By Shawna Karajic, Export Solutions Inc.

Why are Customs Regulations Important?

US Customs at its core is the top law enforcement agency for America. It was established to help control the flow of goods and people in and out of the country. One of their main obligations is to collect duties and taxes on the merchandise that is imported. They also oversee that the merchandise being brought in doesn’t hurt American businesses or people. There are some imports that are also regulated by other government agencies, such as the Food and Drug Administration, US Department of Agriculture, and the Federal Communication Commission. US Customs helps these agencies enforce their regulations as well.

In order to provide this type of oversight, Customs had to create many laws and regulations. Interpreting the various regulations and the constant changes can be very overwhelming for any business, however, under the Customs Modernization Act it is the importers responsibility to know and follow these regulations.

Are you aware of what Customs looks for to ensure compliance on a shipment? Do you know what the consequences are if you don’t follow Customs Regulations?

Types of Customs Violations

As with any type of law enforcement agency, they always look for violations of the laws and regulations that have been set forth and US Customs isn’t any different. When shipments come into the United States, Customs will pull some for examination. The purpose of the examinations is to ensure that the merchandise coming into the country is what it is supposed to be and that there isn’t anything in the shipment that shouldn’t be.

Along with doing physical exams on the shipments, Customs can also review the entry documentation. Did you know that Customs can go back 5 years to examine your entry documentation?

Are you sure that you have been compliant with both your shipments and the documentation to have it cleared through Customs?

Most companies want to do the right thing and are not intentionally violating the law, however, even companies with comprehensive import programs can make mistakes and violate the law. Once a violation has been discovered, it is important to report it to Customs.

There are lots of different types of violations that can occur. The most common importing violations are:

1. Valuation

Valuation is one area that every company can have issues with, and this is one that Customs will look at in depth, since it is their responsibility to fix the final appraisement after the importer of record has filed the declared value.

Are you aware of the six different methods of appraisement and the order in which they are to be used?

This is what can trip importers up when it comes to declaring the value of their shipments. Importers should know what values should be added to the final appraisement of their goods and which should not.

What should be added to your value?

  • Assists
  • Selling Commissions
  • Royalty or License Fees
  • Packing Costs
  • Proceeds of any resale, disposal or use of the imported merchandise that accrue
  • Tooling, molds, etc

These are just some of the additions to values that companies fail to include in their shipments. If you have failed to add any of these into your final value that you have declared on a shipment to Customs, then you have committed a violation. As soon as you find out that your value is incorrect you should make the necessary corrections and notify Customs of the error.

Any company can get these values wrong and if you do, you could face some substantial penalties.

Customs has put together some great Informed Compliance Publications explaining Customs Value and an in-depth Customs Valuation Encyclopedia . These are great tools to utilize to help ensure you are capturing and reporting the correct value to Customs.

2.    Classification

Tariff classification is a tough area for any company when it comes to their import shipments and it is easy to make an error. When classifying your goods, you need to make sure that you follow the General Rules of Interpretation (GRI’s), read the Chapter and Section notes, as well as consult the Explanatory Notes. Any misstep in interpreting these or not following the headings or subheadings in the Harmonized Tariff Schedule (HTS), can lead to reporting the wrong classification to Customs.

This would be a violation that you would need to report as soon as you find the error. If you do find that a good was misclassified, the best practice is to review any other entries that had the same good and report all of the errors at one time.

One example of a good that is often misclassified is fabric. There are over 5,000 possible classifications for fabric. Another example of when you might misclassify a good, is when you have a part, whether it is a gasket, screw, or larger part that goes into something else. You need to know when it should be classified as what it is or whether it can be classified as a part of the larger machine or product.

Customs has supplied some very informative compliance publications on Tariff Classification. If you are unsure that your classifications are correct, it is always best to consult with a Licensed Customs Broker or a consultant that is knowledgeable with HTS compliance.

