Money 9 CBP’s Compliance Best Practices for Importers: • Demonstrate Management Commitment • Establish Compliance Goals • Develop Formal Policies and Procedures (e.g., Manual & SOP’S) • Develop Training Program (Recurrent – keep logs!) • Conduct Internal Control Reviews (i.e., TEST controls!) • Create a Compliance Group or Department • Access to Management for Needed Resources • Develop compliance requirement for vendors • Develop a Recordkeeping Program • Partner with CBP (when appropriate) 9

10. Key Relationships that Affect Trade Compliance 10 10

11. Steps to Building a Compliance Program: First Steps 11 • Request your Trade Data from CBP for the past 5 years (also called “ITRAC” or “OST Data” - may be requested from CBP via a Freedom of Information Request) • Review the Trade Data (a gold mine of information about your imports!): Basic trade data includes: HTSUS, Brokers, MID’s, Ultimate Consignee, Quota/Visa, Entry Date, Transport Mode, Rulings, Ports, Value Quantity, Origin, SPI, Duties Paid, Relationship and Entry Types • Look for cost saving opportunities! (e.g., Are you claiming NAFTA Eligible imports? FTA’s being used? Are you using too many brokers?) 11

12. Steps to Building a Compliance Program: Internal Controls 12 Corporate Compliance Statement – shows upper management’s buy in Customs Compliance Manual – shows awareness of rules and regulations Process Map of Customs Operations – shows thoughtful consideration of the totality of an import transaction Written Procedures – shows systemic, institutional approach to compliance Periodic Internal Reviews (Self-Assessments) – shows commitment to ongoing improvement Compliance Training – Ongoing commitment – reduces risk of non-compliant transactions 12

13. Written Procedures Should Be: Developed for all departments maintaining information relevant to the import process Developed in cooperation with the import department and based on feedback from other departments User-friendly, easy to follow, and readily available Incorporated into normal training regiment Tested and updated periodically 13 13

14. Self-Testing Of Import Operations Should Confirm: What you declared to Custom was accurate Tariff classification Duty–preference program Value (method and seller/buyer relationship) Origin Quantity Non-dutiable charges 14 14

15. Self-Testing Of Import Operations Should Confirm: (cont’d.) What you declared to Customs was complete Invoice requirements Statutory additions to transaction value Additional payments outside commercial invoice Documentary requirements 15 15

16. Sample Review Findings: Value 16 Common Valuation Issues Discovered by CBP: • 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 • Additional Payments to Sellers in Excess of Prices Listed on Invoices • Failure to Invoice Dutiable Charges Such As Royalty Costs and Selling Commissions • Additions: Royalties, Commissions, Packing, Proceeds of Resale, and Assists (E.g., Freight Not Included in Assist) 16

17. “It’s all about the $$$” 17 • A CBP Audit will include a review of Financial Accounts • A good Compliance Program includes periodic review of such accounts. (This serves to check to ensure all elements of value are reported to CBP at the time of entry) • Typical accounts to review include: • Freight on Piece Goods - Interest Expenses • Machinery & Equipment - Quota Payments • Molds - Loan Accounts • Tooling - Mgt. Fees • Commissions • Design Costs • Research & Development • Royalties 17

18. Penalties & Prior Disclosure: Handling Discovered Errors Good Internal Controls minimize errors.... ...But EVERYONE makes mistakes..... 18 18

19. Prior Disclosure What is A Prior Disclosure? It is an Elective Procedure to Minimize or Eliminate section 1592 or section 1593a Penalties by parties involved in import or drawback non-compliance (not applicable to record-keeping non-compliance) Operative statute: 19 USC § 1592(c)4 Operative regulation: 19 CFR § 162.74 19 19

20. Civil Penalties & Disclosure Without Prior Disclosure With Prior Disclosure Fraud:• up to 100% of the domestic value Fraud:Penalties for Revenue Loss Violations• 1 times the loss of duties Gross Negligence:Penalties for Revenue Loss Violations • The lesser of 100% of the domestic value or 4 times the loss of duties Penalties for Non-Revenue Loss Violations • 10% of the dutiable value Penalties for Non-Revenue Loss Violations • 40% of the dutiable value Gross Negligence & Negligence:Penalties for Revenue Loss Violations • Interest on any loss of duties Negligent Violations:Penalties for Revenue Loss Violations • The lesser of 100% of the domestic value or 2 times the loss of duties Penalties for Non-Revenue Loss Violations • No penalties Penalties for Non-Revenue Loss Violations • 20% of the dutiable value 20 20

21. Questions?Robert J. PisaniPisani & Roll PLLCTel 202.466.0960Fax 877.674.5789rpisani@worldtradelawyers.comwww.worldtradelawyers.com 21 21