Contributing Lawyers

Canada

Cyndee Todgham Cherniak

United States

Susan Kohn Ross

Australia

Andrew Hudson



Textile/Apparel Compliance Headaches Continue

Originaly Published in the June 2010 JOC Magazine -

Anyone who imports textile or wearing apparel products knows that achieving 100% regulatory compliance has been challenging for both Customs and the trade community. In a recent presentation, Janet Labuda, the U.S. Customs and Border Protection (CBP) Director of Textile Enforcement, reminded the audience just how daunting that challenge remains. Textiles (including wearing apparel) continue to account for approximately 40% of all duties collected and about 22% of all import entries filed. Customs’ focus remains on preference claims where a 45% rate of non-compliance is not surprising. At the same time, CBP is also examining short supply fabric claims which recently resulted in $2 million in denied claims when such commonly available fabrics as cotton were claimed to be in short supply!

In addition, to short supply concerns, CBP has also been validating free trade agreement claims and again here, too, massive non-compliance has supposedly been found. For that reason, CBP is in the process of developing a training regimen for its own staff in order to make sure CBP’s personnel understand FTA claims. Part of CBP’s concern is the gross lack of knowledge about valid FTA claims, but CBP has also discovered yarn and fabric affidavits which are forged, altered and/or used multiple times to qualify goods which do not otherwise qualify. Who prepares your certificates of origin? How often are they validated and what means are used to validate them? While at least initially CBP has been focused on CAFTA claims, we can expect all FTA claims to be under suspicion and subject to audit.

Looking at the numbers and other intelligence, Ms. Labuda and her team came to suspect entry declarations were wrong on a grand scale. To go about confirming that suspicion, CBP assembled a cross-functional team from various geographic locations which was tasked to review textile and wearing apparel imports from China. To reach a statistically valid sample, it was determined 181 companies would have to be visited. Since that was quite a task. Ms. Labuda explained CBP decided to start with 60 and see what sort of results they got. The fact that in the end the team visited 60 companies in Los Angeles, another 60 in Manhattan and another 61 throughout the rest of the country tells you that extensive non-compliance was found. It was apparently quite common to find out the address given for a specific importer of record simply did not exist. It was also common place to find the address was valid but the importer had long ago relocated or the person there was not really the importer, although his company name was used. One not so humorous anecdote Ms. Labuda told about the difficulties Customs was encountering involved a company that was originally located in New York. When CBP started asking questions about its transactions, the company relocated to Houston. However, when the address was checked out, it was non-existent. In other words, the street existed but not the number. As CBP became more aggressive, the company quickly relocated again, this time to Denver!

Another illustration of what Customs is facing was the example of goods worth $33 million being imported by one company, but the person acting as importer of record was getting paid just 1¢ per garment. In other words, this person did not qualify to act as importer of record and the value being declared at time of entry was significantly underreported. In other examples, a shipment was originally offered for entry with a value of $200,000. When Customs refused the entry, the corrected entry reflected a value of $1.7 million and miraculously expanded from one importer to 5. Another entry originally submitted at $250,000 was ultimately revised to a value of $1.5 million. In yet another instance, brand name high end coats were imported at values as low as $6.95 each, but retailed for $600 each! According to Ms. Labuda, more than half the importers interviewed did not have the right to make entry. They had no knowledge about the goods and also had no interest in those goods.

While these CBP efforts may be focused on importers, it is clear that CBP considers the customs brokers to be the "linchpin" and recognizes that freight forwarders are also involved. As such, CBP and the Federal Maritime Commission are cooperating as these investigations continue.

For Customs, the issue is a simple one - supply chain security. Who are the real parties to the transaction? Without knowing that fact, risk at all levels cannot be properly measured or addressed. From the trade’s perspective, many honest importers are getting stuck in the middle. They file an entry, it is refused on the grounds the value is too low, despite proof of payment. A significantly higher value is then arbitrarily set by CBP. Do you challenge CBP or do you pay the duty, get your goods and argue about it later? Not surprisingly, most choose to secure the goods and argue about valuation later. Should the fact there are some dishonest importers mean that everyone who imports from China should be treated with the same heightened skepticism and close scrutiny? It is also worth remembering that when CBP sets the value based on the transaction value of identical or similar merchandise, an importer is unable to learn the basis for the value set unless in litigation as Customs is relying on values which were validated from transactions by other importers. As such, the only way to learn any details is through the discovery process once in litigation - in short, good luck challenging CBP’s value determination!

One last word of warning on this topic – if you are purchasing branded merchandise on a DDP or LDP basis, you may not be off the hook. Although many in the trade would question this conclusion based on a straightforward understanding of what DDP and LDP mean as a term of sale, from CBP’s perspective, as the owner of the brand name, you may well have some form of liability if the seller does not make proper entry. Does this mean that as the DDP or LDP buyer, you should demand to get a copy of the 7501 from your seller? CBP says yes, but is that realistic? Even if you elect to do so, does getting a copy of the 7501 mean the document you are provided is authentic? How are you supposed to make that determination? Each company will have to answer these questions for itself. What do your SOPs require?

Finally, keep in mind that civil penalties may be the least of anyone’s concerns. CBP says it is facing millions of dollars in lost revenue and so it was not surprising to hear that criminal penalties are being considered. For these purposes, think in terms of money laundering, RICO and 18 U.S.C. 1001 (lying to a government official) and 18 U.S.C. 1002 (submitting a false, altered, forged, or counterfeited writing or document in order to defraud the U.S.). Given the staggering numbers of dollars apparently involved with these importing schemes, it is not surprising that CBP wants to see people spend time in jail. How are you vetting your business partners in order to make sure you do not get sucked into such a scheme?

 

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