Since 1995, the United States Customs Service (it has been renamed "U.S. Customs and Border Protection" or "CBP" following 9/11 and its inclusion into the Department of Homeland Security) has targeted import companies for Compliance and Focused Assessment reviews. These reviews have become an integral part of the agency's "informed compliance" strategy. Originally introduced as a compliance assessment, this program was revised and reintroduced in October of 2002 as Customs' Focused Assessment (FA) program.
What Is A Focused Assessment?
A Focused Assessment is conducted by Customs' Regulatory Audit Division, which reports to Customs Senior Management through a different reporting structure than the more familiar Commercial Operations teams at your local Port of Entry. Initially, a Focused Assessment evaluates the importer's risk of non-compliance with import requirements rather than trying to establish a compliance pass /fail rate, as under the previous Compliance Assessment program. The more intrusive comprehensive Assessment Compliance Testing (or ACT) phase is used only if the Audit team finds that the importer presents an "unacceptable risk". It is in the ACT phase that the Audit team determines a loss of revenue s associated with a non-compliant company.
How Customs Selects the
Importer For A FA Review
The Focused Assessment process begins with the selection of the FA candidate. Customs does its homework when selecting the importer. Using national selection criteria and data collected during the entry process, Customs will evaluate the volume, value, and nature of imports by a company for any given period. Customs looks at a various factors, including imports from primary focus industries (PFI), such as electronics, textiles, automobiles; use of special trade programs and exemptions, such as GSP, 9801 and 9802; and, referrals from local import specialists. Currently any company importing over $100 million is a potential audit candidate.
Once a candidate is selected an importer profile is compiled. This profile contains detailed company background information (Dun & Bradstreet, Web pages, Company 10K and 10Q reports, and information from the trade and press) and customs history (including tariff provisions and exemptions utilized). Information on company compliance is obtained from Import Specialists, the Office of Investigations, intensive exams, and cargo selectivity and entry summary reviews.
Notification Of Selection & The Questionnaire
Once the FA candidate is chosen it is notified by phone and later by an official notice by mail. In some cases the importer may be given significant advanced notice (6 months or more) that it has been selected for the FA. The purpose of this advanced notice is to allow the importer to review or establish its internal procedures and to ensure that its transactions are compliance as possible prior to the commencement of the review.
Generally, included with the written notice is a letter explaining what the importer can expect during the FA process, and it will typically enclose a questionnaire that is to be completed by the company. To see an example of the questionnaire click on Focused Assessment Internal Control Questionnaire. A second questionnaire is also provided requesting information on the company's electronic data storage systems and whether or not financial information can be linked electronically to import transactions.
The company is generally given 30 to 45 days to complete the Internal Control questionnaire. This is not a great deal of time and importers that are not prepared typically have to request additional time or submit incomplete responses. The purpose of the Questionnaire is to provide the RAD audit team with information about the company's organizational structure and internal controls related to Customs transactions, the company's import operations, internal control structure, and to inform the audit candidate of the areas which the assessment will focus. The Questionnaire requests detailed information about:
- Corporate reporting structure for Customs transactions;
- Existence of internal controls, or in-house procedures associated with the entry, classification or valuation of imported goods, and related recordkeeping systems.
- How the company communicates important customs information throughout the company and to its outside vendors, and how it monitors its own compliance.
While there is no legal requirement that companies have written procedures associated with the entry, classification, or valuation of imported goods, the presence of such procedures significantly improve the likelihood of an early termination of the audit, providing an analysis of selected transactions indicates that there are no material inadequacies in the company's customs procedures or systems.
The Advance Conference
Approximately 30 to 45 days after notification of the focused assessment, an advance conference will be conducted. The meeting allows the FA team to meet with company officials and employees, and to discuss any questions that remain by either Customs or the importer concerning the questionnaire or the FA process.
Customs' FA team is made-up of various representatives of Customs. They include import specialists, who specialize in the products in question, one or two members of Customs Regulatory Audit division, and a representative from Customs' Office of Strategic Trade. During the Advance conference, the FA team will review the purpose of their mission, and provide the company with preliminary information obtained on company compliance levels based on intensive exams, cargo selectivity reviews, and entry summary reviews.
At the end of the meeting the RAD team leader will request that the importer provide the team with one or two selected import transactions, and to tie these transactions backwards to the original purchase order and forwards through to payment records. In addition, if not already provided, the RAD team will request a copy of the company's General Ledger and the company's Chart of Accounts.
