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.]

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