Prior disclosures are interesting in that they are often the first line of defense when an importer discovers that some violation has occurred. But, making and perfecting a prior disclosure is sometimes not a simple task.
Prior disclosures are authorized by 19 USC 1592(c)(4). The law provides that:
If the person concerned discloses the circumstances of a violation of subsection (a) of this section before, or without knowledge of, the commencement of a formal investigation of such violation, with respect to such violation, merchandise shall not be seized and any monetary penalty to be assessed under subsection (c) of this section shall not exceed—
(A) if the violation resulted from fraud—
(i) an amount equal to 100 percent of the lawful duties, taxes, and fees of which the United States is or may be deprived, so long as such person tenders the unpaid amount of the lawful duties, taxes, and fees at the time of disclosure, or within 30 days (or such longer period as the Customs Service may provide) after notice by the Customs Service of its calculation of such unpaid amount, or
(ii) if such violation did not affect the assessment of duties, 10 percent of the dutiable value; or
(B) if such violation resulted from negligence or gross negligence, the interest (computed from the date of liquidation at the prevailing rate of interest applied under section 6621 of title 26) on the amount of lawful duties, taxes, and fees of which the United States is or may be deprived so long as such person tenders the unpaid amount of the lawful duties, taxes, and fees at the time of disclosure, or within 30 days (or such longer period as the Customs Service may provide) after notice by the Customs Service of its calculation of such unpaid amount.
The person asserting lack of knowledge of the commencement of a formal investigation has the burden of proof in establishing such lack of knowledge. For purposes of this section, a formal investigation of a violation is considered to be commenced with regard to the disclosing party and the disclosed information on the date recorded in writing by the Customs Service as the date on which facts and circumstances were discovered or information was received which caused the Customs Service to believe that a possibility of a violation of subsection (a) of this section existed.
Complicated, isn't it? There are lots of things to keep in mind when making a prior disclosure and the protection from penalties in excess of interest is only one.
First, your disclosure needs to disclosure the circumstances of the violation. So general statements that there may (or may not) have been one (or more) violations of a law or regulation, just won't cut it. You need to explain with some specificity what you did. But, you don't need to get into such a fine level of detail that Customs knows what you had for lunch on the day of the violation. Despite what you might hear from CBP, you don't even need to provide entry-level information (though doing so may make the disclosure much less painful).
Next, the disclosure needs to be before or without knowledge of the commencement of a formal investigation of that violation. Keep in mind, this is an "either or" situation. You can do the disclosure after the CBP or ICE has opened the investigation so long as you don't know about it. So, once you get the Notice of Investigation, you are sunk unless it relates to something else. If so, go ahead and make your disclosure of the other violation.
The regulations require that the disclosing importer tender the amount of unpaid duties to CBP. But, again despite what you may have heard from CBP, it is not necessarily the importer's job to calculate the duty owed. The regulations state that the tender must be made within 30 days of Customs' determination of the amount. So, you can make a disclosure and, to a degree sufficient to disclosure the nature of the violation, let Customs sort it out. Bad plan, but legal.
Generally, what you want is to get as many of your ducks in a row as possible before making the disclosure. To the extent you can do it, complete the calculation and gather supporting backup documentation. If you can present the disclosure to Customs in as neat a package as possible, the auditors will have to do less work. Your disclosure is, in that case, more likely to be accepted and completed with a minimum of interaction with Customs.
This fact generally counsels against filing a very broad disclosure at the first hint of a violation with the thought that you will sort it out after you file it. Often, that proves difficult and, in some lucky cases, it turns out there was no violation at all.
But, sometimes, there is a real reason to race to get the disclosure in. Those times are generally any time you have reliable information that CBP smells a violation. Possible triggers might include:
- Notices of Action changing classification or value. Go look at your past practice. Go now.
- Census rejects for value or other reasons. Customs knows something is out of whack in your papers.
- Informal visits of calls from import specialists relating to a particular product or practice.
- Something that breaks bad in the course of an audit.
There are also times when a disclosure does you no good. You have to keep in mind that prior disclosure only covers 1592 violations. So, a violation that might lead to liquidated damages (e.g., a late file or failure to close out a TIB) is not going to get any benefit from a prior disclosure. There are times when the benefits are fuzzy. For example, in country of origin marking cases, the link to the documents is tenuous but you should check whether the origin declared on the CF7501 is correct. If the entry contains materially false or misleading information or omissions, you are in prior disclosure land.
Also, prior disclosure is not a cure all for bad information or compliance systems. If you start making frequent prior disclosures, it is likely that someone at CBP will take note. Don't use them to fix things that should be done through reconciliation, Supplemental Information Letters, or Post Entry Amendment.
This is, I know, a bit rambling. I have a terminal case of airport terminal fever. Luckily, we will be boarding shortly. Thus, I close out this rant with the following thoughts (which are not legal advice): Disclose carefully and completely when it will provide a benefit. Sometimes, making that call takes some thought.