CBP has for decades targeted importers looking for problems with assists. And that trend has only escalated recently. Most importers do not even realize that they have assists that must be reported to CBP. This happens because importers do not firmly grasp what an assist is. All this comes to a head typically when CBP audits an importer or sends a request for information. Then there is a mad rush to file prior disclosures and to fix the problem, while shelling out large settlement payments to CBP.
An “assist,” is defined by statute as “materials, components, parts, and similar items incorporated in the imported merchandise” that is provided “free of charge or at a reduced cost, by the buyer of imported merchandise for use in connection with the production or sale for export to the United States of the imported merchandise.” 19 USC Section 1401a(h)(1). An “assist” might consist of, for example, design or engineering work done overseas. The value of the assists is subject to import duties pursuant to 19 USC Section 1401a(b)(1)(C). Pursuant to 19 CFR 152.102 an assist means any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise: (i) Materials, components, parts, and similar items incorporated in the imported merchandise. (ii) Tools, dies, molds, and similar items used in the production of the imported merchandise. (iii) Merchandise consumed in the production of the imported merchandise. (iv) Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.
There are ways to avoid violations, including understanding the regulations governing assists, meticulous record keeping, careful coordination with suppliers, and sound communications within the company.
By the way, did you know that 19 CFR § 152.103 (d) (2) allows companies to depreciate the value of an assist? The regulation states: "If the assist has been used previously by the buyer, regardless of whether it had been acquired or produced by him, the original cost of acquisition or production would be adjusted downward to reflect its use before its value could be determined."
If you are an importer, you probably rely heavily on customs brokers. You may not have the inclination or the resources to clear your own entries. Customs brokers can be indispensable for classification and other compliance areas. Some brokers also provide other services, including logistics and shipping. Brokers are highly trained professionals, having been vetted and licensed by US Customs and Border Protection (CBP). Using customs brokers (or other professionals, like customs attorneys) can help convince enforcement authorities that you are using reasonable care. Customs brokerage has existed as a profession for centuries, preceding the founding of our nation and proving itself essential to international commerce. But none of this means that you give your customs broker carte blanche. A customs broker is your agent. When the customs broker makes a mistake, it is your mistake. When the customs broker violates the law, the law presumes that the customs broker is acting at your company's behest.
Hiring a customs broker does not insulate you from liability. It only extends the avenues for enforcement officials to tag your company for errors and violations. If errors and violations are uncovered, the importer-broker relationship may turn adversarial, with one party blaming the other. Some customs brokers feel that they owe a greater allegiance to CBP than to the importer. In the end, if you chose the wrong broker, you (not your broker) can lose out on the duty-free savings from programs that you did not know about, you are likely to pay hundreds of thousands, or even millions of dollars, in fines and penalties, and you are likely to pay similar amounts in administrative costs and fees to resolve the violations.
Thus, a hands-off approach can be calamitous. You must remain actively involved with everything your customs broker does on your behalf. The best way to do this is to limit the number of brokers you hire, restrict the terms and duration of the powers of attorney you grant, create Standard Operating Procedures (SOPs) for your brokers, and supervise and audit broker performance.
Limit the Number of Customs Brokers
Use a customs broker as liberally as you need to, but limit the number of brokerage firms you hire. Having too many brokers is a sign that you do not control your brokers. If you do not know how many brokers you are using or who they are, you may be in even bigger trouble. There are ways, with the help of an attorney, to find out who is making entries on your company’s behalf.
Once you know who your customs brokers are, trim them to a manageable number. Find out what each broker is doing on your company's behalf. You may discover that you are paying more than one broker to do the same task. You may also find a disparity in the fees you pay different brokerage firms. You may find out that there are individuals and departments within your company that hire customs brokers when they have no authority to do so. All this information will enable you to negotiate for better terms with the brokers you do retain, and to create company policies limiting who can hire brokers.
With all this information in hand, start revoking the powers of attorney of customs brokers that you do not need.
Sign Better Powers of Attorney
Revisit the contracts and powers of attorney for those brokers you intend to retain. It is tempting to sign the "industry standard" power of attorney or contract, but the terms and conditions may not serve your company well. There may be exculpatory clauses, limitations of damages, and other language that is suspect. Many importers sign unlimited powers of attorney. That is a big mistake. This is your power of attorney. You are the principal. You decide what the customs broker can and cannot do when representing you. Also consider limiting the duration of your powers of attorney. Avoiding "standard" forms will benefit both parties. It will force you into a dialogue with your broker, and the expectations of both parties will be revealed with clarity and reduced to writing.
Create Standard Operating Procedures
Create Standard Operating Procedures (SOPs) for your customs brokers to follow. Make sure that your brokers are contractually obligated to follow your SOPs. How much, if at all, you involve your broker in developing your SOPs is a matter of choice and comfort level.
