Importance of Customs Compliance: The Importer’s Duty to Exercise Reasonable Care

At a glance

• The main takeaway: Ford Motor Company was accused of misclassifying imported merchandise to reduce import duties, resulting in a multi-million-dollar settlement.
• Impact on business: Companies engaged in international trade are required to exercise due diligence in customs compliance to avoid penalties.
• Next steps Meet with our team of specialists to evaluate your Company’s compliance practices and mitigate the risks and challenges of navigating this complex regulatory landscape.

The full story:

A recent news story regarding the settlement of Ford Motor Company highlights the critical importance of adhering to customs regulations. Ford has agreed to pay $365 million to settle customs civil penalty claims alleging that the Company improperly classified imported merchandise, leading to the underpayment of duties. Ford was accused of knowingly misclassifying certain vehicles and parts to reduce duties owed to US Customs and Border Protection (CBP).

This settlement serves as a reminder for companies engaged in international trade to exercise due diligence in customs compliance. Importing goods into the US requires close attention and a thorough understanding of the rules set by CBP.

Customs compliance & culpability

In our role as outside expert advisors to numerous international clients, we have observed firms of various sizes rely on information provided by their vendors or mistakenly believe that their customs brokers and freight forwarders would handle customs compliance when clearing imports. However, often times, they do not realize that the Importer of Record—which is usually the buyer or seller of the goods—bears primary responsibility for any consequences resulting from non-compliance.

Monetary penalties can be significant depending on the level of culpability. Misdeclarations resulting from incorrect information or broker errors do not excuse importers from penalty imposition.

A critical aspect of understanding US Customs enforcement lies in comprehending the types of violations outlined in the Tariff Act of 1930. Under Section 484 of the Act (19 U.S.C. § 1484), the Importer of Record is responsible for using reasonable care to enter, classify and determine the value of imported merchandise, as well as providing any necessary information for CBP to properly assess duties, collect accurate statistics, and verify compliance with various legal requirements.

Section 592 (19 U.S.C. § 1592) specifies the imposition of monetary penalties for violations related to the importation of merchandise into the US. These violations cover situations where individuals, through fraudulent acts, gross negligence, or negligence, enter or attempt to enter merchandise into US commerce using false or omitted material information, i.e., the importer did not exercise reasonable care in clearing imports. The chart below summarizes the penalty levels and amounts provided in the statute:

Culpability Level	Revenue Loss	Non-Revenue Loss
Fraud	Up to 100% of the domestic value	Up to 100% of the domestic value
Gross Negligence	The lesser of 100% of the domestic value or 4 times the loss of duties	40% of the dutiable value
Negligence	The lesser of 100% of the domestic value or 2 times the loss of duties	20% of the dutiable value

Surprisingly, this penalty scheme indicates that “non-revenue loss” violations, such as misdeclarations that do not result in duty underpayment to CBP, can carry much larger consequences than “revenue loss” violations. For instance, consider a scenario where a company imports machinery from Taiwan is subject to a 5% duty rate with a declared value of $100. Here are two scenarios comparing revenue-loss and non-revenue loss violations at the gross negligence level:

Non-revenue loss: If the correct country of origin was Vietnam, but was declared as Taiwanese-origin (with no duty difference between Vietnamese- and Taiwanese-origin goods) . . .	Penalty amount: $40 (40% of $100)
Revenue loss: If the correct duty rate was 6% instead of 3% . . .	Revenue loss to CBP: $3 (3% difference) Penalty amount: $3 x 4 = $12 (4 times of loss of revenue) Total amount: $15

CBP has provided extensive guidance for importers to ensure accurate import data and proper assessment of duty amounts under the reasonable care standard. See CBP’s Informed Compliance Publication on “What Every Member of the Trade Community Should Know:  Reasonable Care” for more information.

Common examples of misdeclarations include:

• Misclassification of merchandise under the Harmonized Tariff Schedule of the US
• Undervaluation
• Incorrect country of origin
• Incorrect claims for free trade agreement treatments
• Omission of antidumping/countervailing duties

Enforcement actions

CBP’s enforcement actions may start with simple inquiries, such as Customs Form 28 (Request for Information), or assess additional duties and issue Customs Form 29 (Notice of Action) that can lead to investigations into past shipments. CBP can also escalate the matters to more formal audits like Focused Assessments or Risk Analysis and Survey Assessments or impose “liquidated damages,” which are predetermined penalties for certain violations of customs bond conditions.

Importers must work closely with their customs brokers and act swiftly when CBP enforcement activities begin. Responding promptly with sufficient information to CBP, including evidence of exercising reasonable care and providing comprehensive background and analysis, is crucial for effectively handling CBP inquiries, avoiding extended audits, and mitigating penalties.

In the case that misdeclarations have occurred, importers have the option to submit a Prior Disclosure (PD) to proactively report past errors and pay any additional duties owed to CBP. Although the PD process is formal and lengthy, it can result in significantly reduced or eliminated penalties, if accepted.

The bottom line

From adhering to the reasonable care standard to comprehending penalty assessments based on culpability levels, importers and related stakeholders must comprehensively understand CBP regulatory requirements and remain vigilant in fulfilling their obligations to mitigate potential penalties effectively. Compliance with these standards not only fosters seamless importation processes but also upholds the reputation of the company.

Best practices involve regularly monitoring past imports, managing your customs broker effectively, and ensuring proactive compliance by actively consulting with external advisors. In case of mistakes, promptly communicate and report errors to CBP via proper administrative steps to avoid potential penalties.

Schedule a consultation with our team of Tariffs and Customs specialists to review your import practices and achieve compliance with CBP regulations.

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