Thursday, May 22, 2008

Goodbye SED, Hello AES

The final rule implementing mandatory use of the Census Department’s Automated Export System (AES) will be published soon in the Federal Register. Some industry analysts are forecasting publication of the final rule during the second quarter of 2008. Under AES, required electronic submission of export declarations known as Electronic Export Information (EEI) will do away with the paper Shipper Export Declaration (SED).

Although the proposed rule mandating AES was published in 2005, differences among federal agencies postponed implementation of the final rule. However, the Census Department recently indicated that a compromise has been reached with the Department of Homeland Security (DHS). DHS had initially blocked mandatory AES after failing to gain approval to share export data with foreign governments as part of antiterrorism cooperation. (U.S. exporters opposed this data sharing fearing that their competitors might gain access to proprietary information.) Additionally, DHS had objected to Census continuing to allow post-departure filing of export documents by approved companies.

Post-departure filing, also known as Option 4, is a coup for exporters who are able to secure it. The approximate 2,300 approved exporters and freight forwarders can make export declarations up to 10 calendar days after departure of the goods. Exporters like post-departure filing because their shipments aren’t delayed when information needed for declaration is unavailable at departure. Missing data may include the exact final price of the goods, inventory the items were taken from, the country of origin of components, etc. However, even if a company is approved for post-departure filing, certain countries and commodities still require pre-departure filing.

Census has a current freeze on accepting new applicants to post-departure filing that will remain in effect until publication of the final rule. There is some concern among exporters that, under the final rule, post-departure filing will be abolished or severely restricted requiring formerly approved companies to re-apply. At the winter conference of the American Association of Exporters and Importers, a trade ombudsman from the Census Department’s Foreign Trade Division suggested that today’s high-tech communication between shippers and freight forwarders may alleviate the need for post-departure filing. However, he advised not to be concerned that post-departure filing will go away. The final rule is expected to closely resemble the proposed rule published in 2005.

Under the new AES rule, exporters must file electronic declarations within a certain timeframe prior to departure depending on the mode of transportation. The timeframes are: 24 hours prior to lading for vessel shipments, 4 hours prior to wheels up for air shipments (excluding nearby countries), 2 hours for rail, 1 hour for truck, or 30 minutes for pre-certified secure carriers.

Four alternatives are available for electronic filing of EEI under the new rule. First, shippers can use AESDirect, a free service offered by Census. Second, shippers can purchase AES filing software from certified vendors. Third, shippers can develop software using the Automated Export System Trade Interface Requirements (AESTIR). And, last, shippers can use an authorized agent (such as a freight forwarder) who may charge a fee for filing AES data on an exporter’s behalf. An authorized agent must be certified as a filing agent with a properly executed power of attorney or written authorization from the U.S. Principal Party in Interest (USPPI). Responsibilities of the filing agent can be found in the Code of Federal Regulations (15 CFR 30.4).

A significant impact of the new rule is that penalties for inaccurate or late filed EEI will increase to $1,000 to $10,000 per violation. Both exporters and freight forwarders may be held liable for inaccurately filed EEI. As a result of the final rule, carriers will be required to show proof of filing and/or an exemption legend. Proof of filing can be a citation to an Internal Transaction Number (ITN) or an ITN assigned in the AES filing process. The ITN or legend must appear on the bill of lading, air waybill, or other shipping document attached to the manifest.

Federal agencies view AES as a valuable tool for export compliance. Customs uses AES to target unauthorized parties, unauthorized destinations, and/or banned exports before goods leave the country. The new AES regulation will provide for enforcement of the penalty provisions by three federal agencies: Customs and Border Patrol (CBP), U.S. Immigration and Customs Enforcement (a sister agency to CBP within the Department of Homeland Security), and the Office of Export Enforcement under the Bureau of Industry and Security (BIS) within the Department of Commerce.

Benefits of AES to exporters include: 1) improved export compliance, 2) correction of errors as they occur, 3) decreased costs, and 4) elimination of paper review of licenses against shipments. AES contains an editing system to recognize errors that occur during electronic declaration. Exporters are able to correct errors early to avoid delay or penalties. AES also helps exporters avoid duplicate reporting to correct errors. The system returns an Internal Transaction Number (ITN) as confirmation that an exporter has successfully filed. Additionally, interface of AES to the Department of Commerce BIS electronically validates data on export shipments against previously approved licenses and transmits the transaction to the appropriate agency.

Although the precise date for publication is unclear, the final rule will be effective 30 days after publication in the Federal Register and must be implemented by exporters within 90 days. Once the final rule is published, the Census Department will make an announcement on its web site. Now is the time to consult with experienced legal counsel and plan your company’s transition to mandatory AES filing of export declarations.

