Prior Disclosure - To Make or Not to Make...

“US Customs is moving in the direction of aggressive penalties for non-compliance. When US Customs conducts a compliance assessment, an importer must be 99% compliant (i.e., US Customs only allows a 1% error rate) in order to be considered compliant.” -- Assistant Field Director, US Customs Field Office - NYC

Every importer is aware – or should be aware – of the imposition of penalties for the failure to follow US Customs regulations. Even if an importer believes it has been compliant, an internal audit or other self-assessment, can reveal areas where errors have been made, and some of these may have resulted in a loss of revenue to US Customs whether of liquidated, or unliquidated, entries. So what is an importer to do? Is it better to present the issue(s) to US Customs? And if so, how does an importer go about doing that without opening up “Pandora's Box” in terms of auditing, or the delay of shipments, on the part of US Customs now that you have put yourself on its radar? Is it better to stay under the radar?

Clearly, if a post-entry amendment can be done to rectify the mishap, that is an easy way to resolve the issue. But what if the impact of a seemingly small discrepancy actually extends across years of entries? Or perhaps, the discrepancy is narrow in terms of the volume of entries, but nonetheless resulted in a gross under declaration of duties? Well, now there is a serious problem to deal with. Unfortunately, the problem can be a much much (yes, I wrote the word twice) bigger one. Let me explain why. First of all, 19 USC §1592 sets forth the penalty assessments for failing to pay lawful duties. The penalties differ based upon a range of culpability, ranging from fraud (the most serious), to gross negligence, to negligence (least serious offensive).

They are as follows: Fraud violations = the domestic value of the merchandise. Gross negligence violations =

(A) The lesser of (i) four times (4x) the loss of lawful duties, taxes, and fees deprived the government, or, (ii) the domestic value, or,

(B) 40% of the dutiable value, but in no case to exceed the domestic value of the merchandise, if the violation did not affect the assessment of duties. Negligence violations = (A) The lesser of: (i)two times (2x) the loss of lawful duties, taxes, and fees deprived the government or, (ii)the domestic value, or,

(B) 20% of the dutiable value, but in no case to exceed the domestic value of the merchandise, if the violation did not affect the assessment of duties.

Of course, there is always the option to try and mitigate the above duties, which would reduce the penalties as follows: • Fraud – from a minimum of 5 times (5x) to a maximum of 8 times (8x) the total duty loss, or 50% to 80% of the dutiable value in non-revenue loss cases, but never to exceed the domestic value of the merchandise; • Gross negligence – from a minimum of 2.5 times (2.5x) to a maximum of 4 times (4x) the total duty loss, or 25% to 40% of the dutiable value in non-revenue loss cases, but never to exceed the domestic value of the merchandise; or • Negligence – from a minimum of 0.5 times (0.5x) to a maximum of 2 times (2x) the total duty loss or 5% to 20% of the dutiable value in non-revenue loss cases, but never to exceed the domestic value of the merchandise.

Contrast these penalties, including the possibility of mitigation, to that of when an importer does make a prior disclosure. The penalty is zero (0) if the importations involve unliquidated (i.e., open) Customs entries and no fraud is involved. If the entries are liquidated (i.e., closed or finalized) and no fraud is involved, the penalty is the interest on the loss of duties. If a fraudulent violation is disclosed, the penalty is reduced from the regular assessment of the domestic value of the goods to 1 times (1x) the duty loss, or if the violation involves no duty loss, the penalty is reduced to 10% of the dutiable value of the merchandise. Based on these figures, at face value, making a prior disclosure would appear to be the prudent path to take. After all, by doing so, penalties are substantially reduced. A prior disclosure must be submitted prior to the commencement of a “formal investigation” by US Customs. There are many rules regarding how to make the prior disclosure and what must be included within it in order to be considered valid, including, the circumstances of a violation, and a tender of any duty loss.

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