Weathering A U.S. Customs Focused Assessment

Saturday, May 1, 2004 - 00:00

When a company is notified by the U.S. Customs Service that it will be the subject of a Focused Assessment, management needs to take the notice seriously and act swiftly. A Focused Assessment is not a random request for information. Customs is targeting the company, and significant penalties are a very real possibility. The company must act promptly and carefully to avoid significant liability.

The Focused Assessment

A Focused Assessment is an audit of a company's internal import controls (i.e., both written policies and their practical application) to assess the risk of non-compliance. The basic areas of focus are:

• Classification

• Valuation

• Special Trade Programs (GSP, NAFTA)

• Trade Priority Issues (Chapter 98 Imports, Quotas)

Customs also will assess controls over transshipment, use of foreign trade zones, and intellectual property (i.e., procedures to prevent "gray market" goods entering the United States).

The assessment has two phases. If during the first phase - the Pre-Assessment Survey ("PAS") - Customs finds an unacceptable risk, it will move to the second phase - Assessment Compliance Testing ("ACT") - to determine specific revenue loss.

Pre-Assessment Survey (PAS)

The PAS will generally unfold as follows over six to seven months:

• Customs notifies company via telephone, with formal written notice following.

• Customs sends detailed questionnaire.

• Advance and entrance conference held to discuss PAS.

• Customs auditors conduct field work (reviews import procedures manual, interviews personnel, tests select records).

• Customs provides draft report at Exit Conference and then issues Final Report.

Assessment Compliance Testing (ACT)

Where Customs finds an unacceptable level of risk, it will initiate the second phase - ACT - which is a more detailed records audit. A principal goal of this phase is to determine revenue loss to the government. To date, Customs has only initiated the ACT phase in a few cases. This is because, during the PAS, most companies submit either a "Compliance Improvement Plan" showing how they will address internal control deficiencies identified, or a voluntary disclosure.

How Are Companies Selected For An FA?

In the two years since inception, Customs has completed about 175 FAs. Companies are chosen based on a number of factors, including past discrepancies or violations; referrals from other Customs units; size (i.e., import value, volume, and duties); and trade in "high risk" or special trade areas.

Preparing For And Managing The Assessment

Convincing Management To Dedicate Resources

While there is no indictment or alleged violation to grab management's attention, Customs penalties can be enormous. For example, in cases of gross negligence resulting in loss of revenue, the fine can be the lesser of 100 percent of the domestic value of the product or four times the loss of duties. Even if no duties are owed, penalties for gross negligence can be up to 40 percent of the dutiable value. Companies should treat this audit like a multi-million dollar lawsuit, and allocate personnel resources and set priorities accordingly.

Assemble A Full Team

The import manager cannot handle the FA alone, and Customs expects to see a full team at face-to-face meetings. The team should include: import compliance manager; general counsel's representative; representatives from accounting, purchasing, and import departments; and outside Customs counsel. While outside counsel can provide critical advice in preparing for the audit and making any prior disclosures, the bulk of the preparation work is most effectively done by the company's staff familiar.

Review Of Compliance Program And Implementation

There is some lead time between initial notification and commencement of the assessment itself. During this time, the company's team can:

• Review and update the company's import compliance procedures.

• Coordinate with Customs on the business unit/scope of review.

• Verify that import procedures are being followed.

• Assemble and check materials to be submitted for review to Customs.

• Consider prior disclosure of any violations found.

Prior Disclosures

If the company's internal team discovers material discrepancies early in the FA process, the company should strongly consider making a "prior disclosure" to Customs. Unlike other government agencies where the benefits of a "voluntary" disclosure are subjective, under Customs regulations a properly made prior disclosure can significantly minimize or even eliminate penalties altogether.

However, a prior disclosure must be made before the company has "knowledge" of a Customs investigation or inquiry with respect to particular imports. During an assessment, there is a limited window for filing a disclosure between the initial FA notice, which is general in nature, and the beginning of the audit in earnest.

Compliance Improvement Program (CIP)

Customs expects a company will file a Compliance Improvement Program (CIP) to address deficiencies identified by Customs during the PAS phase. A well prepared CIP that addresses specific corrective actions, identifies responsible individuals, and sets implementation timetables is a key factor in whether Customs will decide to move to the ACT phase or not.

Controlling The Location And Scope Of The Assessment

Many large companies have business units operating in multiple locations. The volume and type of imports and import procedures may vary considerably between units. Companies should assess these business units and propose that the assessment focus on the most logical business unit to be audited based on a number of factors, including volume or value of imports, level of automation, etc.

Ronald A. Oleynik is a partner in the Washington, DC office of Holland & Knight LLP. He can be contacted at (202) 458-7183. Jonathan M. Epstein is also a partner in the firm's Washington, DC office. He can be contacted at (202) 828-1870.

Please email the authors at ron.oleynik@hklaw.com or jonathan.epstein@hklaw.com with questions about this article.