In late 2016, U.S. Customs issued an unusual letter to a select group of 1000 U.S. importers containing numerous compliance publications and detailing facts about the importers’ highest-valued goods. The letter asks for the importers to review CBP’s laws and regulations, and to either assure compliance or disclose in advance any errors identified. It also asks that a receipt copy of the letter be returned. According to the CBP itself, the letter informally represents a warning that the importers are an audit target. The return of the letter, as Customs requests, provides proof of notice. Many importers are currently grappling with the decision to concede actual notice and ensure that they are in full compliance, or to decline to return and require such proof of notice from Customs in the event a deficiency in duty payments is later discovered.
Disclaimer: The article below appeared in the Fall, 2016 edition of The Beacon, the journal of the Maritime Exchange for the Delaware River and Bay, and is reprinted with permission.
Beginning in July of this year, selected U.S. importers began receiving an unusual letter from U.S. Customs. The letter detailed for the importer certain facts known by Customs about their imports – the Harmonized Tariff item numbers under which the company’s highest valued goods were imported; the value of such goods; and the percentage that the highest valued goods represented to all goods imported by that company. Customs said it was supplying this information “to ensure future compliance” (the implication being that past shipments might not have been in compliance).
The letter then furnishes the importer with a DVD containing a substantial number of compliance publications “to assist in understanding CBP’s laws and regulations.” Unfortunately the breadth of the publications is such that the importer cannot identify the concerns Customs has about the importer’s compliance levels. One importer who got such a letter was given 17 separate compliance documents, covering virtually all potential Customs issues. The letter encourages the importer to review its entries; conduct assessments for errors, and then pay any duties due through the “voluntary disclosure” program which has been successfully managed by Customs for more than 40 years. The letter then requests that the importer acknowledge receipt of the letter by signing a copy and returning it to Customs. Lawyers will identify the “sign and return” request as an attempt by Customs to establish what is known as proof of “actual notice,” which ultimately will be used against the importer if an irregularity not previously disclosed by the importer is later uncovered.
The letter prompted an almost immediate and predictable reaction from the import community. What is behind such a letter and why have I received one?”
Informally Customs has been fairly candid in responding to those who have inquired. They have been told that 1000 letters were sent, principally to importers who have not been audited in a significant period, and hence the letter could be construed as a “head’s up” that the company is now an audit target. In other cases, Customs may have identified anomalies in the import transactions of the importer which may warrant further inquiry. Whatever may be the motivation in any particular case, the lesson of the letter is clear – the Customs Regulatory Audit team may be on its way.
What is the best response to such a letter? First, an importer would be wise to review its entries and entry processes for the last year at a minimum and should probably begin with the Harmonized Tariff item numbers identified in the letter. If an error is found, then the company should consider a five year review. This can be done internally, with the appointed Customs broker, with a consultant or with counsel. Companies who retain their broker or a consultant for such a review should understand that there is no privilege between the broker/consultant and the importer, freeing Customs to simply go to the broker or consultant and ask “what did you find” and the broker or consultant will be legally obligated to reply. No such risk is incurred if the importer hires counsel to assist in such a review. If an error is detected, and duties have been underpaid, disclosure is very much advised. It would be folly for an importer to be told in advance that it is on a Customs radar screen; to locate an error in the entry documents and then fail to disclose.
Should the importer sign and return the letter, as Customs requests? Some lawyers have advised against signing the document, for the obvious reason that the goal of Customs is to use the letter against the recipient as evidence of “actual notice,” and no company has an obligation to create evidence against itself. So the cautionary advice not to sign is understandable. However, the other side of that legal coin is that most courts will accept proof of actual notice through a showing of proof of mailing as a substitute for proof of receipt, and the failure to sign and return may just further elevate the prospective target in the eyes of Customs. Eventually someone at Customs will be tasked with prioritizing the 1000 audit candidates, and it would be easy to place at the front of the line those whom Customs knows to have received, but not returned, the letter.
To those who have received the letter, the message should be clear. Customs is likely coming. Protect yourself.