3.    Not Claiming Anti-Dumping/ Countervailing Duties

Anti-dumping and Countervailing (AD/CVD) duties are additional duties that were put in place to help level the playing field for domestic companies. These duties are put on goods that are sold by a foreign producer or exporter at a price that is below normal value or at a subsidized price. These additional duties are determined by the U.S. Department of Commerce, but Customs assists in administering AD/CVD entries, collecting duties and enforcing the AD/CVD orders. At the time of entry, these duties are only estimated, and the final duties are not determined until 2 or 3 years later, when the Department of Commerce finalizes the duty amount to be collected.

The goods that are subject to AD/CVD orders ranges from food products, products made from steel, aluminum, copper or other metals, chemicals, machinery products, plastics, paper products, textiles and furniture. It is critical to make sure that your goods do not have an AD/CVD order in place. Avoiding these additional duties can be more costly than the additional duties themselves.

If you find that you have a good that has an AD/CVD order, but was not claimed at the time of entry, then you are in violation and could face substantial repercussions if Customs finds the error. It is always better to report the error to Customs as soon as you find it. In doing so, it could help save you thousands or even millions of dollars in penalties.

4.    False Free Trade Agreement Claims

Utilizing a Free Trade Agreement to help save you on duty is always a good thing, unless you are doing it fraudulently. The U.S. has 14 Free Trade Agreements (FTAs) with 20 countries that a business can take advantage of for duty savings. Understanding the requirements for each of these FTA’s can be confusing if you aren’t familiar with how to determine if your goods qualify.

Just because your good is coming from one of the countries with a Free Trade Agreement doesn’t mean you can automatically claim the duty exemption. To understand the requirements, you must read through them and be certain that your claim can be supported, and you have the documentation to back the claim.

This is an area that Customs can and will issue a request for more information. Importers need to ensure they have the proof and correct documentation to back any FTA claims.

If you or your Customs Broker make a false claim for an FTA, then you are in violation and need to correct your entry and report it immediately to Customs. As with any errors, double check entries that are similar to ensure that they are compliant and if not, report them as well.

5.    False Declarations

False Declarations are just what it sounds like. Making a false claim of any kind, whether it is an incorrect description of your merchandise, an incorrect country of origin or any other false claim. These false claims can be written or even verbal and are meant to deprive the United States of any duties that may be claimed upon the importation of the merchandise or trying to conceal what you are actually importing.

If you are found guilty of having goods entered into the commerce of the United States by false declarations you can be fined for each offense, imprisoned, or both.

Review your documentation prior to entry or even after entry is made to ensure that the correct information is given to Customs. This is one violation that can be avoidable if the proper steps are taken when you or your vendor prepares the documentation for the shipment.

How Do You Report a Violation?

What do you do if you find an error or a violation on your import shipment? There are several outlets to report these errors to Customs.

  • If your entry is still within the time frame before it is on your statement to pay Customs duty, then whatever error you found can be corrected and retransmitted to Customs. There is no penalty or repercussion to correct your entry prior to pay in.
  • If the shipment hasn’t liquidated yet, you can file a Post Summary Correction (PSC) to have the error corrected. If it results in additional duty owed, you will receive a bill from Customs.
  • If the shipment has liquidated, then you can file a protest. When you do this, you explain what the error was and why it occurred and what it should be. If you are sending this as a hard copy document to the Port of Entry, you can also include a check for the additional duties that are owed.
  • If you end up finding a systemic issue with a number of your import entries, then you can file a prior disclosure with Customs. When you submit your prior disclosure, you will also need to include payment for any additional duties that are owed.

If you notify Customs of the error or violation prior to them notifying you about an issue, it can help with receiving reduced penalties. Filing a PSC, Protest or filing a Prior Disclosure can show your due diligence in being compliant with Customs laws and regulations.

However, you don’t want to rely on post entry filings. The goal is to have the entry correct when it is first submitted to Customs. If you use the post entry process incessantly, it can lead to higher scrutiny from Customs.

What are Penalties for Customs Violations?