The Opening Conference And The PAS Phase
A focused assessment is a two-staged process. The first part is the process is referred to as the Pre-Assessment Survey or "PAS" phase. During the PAS phase, Customs will focus on reviewing adequacy of the company's internal controls over customs transactions in relation to the elements specified in Customs published criteria and guidelines.
It will also test the adequacy of the company's internal controls by select a limited number of transactions (typically between 10 and 20 entry line items) from three separate information pools:
- Customs Entry Records
- Selected General Ledger accounts
- Foreign vendor payments
Additional pools of information can be selected if the importer has sufficient activities in special areas, such as imports under Free Trade Agreements, or claims of U.S. goods returned.
The auditor selects entry records for that importer from Customs' database of entries for that importer. Customs pulls not only transactions where the importer acted as the formal importer of record, but also as the ultimate consignee. Importers are generally given about two weeks to provide the requested records. Customs not only expects the importer to provide the entry record and commercial invoice, but also the purchase order, payment record, and descriptive literature or specifications about the products imported. The type of documents requested may be viewed by clicking on Customs' FA Entry Document Request. Entry records will be reviewed for accuracy in areas such as classification, special duty exemptions and FTA programs, and valuation.
The audit team will also look at financial transactions from accounts payable and general ledger records to determine if unreported assists or supplemental payments exist.
Review of the Importer's Financial Transactions
Customs knows that the price stated on the commercial invoice is not always the "total price paid or payable" for merchandise imported, and that importers can often provide assists, in the form of parts, tooling, equipment, NRE or design information, or make separate payments to the supplier or a third party for such items. Customs value law requires that importer declare these assists or supplemental payments at the time of entry. Failure to do so is a violation of law, and can subject the importer to penalties. Additional information on Customs Valuation requirement can be viewed by clicking on our link to Customs Valuation. Customs believes that the best way to determine if any assists or supplemental payments exist is to examine the importer's financial transactions from accounts payable and general ledger records.
The Foreign Vendor Payment Report
Most importers do not segregate their foreign vendor payments from payments made to domestic suppliers, and this often leads to misunderstandings and delays. Clearly, an importer can screen out payments and reimbursements to employees and vendors for maintenance of domestic facilities, and the like. However, it is also likely that some foreign vendors will request payment be made to a U.S. address or bank. Likewise, it is also possible that a U.S. domiciled supplier may provide parts, tooling, or equipment to a foreign assembler at the request of the importer. It is, therefore, important to discuss early on with your Auditor what this report is to look like, what it is to consist of, and what information is required. Once the Auditor has the report in hand, he or she will select a number of transaction payments (between 10 and 20) for review. Customs will ask for all records related to the payment, including the original invoice, and a description of what the payment was for. If the payment was for imported merchandise or related to the production or shipment of imported merchandise, Customs will request a copy of the entry document or other record showing that the payment was reported to customs.
The General Ledger Report
In this situation, the auditor is using the company's General Ledger and Chart of Accounts to determine which accounts are used to record purchases or payments for imported merchandise, for assists and supplemental payments, for payments to agents and third parties, and for royalty or license fees that relate to the production of merchandise. Typical accounts reviewed in include Cost of Goods, R & D, Royalties, as well as the not so obvious accounts. Once the list of accounts is selected, RAD will ask that the importer provide a report of all of the entry line items in each of the selected accounts. Once the Auditor has the report in hand, it will select a number of individual journal entries (between 10 and 20) for review. Customs will ask for all records related to the journal entry, including the invoice, payment record, and a description of what the item was for. If the payment was for imported merchandise or something related to the production or shipment of imported merchandise, Customs will request a copy of the entry document or other record showing that the payment was reported to customs.
Comments On Records & Documentation
The collection of documents request during an FA can be daunting, particularly if the company does not have a systematic method of filing entry records or in cross-referencing its record retention system to the Customs entry number. (Which is how Customs typically asks for information.) Most companies can, with some effort, locate the entry summary document, commercial invoice, airway bill, and packing list associated with the entry, as these documents are often maintained as a package either on site with the importer or off-site at broker or other third party. With a little more effort, the company can also locate the purchase order and/or contract associated with each product on the commercial invoice, however, Customs will also request:
- Receiving report and Inventory records showing the merchandise entered into the inventory system.
- Accounts payable and disbursement record for the merchandise.
- Correspondence with foreign suppliers related to the merchandise purchased.
- In the case of related party transactions, documentation to support transaction value such as requests for quotation, market price analysis, and/or records of price negotiations.