[Thanks to Rosa Dunnegan for her assistance in preparing this article.]

Tuesday, May 20, 2008

To tell or not to tell, that is the question.

Whether you import or export, you will invariably face the question of whether to tell the government that you have made an error in your shipment declaration documents. The disclosure process for importers is the voluntary disclosure program (VDP) while the disclosure process for exporters is voluntary self-disclosure (VSD).

Let’s take importers first. VDP allows importers to voluntarily disclose or report erroneous, inaccurate or insufficient information on import entry declarations as well as underpayment of corresponding duties and taxes. Reasons you might choose disclosure include: exemption from paying fines or penalties on the amount of deficiency disclosed, exclusion from customs audit examinations for two years, and designation as a last priority in the audit selection process.

What can be disclosed and what happens after disclosure? Importers may disclose errors such as: products listed with incorrect tariff headings, imported articles that have been misclassified, erroneous use of customs value, etc. Each disclosure requires settlement of deficiencies incurred with Customs.

If you choose not to make a disclosure and instead wait until Customs issues an Audit Notification Letter (ANL), you may incur significant consequences as well as audit penalties. In extreme cases, importers can be held criminally liable. Penalties are assessed on the basis of negligence, gross negligence or fraud. Such penalties range from a minimum of 50% to a maximum of 800% of the assessed revenue loss. Protection from penalty can be provided by prior disclosure.

Can you blame your broker? No, even if you rely heavily on a broker, the importer of record is fully accountable for information submitted and declared to the Customs. Importers should review their customs compliance records for potential violations and discuss disclosure with legal counsel.

VDP is not a cure-all and does not apply to: 1) importers who have already been issued ANLs, 2) transactions covered by a final assessment issued by the Commissioner of Customs, or 3) cases already filed or the subject of pending ruling requests.

Okay, let’s move on to exporters and VSD. A VSD can be made when information was not reported or when incorrect information was provided on the Shipper’s Export Declaration (SED). An exporter is eligible for VSD whether the omission or error was deliberate or unintentional.

But, a VSD cannot be used to report a correction to a shipment. If information changes after export, amendments must be made to the existing SED for that shipment. Corrections must be made as soon as possible whether before or after VSD. An amended SED should not be used to commit a further misrepresentation, such as the substitution of an export license actually granted after the time of export.

When is disclosure warranted? Although prompt admission of a violation may be considered as a mitigating factor in later enforcement actions, substantial civil and criminal penalties may be triggered. Disclosure is advisable when a recurring diversion of goods to a prohibited destination might be prevented by swift government action. Failure to disclose under these facts may constitute an act of conspiracy or obstruction of justice. Also, disclosure may be required to avoid falsification of reports later submitted to the government.

Let’s wrap up with some general thoughts about disclosure. In certain instances you may need to rush to get disclosure in, particularly if you have reliable information that Customs suspects a violation. Indicators of suspicion include: 1) notices of action changing classification or value; 2) Census rejects for value or other reasons; 3) Customs detects an error in your papers. 4) informal visits or calls from Customs specialists; or 5) a hiccup during a Customs audit.

Disclosure is considered “voluntary” only when made before discovery of a possible violation by government officials. Nevertheless, a company may achieve some mitigation by making disclosure after an investigation has started. When considering self-disclosure, one should discuss with legal counsel whether there is an obligation to disclose and whether a pattern of self-disclosure may constitute a major violation.

If you are considering self-disclosure, you should work closely with your attorney to comply with the requirements of proper disclosure. For example, violations involving export of items controlled, licensed, or otherwise subject to the jurisdiction of the federal government must be made to the appropriate federal department or agency, in addition to the self-disclosure required by the Census Bureau.

There are instances when disclosure is worthless. A violation that might lead to liquidated damages will not benefit from prior disclosure. Since liquidated damages are not the result of a violation of law, there are no fines involved. Instead, liquidated damages represent a breach of an obligation that was secured by the Customs bond. Examples include: late filing or non-filing of a 7501, late payment of non-payment of duties and fees, failure to redeliver merchandise to Customs when demanded, etc.

Sometimes, the benefits of disclosure are unclear. For example, in country of origin marking cases, the connection to declaration documents is weak but you should check whether the origin stated is correct. If the entry contains materially false or misleading information or omissions, you should make prior disclosure.

Finally, don’t use disclosure to fix things that should be done through reconciliation, supplemental information letters, or post entry amendment. The proper course of action, i.e. to tell or not to tell, should be selected in concert with your attorney. It is vital to protect the attorney-client privilege should a serious investigation later ensue.

[Thanks to Rosa Dunnegan for her assistance in preparing this article.]