Customs Compliance Puts Importers of Record on the Spot

Importers have traditionally treated customs compliance as a transaction-level exercise — classify the product, calculate the duty, file the entry and keep the records. That model is now becoming difficult to sustain.

Executive Order 14411, “Strengthening Customs Enforcement,” signed on June 3, directs the U.S. Department of Homeland Security (DHS) and Customs and Border Protection (CBP) to fundamentally expand the information, documentation and accountability associated with importers of record (IOR).

The executive order (EO) places greater emphasis on who is importing, who owns that entity, what assets it maintains in the U.S., who its affiliates are, and what can be demonstrated about the origin and movement of imported goods.

For importers, the significance extends well beyond another regulatory checklist. The changes point toward a customs environment where traceability, data accuracy and the ability to reconcile information across the supply chain become core compliance requirements.

An IOR Is Under Greater Scrutiny

The EO directs CBP to revise importer eligibility requirements within 180 days. Among other provisions, the order calls for IOR to maintain minimum levels of tangible domestic assets, bonding or both, while also providing additional information about anticipated import volumes, organizational history, ownership, beneficial ownership, business affiliations and domestic assets.

Also, the EO establishes a “good standing” framework for IOR and directs CBP to (1) update the IOR registry, (2) remove inactive importers, (3) confirm compliance and (4) establish risk-based tiers based on such factors as compliance history, enforcement actions and audit results. Enhanced vetting is also contemplated for importers, affiliates, customs brokers, custodians of bonded merchandise and freight forwarders. That makes the accuracy of basic importer information more consequential.

CBP has already begun putting this emphasis into practice. In an August notice, CBP announced enhanced enforcement of IOR information submitted through CBP Form 5106. Beginning September 18, CBP stated that inaccurate or incomplete information could result in the immediate voiding of an IOR number, preventing the importer from using that number to enter merchandise into the U.S.

In other words, the first question in a compliance program very well may be: Can you prove who you are?

Foreign Importers Face Additional Requirements

The EO directs DHS and CBP to impose additional requirements for foreign IOR. It directs DHS to prohibit foreign IOR from filing informal entries.

For formal entries, foreign IOR generally would not be permitted to rely on a continuous bond unless CBP determines that the revenue would be fully protected and compliance assured. The order also directs foreign IOR to participate in the CBP’s Customs Trade Partnership Against Terrorism (CTPAT) where eligible or use a CTPAT-validated and licensed customs broker.

For multinational companies, this creates an important distinction between having a presence in the U.S. and being able to demonstrate the characteristics required to qualify as a U.S. IOR.

The EO specifically directs DHS to develop guidance addressing what it means for an entity to be “located” in the U.S., including consideration of its principal place of business, physical presence and sufficient tangible U.S. assets. That means corporate structure, ownership and operational information are becoming part of the customs compliance conversation.

The Documentation Requirement

Perhaps the most consequential development for day-to-day compliance teams is the push toward greater visibility into documentation generated before goods ever reach the U.S. The EO directs DHS to establish a requirement for submission of information or documentation that a foreign exporter was required to provide to its foreign customs administration before exporting goods to the U.S.

CBP’s September 2 advance notice of proposed rulemaking (ANPRM) provides more detail about what this could mean. The agency is considering whether importers should submit or retain such foreign export documentation as:

• Foreign export declarations
• Commercial invoices
• Packing lists
• Certificates of origin
• Export licenses and permits
• Bills of lading and air waybills.

CBP says this information could help the agency reconcile import entries with information provided to foreign customs authorities and identify discrepancies that could indicate violations, including potential dual invoicing.

Importantly, CBP has not yet finalized a universal requirement covering all of these documents. The ANPRM is asking the trade community how such a requirement should work, whether documentation should be submitted with an entry or simply retained, who should be responsible for maintaining it, how authenticity should be verified and what compliance costs would result.

The comment period closes December 1.

For importers, that date should therefore be viewed as a major regulatory milestone and preparation point, rather than a blanket deadline to begin submitting every foreign export document to CBP.