Audit Your Customs Brokers
Audit your customs brokers for compliance with your SOPs. No one in your company should ever say anything like, "We don't worry about that (e.g., classification). That's what we have a broker for." There are many ways to audit your customs brokers, and your review does not have to be incredibly intrusive or prolonged. But in the end, be brutally honest in grading your customs brokers. Your customs brokers should certainly not be reluctant to cooperate, having agreed to your SOPs.
Get a good lawyer
Finally, hire a seasoned lawyer to help your company foster a mutually beneficial relationship with your customs brokers, someone who is responsible primarily for protecting your company's interests.
The blockbuster movie season has started. The movies are expensive, breezy, predictable, and highly enjoyable, especially the younger you are. The critics hate them, but as summer approaches, the public retreats to accessible escapism. The studios work mightily at finding just the right balance between familiarity (often in the form of sequels) and thrills. While Avatar created a whole new world of people, lexicon, and topography, its themes and story line are viewer-friendly and familiar. They have to be. Movies that stray away too much from concrete reality lose audience.
But who judges if a movie is real enough? As we are all human, we are all equally expert at judging motives of all parties to a movie plot. Scientists are often asked about a technology or gadget that is featured in a movie ("can people really do that?"), but lawyers are rarely asked whether events in a movie are even possible under the law. Lawyers would have a field day if asked. For example, CSI movies and TV shows greatly exaggerate the reliability of forensic “science”, the prominence of CSI personnel in resolving a crime, and the admissibility at trial of the evidence generated.
You might, respond, “who cares? I don’t want to know if the law shown in a movie is real.” We can’t really blame anyone for thinking this way. Injecting legal realism into a plot often sucks all the fun out of a movie.
But this blog is about the law, after all, and we back away from reporting on the law. Every once in a while, we may review some of the movies to see how closely they approximate legal reality. We will try to keep it entertaining, but we may go into a movie’s plot details. So, here’s a standing spoiler alert.
Let’s talk about Iron Man 2. Tony Stark (Robert Downey, Jr.), an inventor billionaire, is Iron Man. Mr. Stark created a high tech suit that turns him into a super hero and that also allows him to live. Without the arc reactor, an important component of his armor, his heart would stop. The US Government wants Tony to fork over the technology behind the armor for national defense purposes. That’s villain number 1. Villain number 2 (there is a third villain, but he won’t be mentioned here) is of the super variety. His name is Ivan Vanko (Mickey Rourke), a Russian genius inventor fresh from a gulag and itching to thump Mr. Stark for what he considers a patent infringement on the arc reactor. So Vanko does what you or I might do if we wanted to enforce intellectual property rights: he builds his own super armor to ambush Iron Man/Stark at a car race in Monaco.
Problem One: Export violations. Tony Stark invented some of his armor’s technology while being held prisoner in the Middle East, but Stark Industries is US-based and the technology behind his armor is clearly tied to US soil. At one time, he was a major supplier of munitions to the US Government, he was thus probably registered with the US State Department and was accustomed to filing export licenses before shipping his technology overseas. Monaco is overseas. Thus, he would probably need to have first applied for an export license.
Problem Two: Patent Infringement. Prisoners tend to know the law better than most lawyers and Vanko had oodles of time to investigate the finer points of enforcing his intellectual property rights. While nothing can beat the adrenalin rush from thrashing a goody-to-shoes superhero, hiring a lawyer would have been more effective. A lawyer would have filed to protect the patent and gone after the rights to the intellectual property, as well as against the infringer. A lawyer would have invoked treaties and applied to agencies and enforcement authorities, probably sought injunctive relief and damages. The downside is that there aren’t too many pyrotechnics when you watch lawyers do this kind of stuff.
Incoterms can be great. Incoterms do all sorts of things, like allocating risk of loss and responsibilities for paying insurance and freight. They were recently amended by the International Chamber of Commerce. But Incoterms are conventions or standards. Actually, they are suggestions. They are not law. They can’t be law because the buyer and seller can massage them to fit their particular contract. Often parties don’t even use Incoterms as intended or even at all. Thus, we can say that when a contract between foreign seller/exporter and the importer of record specifies that foreign seller/exporter pays for freight and insurance, and if those charges are set out separately in the invoice and elsewhere to CBP's satifsaction, then the importer of record can deduct those charges and make sure it doesn’t pay duty on them regardless of what the Incoterms say.
Take HQ 547826 for example, a 2002 ruling issued by CBP. Here we have an instance where the parties wrote on their contract: FOB Miami, which CBP complained was nonsensical. But it isn't nonsensical if the parties knew what they meant. That’s what a contract is. The meeting of the minds. Who cares who else understands, right? Well, it matters if an outside arbiter, like CBP or a court, has to resolve a contractual dispute between the parties. In this ruling, FOB Miami didn’t make sense because traditionally FOB means that the exporter/seller’s responsibilities end at the foreign port, but it was clear that the exporter/seller paid all the freight and insurance costs all the way to the US port. Because the importer supplied sufficient, itemized backup to support this, CBP ignored the FOB and allowed the importer to deduct those costs from the transaction value.
Principal and a founding member of GRVR Attorneys.