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Premier Provider of Innovative Insurance and Surety Solutions

Premier Provider of Innovative Insurance and Surety Solutions. ISF When will the Hammer Fall? Presented by Keith Sanchez, Divisional Vice President Wesccon 2010 October 22, 2010.

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Premier Provider of Innovative Insurance and Surety Solutions

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  1. Premier Provider of Innovative Insurance and Surety Solutions ISF When will the Hammer Fall? Presented by Keith Sanchez, Divisional Vice President Wesccon 2010 October 22, 2010 ATLANTA | BOSTON | CHARLESTON | CHICAGO | HOUSTON | LOS ANGELES | MIAMI | NEW YORK | SAN FRANCISCO | SEATTLE | TORONTO

  2. ISF Gradual Enforcement • CBP has completed 3rd stage of gradual enforcement: • Concentrated efforts on importers who were not filing ISFs for U.S.-bound shipments. • ISF compliance rate at 90-92% during 2nd stage (June 2010). • 8-10% of importers were still not processing ISFs. • CBP issued Warning Letters and placed holds on shipments. • CBP will not provide data on holds, timeliness, or ISF accuracy. • Previously 70 to 80% of ISFs were filed timely. • 97% of ISFs were accepted (accuracy not yet verified). • Entering 4th and final stage of gradual enforcement: • Feedback from CBP varies, but 4th stage calls for liquidated damages (LD) although will likely start in 2011. • LDs will focus on repeat and/or serious violations, primarily non-filers or repeat late filers of ISF. © Avalon Risk Management

  3. ISF Gradual Enforcement • Non-compliant importers should expect: • Warning Letters (unknown how many were issued). • Non-intrusive inspections (NIIs) upon arrival in the U.S. • Holds on freight - Per CBP, holding freight is the greatest enforcement tool they have to raise compliance (number of holds unknown). • As gradual enforcement ends, non-compliant importers will continue to see an increase in holds and will be subject to stricter enforcement: • Liquidated damage assessments. • Escalation in liquidated damages for repeat violations. • C-TPAT members may have C-TPAT status revoked. © Avalon Risk Management

  4. Quarterly NY/NJ Meeting 9/21/10 • Full Enforcement will begin January 2011: • HQ gives ports discretion to hold up to 50% of shipments. • If ISF is not filed before the port reviews the manifest: • Shipment will be held and undergo NII or full inspection. • Do Not Load (DNL) messages: • Currently issued when no ISF is filed. • DNLs will increase during full enforcement. • CBP may issue DNL for insufficient information. • DNLs may be issued if shipment does not appear “in order.” • DNL codes are only sent to carriers in AMS. • CBP recognizes need to provide DNLs to brokers in ABI. • Liquidated Damages • Will be issued starting January 2011, extent of enforcement is still uncertain and unknown. • Sureties not receiving ISF data. © Avalon Risk Management

  5. ISF Bonding: Obligations • Liquidated Damage Obligations • Commences 24 hours prior to departure of mother vessel. • Terminate when goods enter the first port of arrival/in-bond port. • ISF liquidated damages subject to 6-year statute of limitations. • Per 28 U.S.C. § 2415, this is federal stature for all Customs Bonds. • CBP has six years from “right of action.” • Avalon participated w/ NCBFAA and COAC in support of a shorter release/liquidation period for timely/accurate ISFs. • CBP Position on 6-year statute still unresolved, however: • According to CBP’s FAQ dated 7/9/10: “CBP will not limit its authority to enforce ISF requirements.” • Penalties may be assessed separately - 19 U.S.C. 1595a(b) • Based on CBP’s HQ approval. • For “serious or repetitive violations.” © Avalon Risk Management

  6. ISF Bonding: ISF-D Rejections • Principal missing legal designation. • Importer must specify “individual, partnership or corporation.” • Must include state of incorporation. • Principal not found or does not match CBP’s system. • Requires CBP 5106 to update as necessary. • CBP 301 bond form cannot be used for ISF bonding. • CBP 301 bond form can only be used for unified ISF and entry. • Currently less than 3% of all ISF transactions are unified. • Multiple ISF-D bonds are sent with single submission. • ISF-D Bond is missing information: • ISF transaction number (unique number provided by CBP). • ISF transaction date. • Bond effective date. © Avalon Risk Management

  7. ISF Liquidated Damages • Late Filing:$5,000 per late ISF. • Non-file or untimely filing (24 hours prior to departure). • Untimely filing of an ISF update and/or flexible filing. • CBP will not release data; timeliness varies by port (50%-90%). • Inaccurate Filing:$5,000 per inaccurate or incomplete ISF. • Last data indicated 97% of ISFs were accepted as complete. • CBP will not release data on accuracy, B/L matches in AMS, etc. • Amended or Withdrawn ISF Filing:$5,000 per violation • $5,000 for inaccurate update or correction to flexible filing. • $5,000 for failing to withdraw an ISF. • Late ISF-D Bond?: LDs could be assessed if ISF-D Bond not filed within 12 hours of ISF acceptance. • $10,000: Maximum for multiple violations © Avalon Risk Management

  8. ISF Liquidated Damages • ISF Full Enforcement Process – How it will work: • Ports will initiate liquidated damage (LD) assessments. • Ports forward to CBP headquarters (HQ) for review. • HQ will make final decision on LD assessments to ensure uniform enforcement across the country. • HQ is authorized to approve the proposed LD assessment or return to originating port with alternate recommendation. • LDs for ISF will follow normal 5955A notification process: • Status 1600 – First Notice to Importer (have 60 days to pay or petition to mitigate) otherwise advances to demand on surety. • Status 3600 – First Notice to Surety (surety then has 60 days to pay or petition) and will subrogate against importer. • ISF Informed Compliance Publication – Not published to date, CBP indicates this will include more information on ISF mitigation. © Avalon Risk Management

