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Import Strategies in Maintaining a “Compliant and Secure” Inbound Supply Chain

It is critical for importers to maintain compliant inbound supply chains. Since 9/11, it has been made clear that importers who are forever noncom-pliant will sacrifice their privileges to import. This chapter views the corporate strategies to balance the need to maintain compliant supply chains with competitive landed model costing.

INTERNAL COMPLIANCE MANAGEMENT AND INTERNAL AUDIT

There is an expectation of CBP that companies can self-regulate their import responsibilities, internally, with assistance from an external qualified third party, or both.

Most companies are not capable of performing a self-audit on their own import/export operations and logistics divisions. This is due to lack of internal expertise related to the regulatory guidelines, because common practice knowledge has compromised the operational process for far too long, and because corporate culture cannot separate compliant practice from common practice.

As an option, many companies seek the professional services of a third party that can objectively perform an audit and does not have any conflict of interest in providing accurate assessments of all service providers, vendors, and internal operational functions.

The purpose of internal audit and compliance management is to effectively monitor the compliance measures in place and ensure that operational functions are within the guidelines of those established procedures.

SENIOR MANAGEMENT ENDORSEMENT

For any compliance management program to be effective in the operational aspect of any importer/exporter, it is imperative that senior management is engaged and endorses the actions and efforts of the compliance department. A centralized center for compliance management is only as good as the hammer it may place down to effectively identify risks and implement change.

Once the senior management team “buys in” to the concept that compliance is a known cost and noncompliance is an unknown cost, companies can effectively implement compliance measures designed to minimize and eliminate risk factors that exist in the import/export supply chain process.

OWNERSHIP

Stakeholders along with senior management need to create a committee with one person in charge of import trade compliance responsibilities.

There needs to be a person or party delegated to take “ownership” of the compliance responsibilities for the importer/exporter. This party will be the lead person for the entire organization on all regulatory affairs related to the Bureau of Customs and Border Protection, the Bureau of Industry and Security (BIS), Food and Drug Administration (FDA), U.S. Department of Agriculture (USDA), and Transportation Security Administration (TSA).

With the endorsement of senior management, the compliance department will have the authority to implement changes and procedures to elevate the overall compliance levels of the company.

Customs, other government agencies, vendors, and third-party service providers will have an immediate centralized contact party to address all inquiries and concerns. This centralized department will be able to control the information being requested and provided on behalf of the company. This level of supervision and internal control is a key element in the compliance management effort. CBP and other government agencies recognize and appreciate a company with a “compliance point person,” who can mitigate their view of a potential problem by lack of a person named responsible for government compliance.

EDUCATION AND TRAINING

Importers need to make sure they are internally training and educating all of the personnel who are stakeholders in the import process.

Training allows the best method to get the word out and assure that everyone understands the implications and their role in trade compliance management and the import business model.

Training affords a documented process of how a company exercises reasonable care and due diligence along with supervision and control over its import model.

Recurrent training also affords the best opportunity to maintain a current status, as regulations are always changing.

COMPLIANCE MANAGEMENT STRUCTURE

1. Validation process. Every compliance structure should have a validation process to properly analyze the purchase process, valuation structure, and shipping and receiving practices of the transactions. This validation function must be supported by various departments, such as purchasing, accounting, logistics, operations, shipping, sales, and receiving.

2. Internal supervision and control. The ability to supervise and control the import/export logistics process is a degree of measure of compliance control. If an importer/exporter can demonstrate that there is a control factor in the shipping and receiving process by each respective importer/exporter, it will be regarded as a compliant department. Cases in which companies rely solely on third-party persons to advise and assist without the capability to independently monitor those third-party logistics company (3PL) service providers are noncompliant. An importer must be able to demonstrate that it had full knowledge of the shipment from the point of purchase order notification up until it was released from customs authority and domestic disposition of the cargo. It is the exporters’ responsibility to know where their goods are being shipped and, as a compliance measure of supervision and control, how the goods will be used and who will use the goods in the country of receipt or destination.

The ability to control the actions of the broker and freight forwarder is a compliance strength. Know your third-party service provider’s strengths and weaknesses to avoid delays in service and potential fines and penalties. Inquire about specific expertise that all service providers have in handling your commodities.

3. Classification structure. Every importer/exporter is responsible for-properly classifying items entering and/or leaving the commerce of the United States. Cases in which the importer/exporter relies on the broker or freight forwarder to classify the goods are examples of noncompliance. Participants must demonstrate the ability to classify within their own establishment and provide the third-party service providers with accurate commodity classifications. The participant must have knowledge of the hard-copy version of the Harmonize Tariff Schedule of the United States and the online version and the automated process. The ability to audit your transactions to ensure the proper classifications are being used will lead to higher compliance standards.

4. Power of attorney management. Every importer/exporter is to be fully aware of all parties who have an existing power of attorney on their behalf. Failure to properly identify all parties with this power is a lack of supervision and control and a compliance deficiency.

5. Record retention. Every effective compliance/audit management department will have the ability to create, implement, and audit internal centralized recordkeeping practices of the company. It is essential to the compliance effort that all records be maintained for five years from the date of entry. Ensure that all records are properly received from those parties who generate the records in the original form as when they are created. All amendments to forms and/or documents must also be maintained in this effort.

6. Global security management. Compliance management is a vital partner in the efforts of global security. The Customs Trade Partnership Against Terrorism (C-TPAT) responsibilities may fall under a different department as a security specialist; however, compliance is the nucleus of global security. The more compliant an importer/exporter remains, the more globally secure that same entity will be. Compliance management should include C-TPAT partnership participation.