Traceability Becomes a Compliance Capability

The implications extend beyond document storage. CBP is explicitly asking for input on technology that could improve supply chain traceability and visibility into the parties involved in imported goods.

The agency is considering ways to connect information about manufacturers, exporters, intermediaries and other parties across the import transaction. That raises a practical challenge for compliance teams.

The necessary information often exists, but it may be scattered across an ERP, broker systems, supplier portals, spreadsheets, product databases, emails and foreign documentation. Different systems may contain different product descriptions, values, classifications or country-of-origin information. A compliance team cannot effectively reconcile data it cannot find.

This is where trade compliance technology can become more than a classification tool. Companies need a system that can connect product-level information with tariff classifications, regulatory requirements, and changes that could affect an entry.

Reasonable Care Gets More Complicated

One of the most important questions in CBP’s ANPRM concerns the importer’s responsibility for foreign export documentation. CBP specifically asks whether the IOR should be responsible for retaining and furnishing foreign export records and whether “reasonable care” should be the appropriate standard for assessing the accuracy of those documents before submitting them. That question deserves attention from every importer.

An importer may not create a foreign export declaration. A supplier, distributor, trading company or logistics provider may create and submit the document to a foreign government. Yet, the importer could potentially be responsible for retaining it and reconciling it against the U.S. entry.

That creates a data problem as much as a documentation problem. Companies will need processes for identifying discrepancies in information such as:

• Product classification
• Declared value
• Quantity
• Country of origin
• Manufacturer
• Product identifiers
• Supply chain participants.

A discrepancy does not necessarily mean that one document is incorrect. Foreign customs systems and U.S. customs valuation and entry requirements can treat information differently. CBP asks in the ANPRM how importers should reconcile legitimate differences between information reported to a foreign customs authority and information used for U.S. customs purposes.

The key is being able to identify the difference, understand why it exists, and document the explanation.

Compliance Teams Need a Data Strategy

The practical response to these changes is not simply to create another folder for customs documents. Importers should begin evaluating whether they can answer several basic questions across their product catalogs and supply chains:

• Who is the IOR?
• Who owns and controls that entity?
• What suppliers and manufacturers are connected to each product?
• What documentation was submitted to foreign authorities before export?
• Does the information in those documents align with the U.S. entry?
• If it does not, can the difference be explained and documented?
• Which classifications, tariff programs and regulatory requirements apply to the product today?
• What has changed since the last entry?

Those questions require connected data.

Companies should evaluate whether their existing systems can bring together product information, tariff classifications, customs rulings, country-of-origin data, supplier information, regulatory requirements and supporting documentation. They should also assess whether compliance teams can identify changes, investigate discrepancies, and maintain an audit trail showing how decisions were reached.

This is particularly important as customs enforcement moves toward greater visibility across the entire import transaction. A compliance program built around periodic reviews may not provide the same level of visibility as one that continuously monitors relevant data and flags potential discrepancies for human review.

The objective is not simply to collect more information, but also to make that information usable when an importer needs to demonstrate that an entry was accurate, properly documented, and supported by reasonable care.

December 1 Should Be a Planning Milestone

The December 1 deadline gives companies a useful forcing function. CBP is asking the trade community to provide feedback on the operational realities of expanded documentation and traceability requirements, including data availability, record retention, technology, costs and implementation timelines.

Importers do not have to wait for the final rules to begin preparing. They should start by (1) validating their Form 5106 information, (2) reviewing IOR and ownership structures, (3) mapping where foreign export documents are created and stored, (4) identifying gaps between supplier and U.S. entry data and (5) determining which compliance processes still depend on manual reconciliation.

The broader message from EO 14411 is that customs compliance is moving toward greater accountability for the data behind every import transaction.

For companies that still manage that information across disconnected systems, the challenge will not simply be keeping more records, but also proving that the records agree. As CBP gains more visibility across the international supply chain, that ability to connect, reconcile and defend trade data may become one of the most important capabilities an importer has.

(Image credit: Getty Images/Andrii Yalanskyi)