  9. ISF Mitigation • ISF mitigation guidelines published 7/17/09. • CBP Decision 09-26. • First ISF Violation: $1,000 or $2,000 mitigation. • Late/non-file of entry = $100 mitigation. • AMS violations = minimum $500 mitigation. • Second/Subsequent ISF Violations: $2,500 mitigation. • No escalation of minimum for repeat offenders for Late/Non-Files of Entries nor AMS violations . • 50% reduction for C-TPAT members. • No relief granted • if security is threatened • if law enforcement goals were compromised. © Avalon Risk Management

  10. Surety Liquidated Damage Data • Avalon Liquidated Damages: • 10,000 LD cases averaged each year. • Majority are Late or Non file of Entry Summary ($100). • FDA-Failure to Redeliver (1-3 times value) less frequent, more severe. • International Carrier and AMS Violations ($500-$1,000). • Average LD claim = $7,750 (ISF = $5,000 to $10,000). • Average Mitigated LD claim = $175 (ISF = $1,000 to $2,500). © Avalon Risk Management

  11. ISF vs. AMS Liquidated Damages from AMS 24-Hour Rule Bonded only AMS Filers (not importers) 5,600 International Carrier Bonds (C3) as of 9/1/10 Filers are Customs Brokers, NVOCCs, Vessel Operators Continuous Bonds only (no single transaction bonds) Continuous Bonds range from $50,000 to $150,000 Vessel Operators/NVOCCs typically collateralized Top 3 Violations Failure to report arrival of conveyance (62%) = Non-File/Late ISF   Untimely filing of Cargo Declaration (31%) = Late ISF Manifest Discrepancies or no Manifest  (7%) = Inaccurate ISF Surety Liquidated Damage Data © Avalon Risk Management

  12. ISF vs. AMS Liquidated Damages from 24-Hour Rule Enforcement began March 2004 During “informed compliance period.” 10% of Avalon bond principals received liquidated damages. $8 -25 million in liquidated damages the each year (2004 – 2010) Demonstrates 6-year tail on AMS/ISF exposure. AMS affords mitigation of $500 per violation for both first time and repeat violations vs. ISF at $2,500 x 5 times the exposure. Difference - Claims are typically paid or collateralized because of strong compliance programs and ongoing operations. Surety Liquidated Damage Data © Avalon Risk Management

  13. ISF Liquidated Damage Estimates • What will the violation rate be? • 8.3 million ISFs x Violation Rate = Liquidated Damages • 97% ISF compliance rate = 3% violation rate • How many liquidated damage claims? • 8.3 million x 3% = 249,000 LD claims annually for industry. • Currently, no more than 50,000 LD claims annually • How much in liquidated damages? • 249,000 x $5,000 = $1.245 billion in LDs each year • 249,000 x $1,000 (first time mitigation) = $240 million in LDs • Escalation in subsequent years • 6 year statute of limitation resulting in stacking exposure • New ISF Codes (available 10/1/10 through 6/30/11) • ISF Types 5-6, “no bond on file” • One-time only, CBP will monitor usage © Avalon Risk Management

  14. ISF: In Summary & Best Practices • Continue to be proactive • CBP Outreach and FAQs (most recent 7/15/10). • www.cbp.gov/xp/cgov/trade/cargo_security/carriers/security_filing/ • ISF Data Warehouse - Ready by 10/1/10? • Portal will have standard reports for importers, brokers, etc. • Ability to run ad hoc reports. • ISF Web Portal – 99% complete • Understand ISF activity and bonding needs: • DDP shipments (foreign importers) and “one-shot” importers pose additional risk for sureties; typically collateralized. • New ISF codes for “no bond on file” may help but only allowed for a first-time, single ISF transaction through 6/30/11. • Review annual ISF volume and need for Continuous Bond. • Automate bond compliance to avoid ISF/bond rejections. © Avalon Risk Management

  15. ISF Best Practices • Customs Brokers acting as Importer of Record on ISF. • Not recommended. • Consider liquidated damage exposure against all bonds. • Activity Codes C1, C2, C3, C4 (review bond amounts). • Avoid Single Transaction or ISF-D Bond aggregation. • CBP will attempt to “double dip” against all bonds for ISF. • Routine importers should obtain a Continuous Bond. • Limits ISF and entry exposure to $50,000 annually (unless importer has higher bond amount). • 92% of all bonds $50,000 minimum. © Avalon Risk Management

  16. Overall Best Practices • Update ISF Documentation • NCBFAA T&C and POA were updated for ISF as of July 2009. • Get updated, signed T&C and POA from importers to address ISF exposures. • Consult with insurance broker and attorney to avoid being held liable for: • ISF liquidated damages. • Demurrage expenses as a result of cargo holds/delays. • Cargo damage due to inspections. • Contracts • Ensure liquidated damages do not become customs broker’s responsibility as the filer and primary facilitator of ISF. © Avalon Risk Management

  17. Overall Best Practices • Cargo Insurance • Ensure policy provides coverage for damage during inspections. • E&O Insurance • Ensure policy provides coverage for ISF activity. • Consider limits and deductibles based on your ISF volume. • Regulatory Defense to assist with ISF mitigation and legal fees. • Use an automated bond issuance program • Eliminates or reduces your rejection rate • Less manual work • Speeds the process © Avalon Risk Management

  18. Premier Provider of Innovative Insurance and Surety Solutions Thank you for participating. Any questions? For more information, visit www.avalonrisk.com ATLANTA | BOSTON | CHARLESTON | CHICAGO | HOUSTON | LOS ANGELES | MIAMI | NEW YORK | SAN FRANCISCO | SEATTLE | TORONTO

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