Originally published by the Journal of Commerce in September 2017.

As the scoundrels of the world are ever more creative with their attempts to circumvent the law, Customs and Border Protection (CBP) responds by implementing new tools.  One new tool is worth considering and one existing tool is worth revisiting.

The new enforcement tool is the Importer of Record Task Force, which cuts across all product lines. If you are a first time importer, CBP is now requiring you to establish you are a real company and a real importer and that is before the goods are released.  The long-standing approach scoundrels have been relying upon is to find a relative or friend in the U.S. to act as a middleman. The friend or relative is paid a small fee to act as importer. In fact, these middlemen have no ownership or financial interest in the shipment and so do not qualify as importer of record. Some act innocently and others turn a blind eye to actual facts. When confronted, most say they know the oversees supplier has asked them to act as a middleman in order to reduce the duty which is paid. The trouble is those middlemen don’t really appreciate the consequences of their actions.

The actual transaction takes place between the often Chinese seller and the American buyer.  In these cases, the proper INCOterm of sale is DDP or delivered duty paid. However, the scoundrel consigns the goods to the designated U.S. middleman at an FOB cost of goods which is frequently well below market price. The fact the value is too low is itself a trigger in CBP’s risk management analysis, but the poor middleman gets nailed nonetheless.

What CBP is now doing is an interesting twist. First, the shipment is detained upon arrival with the requirement the middleman first establish his is a real company. This inquiry takes the form of requiring the company to provide its formation documents and evidence of the identity of its principals. The company must then also provide the purchase order between it and the factory and it and the ultimate U.S. buyer.  CBP also insists on receiving proof of payment to the factory and by the U.S. buyer.  If there is design work involved, the designs must be produced. Similarly, if there are product specifications or other documentation that would typically be exchanged between an American buyer and a foreign seller, those, too, must be produced. All too often, the middleman has no idea what he is getting into, cannot produce the basic commercial documents which would exist between the typical buyer and seller, and then CBP is faced with deciding which enforcement tool it will implement.

First, of course, CBP insists the ultimate U.S. buyer must be the importer and pay duty at the price at which the goods are sold to him, if he still wants those goods. If not, the middleman is left liable to the carrier for the charges associated with the shipment sitting often for weeks on end.

At the same time, CBP is left to decide what to do to the hapless middleman. Bearing in mind there were declarations made by that middleman when the entry was filed on his behalf, CBP is in position to impose a fine. 19 U.S.C. 1592 authorizes CBP to impose a fine on a party which either misrepresents a material fact or makes a material omission, but it also allows imposition of a fine against those who “attempt to enter or introduce” goods when a material omission or misrepresentation is made. Filing the entry with an improper value and representing oneself as an importer when both are incorrect certainly is material and could be grounds for such a penalty.  So, those new to importing should be mindful that CBP has a new tool at its disposal to detect those playing games early in the process and is applying this tool even if the middleman is unclear what are the rules of the road.   One question for customs brokers to consider is whether or how to change their new customer intake process to weed out such gamesmanship.

In the context of an existing enforcement tool getting renewed attention, we turn to country of origin inquiries.  These most typically arise when goods which would be subject to antidumping if made in Country A are imported stating Country B as their origin and the two countries are in relatively close geographic proximity.  CBP’s inquiry typically includes a request for the following documentation, but perhaps more:

1)         Descriptive or illustrative literature;

2)         A breakdown of the components, materials or ingredients by weight, and their actual cost at time of assembly into the finished good being imported;

3)         The name and address of the actual manufacturer, if not the foreign supplier;

4)         A detailed description of the production process and documentation relating to the production, including lot numbers, manufacturing dates, plant locations and serial numbers;

5)         Product specification information; and

6)         Purchase order or contract for the goods being imported.

Where importers tend to go wrong is the documentation they provide in responding is often incomplete and unintelligible.  What importers tend to do is simply take the documentation they receive from their factory and send it to CBP without ever validating it is complete and easy to understand. While responses differ depending on the imported product and the sophistication of the supplier and importer, there are some basic principles which should be followed:

1)         Fully describe the production process, from the time the raw materials are obtained to the time the imported product goes out the supplier’s door.

2)         Include a Google Earth image of the factory and provide CBP with information about how to find the factory on Google Earth.

3)         Make sure the quantity of raw materials is sufficient to support the end product being imported.

4)         Provide records showing the production process – including the quantity of raw materials taken into inventory and when; when the needed quantity of raw materials is removed from inventory and put into production; how those raw materials travel through the production process, including the equipment used to make the end product and payroll records to show who made the end product; when and how that end product is packaged and prepared for shipment; and every other step in between.

Then, and perhaps most importantly, make sure to present the information in a manner that is easy for CBP understand.  If you send a bunch of photos to CBP without organizing and labeling them, CBP has no idea what those photos represent. If your product includes labels provided by the U.S. importer, those labels should be included in the production process explanation. If you import 1,000 pieces of machinery, make sure to explain how much metal is needed to make each machine. If you say it takes 100 kilos of steel to make a machine, and you have 1,000 pieces of machinery but only account for 200 kilos of steel, it makes no different how clearly you present the information, you have not established your product was made in the factory where you say it is made.  Similarly, if some of the intermediate components are made by a sub-contractor, whether in the same or a different country, that process also needs to be explained and a paper trail presented to show receipt of the intermediate components and how they are put into final production. The cited factors are just illustrations. What do you need to explain about how your product is made so CBP is satisfied origin is validated?

Different products require different explanations, so start by thinking about what is unique about your product and whether it or some part of it could be subject to antidumping duty and from which country/countries?  For example, one area where CBP is focused right now is solar cells.  Solar cells from China are subject to antidumping duty. Knowing the solar cells are key, make sure to explain where the dopants/wafers/cells are made. If they are made by a third party, what changes does your supplier make to them in producing the importer product? If the solar cells are made in China, is the production of your final product enough to change their origin?

As is obvious, there is no one way to answer an origin inquiry, but unless the overarching approach is to be detailed, complete and clear, your response is doomed to failure, with all the unpleasant costs (including possible imposition of antidumping/countervailing duties) and supply chain complications that result.

There are other widespread challenges CBP faces when it comes to imports and exports. It will be interesting to see what other enforcement tools the agency implements or resurrects!