Violating any Customs laws or regulations can result in significant penalties for individuals or companies. There is also the potential of jail time if the violation is a criminal act.  Violations can be intentional or negligent. They can run the gamut of being a small one-time mistake to a huge fiasco that you have to face the music and pay the fines/penalties and possible jail time for.

Being able to navigate what each penalty can be for Customs Violations, whether it is import or export, can be scary. But what is even scarier is what you can face when you are not compliant.

If Customs finds that you have an import violation, then they look to see the culpability of the action. Were the actions fraudulent, negligence or gross negligence? Depending on what they find will determine the type of punishment you receive.

These types of violations can end up having a pretty hefty penalty. The least amount might be the domestic value of the merchandise, up to 2 or 4 times the loss of duties or 20%-40% of the appraised value of the merchandise.

1. Fines

With fines or penalties starting at thousands of dollars and reaching up to millions, it can be very damaging to a company’s bottom line. What if you were faced with the fine along with the company? Would you be able to handle paying it?

Here is one example of a fine for a false declaration. A company that produces optical lenses had provided false descriptions, tariff classifications and duty rates for their entries of machinery and repair parts. Customs had pursued action against them, since they were defrauding the United States of duties owed. The company settled with Customs and proposed an offer in compromise, which is a written offer and deposit of funds to settle civil liability relating to a Government claim arising from Customs laws. Customs accepted their offer and the company paid $3,320,425 for their violation of false claims.

2. Imprisonment

Along with a fine, you could be subject to prison time as well for a Customs violation. Many of the violations can result in prison time starting at a few months up to 20 years. If Customs finds that the violations are criminal in nature, they will undoubtedly combine as many charges for non-compliance that they can.

A gentleman from New Mexico was convicted for multiple violations of smuggling, which of course violates Customs laws. The government proved that he played a role in smuggling ancient artifacts that were stolen from burial sites in Pakistan and then was trying to sell them in Santa Fe. He was found guilty and is facing up to 20 years in prison.

3. Probation

Depending on the severity of the violation and the type of offense, Customs could give an individual or even a company probation time. If a person is sentenced to probation, they must serve at least a 12-month sentence, though possibly longer. The court lays out the rules that must be followed while on probation. For example, asking the probation officer to move or leave the country, staying out of any more trouble and paying any fines and court costs.

There was a company that was involved in a Customs fraud scheme. They were submitting fraudulent invoices to Customs by undervaluing their goods in order to launder money and other crimes. The company was placed on probation for 5 years. During that time, the company had to implement an effective anti-money laundering and ethics compliance program with an outside compliance monitor.

What Should I Do Now?

Mistakes can happen when preparing documentation for Customs, whether it is an import or an export. There are ways to alert Customs when there are just minor errors and they are caught early enough and hopefully by you or someone in your company.

Don’t let mistakes build up and become a serious matter. The laws and regulations can be very complicated to determine how serious your violation is. The sooner it is caught, the better. The best way to catch any violation is to have a strong trade compliance program that incorporates procedures for self-assessment and periodic entry review.

If you are unsure if any of your export or import documentation can be cause for concern, now is the time to review it. You don’t want to have Customs come in for an audit and uncover violations that you never knew where there or receive a letter stating that you are under investigation for Customs violations.

Export Solutions has experienced and knowledgeable consultants well-versed in import compliance. If you need assistance in determining whether or not you may have violations or you would like an assessment of your existing program, please contact Export Solutions for a free consultation.

Customs Violations F.A.Q.s

What is considered a customs violation?
Customs violations are crimes of evasion committed when individuals and/or companies try to bring in products without paying importation duties or evade other customs laws, such as providing incorrect valuation, falsifying documents, or importing prohibited items.
What are the most common import violations?
The most common import violations include failure to claim anti-dumping duties, valuation, classification, and violations of intellectual property rights.
How much are Customs penalties?
Penalty amounts issued are based on the value of the merchandise or duties, taxes and fees. These fines can end up being quite substantial based on the level of culpability for non-compliance.

Shawna Karajic is a Senior Consultant for Export Solutions -- a full-service consulting firm specializing in U.S. import and export regulations.