- Records of all other payments associated with the import.
If the entry or line item involves a claim of special or preferential duty treatment, the importer will be asked to produce information which substantiates the claim; such as, in the case of NAFTA, certificates of origin; or in the case of GSP or similar programs, qualifying cost information. For U.S. goods returned, it will be U.S. and foreign manufacturers certifications. Merchandise catalogs and data sheets will also be requested to confirm product descriptions and tariff classifications. Obviously, your best defense is a good offense. Learn what records you are required to have available and implement a system retain and maintain them.
The PAS Report & The Closeout Meeting
The questionnaire responses, and the results of interviews with company officials and employees, the survey of company procedures, and the limited testing will be used to by the Audit Team determine the overall effectiveness of the company's internal controls. The findings of the Audit Team will be prepared in draft form. The draft will be provided to the importer for comment on the findings. The importer's comments will then be incorporated into a final audit report and a close out meeting conducted between the Audit Team and the importer. During the closeout meeting the results will be reviewed and if weak internal controls or errors in the sample transactions were found to exist, the importer will be requested to devise a Compliance Improvement Plan (CIP) that addresses the error or weakness found.
If significant errors were found during the review and the errors were systemic, the Audit Team will request that the importer conduct its own self-evaluation and determine there was any loss of revenue associated with the type of errors. If the importer refuses or it is later determined that the review was not thorough enough, Customs will move into what it refers to as the ACT phase.
The Assessment Compliance Testing ("ACT") Phase
In the ACT phase, Customs identifies the extent of non-compliance and/or computes the loss of revenue for areas of identified risk. The FA team may proceed to the ACT phase where:
- The company does not maintain adequate internal controls and ACT testing is necessary to determine the level of compliance of the company's imports.
- The FA team is not able to confirm that internal controls are adequate to control risks to Customs and ACT testing is necessary to determine the level of compliance of the company's imports.
- Revenue issues are involved but cannot be resolved without additional testing by the FA team.
During the ACT review phase, Customs will take new, statistically valid samples for each area that was found to be non-compliance (between 60 and 100 items), and reevaluate the compliance of each sample. The importer will be expected to produce all of the same documentation and backup information as supplied in the PAS sample phase. But because the new sample is statistically valid, Customs will use the results of the new review to project the loss of revenue from the sample to the universe of imports by the company.
The FA Follow-Up Review
Nope, it is not over yet. Unless the company received passing marks in all areas of review, RAD will come back within 6 to 8 months of the close-out to determine whether the corrective actions specified in the Compliance Improvement Plan (CIP) were implemented and were effective in correcting the deficiencies identified during the previously conducted Focused Assessment (FA) and in managing risk to Customs.
How Importers Can Reduce The Risk Of Non-Compliance: Implementing Best Practices
Throughout the FA process, the importer is not expected to sit back and await the results of the review. Rather, Customs expects the importer to take an active role and use the questionnaire and other information to identify potential problems and, where appropriate, make voluntary disclosures to find out more about this topic follow our link to voluntary disclosures before discovery by the audit team, thereby avoiding the possible of assessment of penalties. Typical areas where importers have problems include:
- Unable to support deductions for Non-dutiable costs (C.I.F.)
- Merchandise misclassifications
- Unable to support claims of American goods returned
- Unable to support claims of use of American components in foreign made goods
- Errors in valuation of related party transactions
- Unable to support claims of non-dutiable buying commissions
- Unable to produce required records in a timely fashion
- Payments to foreign sellers and third parties, engineering or product modifications, and royalty and license fees;
- Providing un-reimbursed equipment, materials and components to foreign producers.
A company can do a great deal to prepare for its FA review, but it needs to start early. Steps to take include:
- Prepare in-house procedures and controls in such areas as record-keeping, classification, and valuation;
- Make sure your internal controls are formalized and in writing, and your transactions adequately documented
- Audit your entries and Make sure that your documentation shows that corrective was taken when required
- Conduct your own self-assessments and use the results to implement corrective action;
- Prepare your response to Customs audit questionnaire in advance
Consider how your company determines tariff classifications or eligibility for preferential treatment products? What steps have you taken to verify the correctness of classifications and eligibility for duty preferences performed by others? What have you done to verify whether your company has made additional payments to suppliers or third parties, and if so, whether those payments are dutiable?
With combined efforts and advanced preparation, your company's FA review will concluded sooner and with less Government intrusion, saving time and money, and making you look good in the process.