Friday, October 20, 2006

What Goes Around

When I started in this practice, a decade before 9/11, there were always Special Agents sniffing around importers looking for revenue and admissibility violations. My first really big project involved a multi-year investigation of one of the biggest companies in the world. The investigation went on so long that I became relatively friendly with the lead agent and auditor. It was the auditor's job to follow up on the agent's theories and hunches about the bad things the client had allegedly done. I'm happy to say that, in the end, it did not amount to much more than several prior disclosures.

Today, things appear to be very different. The agents have been peeled off into a different agency altogether. They spend most of their time, it would appear, working to keep us safe from terrorists and narcotics. Which is, of course, laudable. For the past five years, it has been rare, at least in my experience, to deal with a Special Agent on a matter involving commercial enforcement. Rather, Customs has used Focused Assessments and the Importer Self Assessment program to let Regulatory Audit whip importers into procedure-driven compliance.

Something is about to change. To me, it looks like a return to the pre-9/11 days with a fancy new name: Quick Response Audits. Customs announced this in May, so nothing I say below is talking out of school. Boiled down to its essential core, a QRA is simply an audit focused on a single compliance risk that was triggered by a request from someone inside DHS (most likely ICE) or CBP to Regulatory Audit. The request could also possibly come from an outside tip.

Assume, for example, that an Inspector stops a shipment of craft works because they are made from the feathers of an endangered species. That Inspector can request that an auditor determine whether any past shipments by that importer contained the offending materials. The same applies to just about any admissibility issue. There appears to be a focus on agricultural products at the moment.

The same applies to classification, value, quantity, rate of duty, origin, and essentially anything Customs enforces. So, if an importer does a Supplemental Information Letter to change the classification on an entry, the Import Specialist might request a QRA of past entries of the same merchandise. Another focus area is intellectual property. If an Inspector seizes some merchandise bearing a trademark and the importer cannot show a legal right to import it, the auditors can be asked to look for past offending entries.

This sounds remarkably like the way things used to work except that the agents are out of the loop. Rather than have the front line Inspector call a Special Agent (who used to work for the same agency), the Inspector calls the auditor directly.

One has to wonder whether this is this a result of having the Agents removed from CBP? Maybe it is a bit of turf squabbling between CBP and ICE. Perhaps CBP is just trying to fill a gap left by ICE Agents busy elsewhere. Or CBP may be building up its own emphasis on commercial law enforcement.

A lot remains to be seen about how QRA's will work. A few things are clear:
  • ISA members are not exempt. Sorry, there goes another benefit of ISA.
  • If you are notified that you are going to be subject to a QRA, it is likely that Customs suspects a violation has taken place.
  • That means you need to get a disclosure in pronto--before you have notice of an investigation. Unless the notice is worded quite specifically, notice of an audit does not count as notice of an investigation.
  • Many QRA's will relate to violations for which prior disclosure does not provide any benefit anyway.

There was a period, not too long ago, when importers were viewed essentially as criminal suspects who needed to prove to Agents that their imports were being handled properly. Under the first President Bush and in the Clinton years, the philosophy at Customs shifted to enforcing the law while facilitating legitimate trade through the application of technical risk management techniques. In trade circles, this was known as the era of a "warm and friendly Customs Service." After 9/11, the focus rightly shifted to national security through cargo security while leaving commercial enforcement, in part, to self reporting through, prior disclosures, reconciliation, ISA, and other audit related programs.

Take a deep breath people. The pendulum may have reached its apogee.

2 comments:

Anonymous said...

I'm not so sure you're right that notice of an audit cannot be deemed to be notice of an investigation, maybe especially because of the numerous comments (which need to be said nevertheless) about what QRA's really are. Take a look at US v Ford (CAFC Case No. 05-1583) in which the CAFC upheld Customs' contention that a notice of investigation that said Customs was investigating "assists and indirect payments" actually meant that Ford was actually investigating all payments related to imports, which Ford apparently learned by vague verbal remarks, including "here" at a meeting shortly after the notice was issued. Paul V.

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