PENALTIES

Customs can fine violators in amounts as high as the goods’ entire resale value, impose liquidated damages, seize and keep goods, and restrict future imports. The importer remains ultimately liable for compliance with the import regulations. Following are the most common fines and penalties issued by customs:

Recordkeeping: $100,000 per willful violation and $10,000 per negligent violation

Negligence: Twice the revenue loss, or if no revenue loss, 20 percent of the goods’ dutiable value

Gross negligence: Four times the revenue loss, or if no revenue loss, 40 percent of the goods’ dutiable value

Fraud: Market or resale value of the goods seized and forfeited

Criminal: Goods seized and forfeited plus $500,000 fine plus five years in prison

IMPORT CASE STUDIES

Case Study 1

ABC Imports sells fashion accessories throughout its U.S. distribution system. The sourcing team attends trade shows throughout Asia, including China, Japan, and Korea. One of the team members attends a trade fair in Korea and purchases a large volume of earrings from the Korean vendor. Upon import, ABC Imports advises its broker that the earrings are purchased in Korea. The broker enters the earrings under the Korea Free Trade Agreement, and the importer receives preferential duty treatment and pays no duties in lieu of the most favored nation rate of 16 percent.

CBP forwards a Request for Information seeking additional information of the applicability of the Free Trade Agreement. ABC Imports assumes its customs broker is receiving a copy of the CBP28 and does not reach out to the broker nor respond to CBP directly. CBP issues a Notice of Action (CBP29) and sends a bill for additional duties owed. ABC Company pays the invoice and over the next few months enters a pattern of receiving the CBP28, not responding to the CBP28, and receiving a CBP29 and invoice for duties. Following this series of events, ABC Company receives a request for audit from CBP.

Case Study 2

FBN Inc. imports plastic bags from China. The bags are subject to anti-dumping duties. FBN pays the ADD and correctly declares the import classification, country of origin and ADD case number for each of the shipments.

FBN becomes aware that its foreign subsidiary in Canada has sent a pallet of plastic bags to its U.S. office. While the plastic bags are shipped from Canada, the country of origin of the bags is China and the bags are subject to ADD. Upon realizing the country of origin was not properly declared to CBP, FBN contacts its broker to make a post entry amendment, declare the correct country of origin on the bags, and pay the correct amount of duty.

THE FDA AND BIOTERRORISM

The FDA required that domestic and foreign facilities that manufacture, process, pack, or hold food articles for human or animal consumption in the United States must register with the FDA. Registration information must include name and address of facility, contact information like telephone, fax, and email addresses, U.S. agent information, and details on the way the food is processed, stored, packed, or produced at the foreign facility.

One of the regulations concerns the advance notification by U.S. food importers to the FDA by noon of the calendar day before the arrival day of the food. The prior notification includes but is not limited to the entry number and entry type, location where the product will be held at the port of entry for failure to submit adequate notice, identification of food article including FDA product code, common product name, market product name, quantity, lot numbers, identification of manufacturer, identification of shipper, country from which shipped, identification of importer, consignee, and carrier information.

Much of this information is the usual data provided to customs on the commercial invoice submitted on arrival into the United States. However, this advance notification allows FDA time to review, evaluate, and assess the import information before the food product arrives to ensure that a safe food product is going to consumers. As of this writing, the proposed plan is for this information to be submitted electronically using the FDA’s Prior Notice System.

Any food article found during inspection that presents a threat of serious health consequences, whether to animals or humans, will be detained. The detention order will include the detention order number, hour and date of the order, identification of the detained article, detention period, reason for detention, and location where the article is to be detained. The detention period may not exceed thirty days. Detention orders will be terminated by release by FDA or expiration of the detention period.

The final provision of the Bioterrorism Act covers recordkeeping. Records must be maintained by domestic persons and foreign facilities that manufacture, process, pack, transport, distribute, receive, hold, or import food intended for human and animal consumption.

Records must be established and maintained to identify sources of all food (including names, faxes, addresses, delivery dates, and food quantities and types), identify every mode of transportation used (company truck, rail/air/ocean carrier), and identify the individual responsible from when the food was first received until it was delivered.

Records must be retained at the establishment where the activities as described in the records occurred. Records may be kept in any format as long as they contain all of the required information.

CUSTOMS EXAMINATIONS

Customs has a right to examine any shipment imported into the United States, and it is important to know that the importer must bear the cost of such cargo exams. Per the customs regulations, it is the responsibility of the importer to make the goods available for examination. “The importer shall bear any expense involved in preparing the merchandise for customs examination and in the closing of packages.”

Household effects are not exempt. No distinction is made between commercial and personal shipments. In the course of normal operations, customs does not charge for cargo examinations.

However, there may still be costs involved for the importer. For example, if your shipment is selected for examination, it will generally be moved to a Centralized Examination Station (CES) for the customs exam to take place. A CES is a privately operated facility, not in the charge of a customs officer, at which merchandise is made available to customs officers for physical examination. The CES facility will unload (de-van) your shipment from its shipping container and will reload it after the exam. The CES will bill you for its services.

CONCLUDING REMARKS

We cannot emphasize enough the importance of maintaining a specific compliance and security strategy for your import business. This strategy will work more successfully when integrating the components of security and compliance management as outlined in detail in this chapter. The import supply chain or purchasing manager that “thinks and acts” proactively with a security and compliance mindset will have the most success in inbound logistics.