By Alan Lebowitz, Esq.

The more a lender knows about its accounts, the better informed its risk-related decisions will be. An often overlooked or underexplored area of due diligence involves regulatory compliance with respect to imports. The Customs Service, now known as U.S. Customs & Border Protection (“CBP”), regularly sends inquiries to importers, audits importers and investigates import practices to ascertain compliance. In cases of non-compliance, CBP can seize merchandise, assess additional duties, assess penalties up to 800% of the loss of revenue and even recommend criminal prosecution in the most egregious cases. Customs violations have also recently been at the heart of several high-profile whistleblower cases. Finally, CBP not only enforces its own regulations but those of numerous other agencies such as the Consumer Product Safety Commission, the Department of Commerce, the Federal Trade Commission, the Food & Drug Administration, Fish & Wildlife, etc.

A few simple questions will go a long way when determining whether your account has significant potential exposure that may impact profitability or even long term economic viability. On the upside, importers that are willing to undertake routine internal compliance reviews are often able to identify significant potential duty savings opportunities. So the next time you sit down with a potential or current account that sources product overseas, you may want to consider asking some or all of the following questions:

  • Has your company ever received a penalty or liquidated damages claim from CBP?
  • Has CBP detained or seized any of your shipments in the last five years? If so, what was the outcome?
  • Has CBP suspended liquidation of any of your entries in the last five years?
  • Do you make any off invoice payments to vendors? If so, are such additional payments communicated to the import department?
  • Do you ever receive invoices payable in a foreign currency?
  • Do you supply any component materials, equipment, tools or dies, packaging, designs, R&D, etc. directly or indirectly to vendors?
  • Do you ever buy from related vendors? If so, do you have a written Customs-based transfer pricing policy?
  • Do you pay royalties to a vendor or a third party in connection with imported merchandise?
  • Do you purchase merchandise on a Delivered Duty Paid (“DDP”) or Landed Duty Paid (“LDP”) basis where another party acts as the importer of record? If so, what percentage of your total purchases is on such DDP or LDP terms?
  • If you claim preferential tariff treatment under a free trade or similar agreement, e.g., G.S.P., NAFTA, etc., have you ever undergone a CPB verification?
  • Do you utilize buying agents in connection with any of your foreign purchases? If so do you have a written buying agency agreement? Are resultant commission payments disclosed to CBP?
  • Has any of your imported merchandise been subject to an antidumping (“ADD”) or countervailing duty (“CVD”) order in the past five years? Are you aware of any such current cases affecting your industry or trade? (Many ADD duty deposit rates exceed 200%).
  • Have you ever applied for a Customs ruling or ADD scope determination?
  • Do you use outside legal counsel or obtain expert advice from any third party, e.g., a customs broker, in connection with import related transactions, including tariff classification.
  • Do you have written import procedures or a Compliance Manual?
  • Are Customs entries prepared by your broker regularly reviewed by import department personnel for accuracy?
  • How long do you maintain records needed to support Customs valuation or tariff classification declarations? Do you have a written record retention policy?

Potential Duty Savings Opportunities Questions

  • If you had to guess, on average, what percentage of the prices charged by your vendors relate to non-production related activity, e.g., merchandising, quality control, etc.?
  • Are you familiar with the first sale appraisement principle, whereby duty on a middleman’s mark-up may be lawfully avoided in certain situations?
  • Have you recently reviewed the duty rates being applied to your imported products? Have you explored whether making relatively minor component material or design changes might lower duty rates applicable to your imports?
  • Do your sourcing decisions take duty free treatment under the many free trade agreements negotiated by the U.S. into consideration?
  • Do you ever receive defective or late shipments that you sell at discounted prices? Do you ever receive discounts or rebates from vendors in such instances?
  • Are duty drawback refunds available, e.g., upon exportation of products incorporating imported duty paid components?


Please note that this article is an education tool that is general in nature and is not intended to provide legal advice in any specific circumstances.

Alan G. Lebowitz is one of the founding partners of Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP. GDLSK is one of the largest law firms in the United States that devotes its practice exclusively to international trade regulation. His practice areas include customs law, intellectual property, administrative enforcement proceedings, export sanctions, trade legislation, product licensing and admissibility and international trade regulations. He has represented clients before U.S. Customs and Border Protection and other government agencies with responsibility over import and export transactions, e.g., the Food and Drug Administration, Bureau of Industry and Security, the Federal Maritime Commission, the Consumer Product Safety Commission, the Federal Trade Commission etc. for over 30 years. Mr. Lebowitz counsels companies on a regular basis with regard to duty minimization and internal compliance programs, including Free Trade Agreement administration, and has assisted both private and public companies with respect to government and internal audits and investigations.

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