Customs Quick Response Audits: How an Importer Can be Prepared
March 3, 2007
By: Robert E. Burke
Prepared for the International Trade Club of
The Bureau of Customs and Border Protection, Office of Strategic Trade, is using a new audit method that should be of interest to all importers. This is the Quick Response Audit (“QRA”) that Customs announced earlier this year. Customs auditors around the country have reportedly been in training for this new form of audit, which is now in effect. This program is an alternative to the much more cumbersome “Focused Assessment,” and targets typical non-compliance areas. An importer will need to have a high level of confidence in its compliance to withstand scrutiny of such audits. Importantly, importers in the voluntary Importer Self Assessment (“ISA”) program will also be included in the QRAs. An importer might consider reviewing its internal controls in those areas that are likely of targeting by Customs, and consulting with the company’s customs attorney to help confirm compliance.
On its website, Customs states:
Quick Response Audits (QRA) are single-issue audits with a narrow focus. These audits are designed to address a particular limited objective within a reasonably short period of time. QRA is a term used to cover a variety of audits that will have limited objectives as opposed to the complete evaluation of a company's Customs and Border Protection (CBP) activities in the Focused Assessment program. Because audit objectives vary among QRA, a universal audit program cannot be established and used for all QRA efforts. Many single-issue audits may be a single review area of the Focused Assessment process... Examples of a QRA might be an audit of an importer's CBP operations to determine if there is a potential for unlawful transshipment (Focused Assessment Exhibit 5L) or an audit of the company’s controls concerning intellectual property rights (Focused Assessment Exhibit 5U).
Many QRA originate from referrals from other CBP disciplines utilizing risk management principles to identify specific companies involved in certain types of transactions. The authority for auditors to examine records and conduct audits is contained in 19 U.S.C. 1508 and 1509.
Regarding the length of a typical QRA, a top official in CBP Regulatory Audit has indicated to us writer that such audits are, by definition and scope, “more specific than a Focused Assessment so the timeframes should be more condensed than an FA.” The official went on to state “the conduct of a QRA does usually require an importer site visit by the auditor or audit team.” He stated that QRAs are an approach rather than a distinct, stand-alone type program, noting that there have been many QRAs completed in recent months. The official emphasized that “a QRA is usually the result of a referral from another CBP discipline and usually involves a single issue.” In contrast, Customs has stated that companies selected for Focused Assessments are the product of Customs’ risk assessment system. That system employs a variety of risk factors, which are subject to change and weighting each year. The official also indicated that there will be no formal announcement or commencement since the QRA approach is already being used in audits nationwide. Interestingly, he stated “The QRAs are oriented to trade issues, not security issues, so membership in C-TPAT is not a determinant either way as to whether a company is selected for an audit.”
Thus, the QRAs will likely be strategically based on suspected conduct Customs identifies from information and data available to it. This will include all the CF 7501 data and other information from national and local Customs information sources. These resources certainly include information from the five Strategic Trace Centers, the nine Regulatory Audit Field Offices, import specialists, inspectors, special agents and informants. Also, it is probable that Customs will consider the past history of an importer in targeting candidates for a QRA. Such past history might include failed audits, prior disclosures, violations, reports by account managers and similar circumstances. We have observed that Customs is highly sophisticated in identifying likely problem areas specific to a company undergoing a Focused Assessment. Certainly, Customs will use these same highly sophisticated methods of identifying potential issues and candidates for a QRA.
What does this mean for importers? Businesses need to review their internal controls to ensure that there are no violations, starting with those enforcement areas that Customs is likely to view as critical for its new QRA program. The specific nature of the QRA suggests a targeted approach by customs that implies that the selected area for the QRA probably does reflect violations. Thus, it is possible that these fast and targeted reviews may the opportunity for internal reviews and prior disclosures.
Based on our experience with Focused Assessments and general importer audits, and recognizing that Customs has identified most of these areas as “Priority Trade Issues,” we believe that the following areas are very likely to be prime subjects for CBP in this new QRA program.
1. Generalized System of Preferences. In initiating a Focused Assessment, Customs regulatory auditors are inclined to assume that most companies that import goods under the GSP have inadequate controls to support these claims. Customs’ position is that an importer’s obligation is to ensure that it has cost data from the supplier to ensure that the local content requirement of 35% of the appraised value is correct. While this requirement may go beyond the law and regulations, it has been the basis of Customs collection of substantial sums in audits, and probably will be of considerable focus in the QRAs. Customs can readily identify GSP claims, by importer, and can usually ascertain whether the supplier is related by examining the MID code. A higher standard of compliance in this area might be expected when importing from related parties.
2. Free Trade Agreements, including NAFTA. This has been another area of violation typically found in audits. Here, critical areas include confirmation of documentation on hand by the importer at the time of importation as well as documentary support, correct legal analysis, and recordkeeping for entitlement to the benefits of the particular FTA program.
3. Intellectual Property. To a greater extent than before, Customs is interested in preventing the importation of infringing or piratical goods. Expect auditors to request copies of license agreements from importers to prove they are entitled to use patents, trademarks, trade names, copyrights and other forms of intellectual property.
4. HTSUS Classification. Customs has detailed means of tracking goods by source, average import value and comparisons to other importer’s classifications and valuation of similar goods to determine possible areas of mis-classifications. This is why Customs is so effective in selecting “random” line items in a Focused Assessment that turn out to be mis-classifications. Customs might also be interested in circumstances where classification changes occur on the same products over time, or where an importer of parts or components is using classifications for materials (e.g. plastic goods of Chapter 39, or base metal articles of Chapter 72). Likewise, the use of basket classifications, such as 8708.99.80 for the classification of automotive parts is a tip-off to possible classification errors. Customs is aware of many similar examples, by product and by industry. All that is required is for Customs to identify the area of typical error, and which importers are likely candidates.
5. Customs Valuation and Basis of Appraisement. Regarding assists, Customs knows there are particular industries where the use of assists is common. These include automotive, pharmaceutical (especially toll manufacturing), general “off shore” manufacturing of parts and components, trading company business, and similar areas. Further, customs has tools to identify whether related party imports are also being sold to unrelated parties at different prices. Customs could even question lowering average prices reported by an importer under one HTSUS subheading. Customs could keep track of imports marked “consignment” on the CF 7501, or the use of “pro forma” invoices.
Other possible valuation issues fit traditional areas. For imports from a maquiladora in
6. Other Duty Reduction Programs. American Goods Returned, Assembled American Goods Returned, Goods Exported for Repairs or Alternations and similar provisions require documentation of
7. Antidumping/Countervailing Duty. Importers need to confirm that they properly classify goods that are subject to antidumping or CVD orders. For example, it happens that merchandise that is considered parts of articles is actually covered by such orders, but may be entered under a classification that escapes AD or CVD scrutiny.
8. Transshipments. Customs has very sophisticated means of identifying the actual sources of merchandise, particularly with respect to wearing apparel, textiles and similar products. These included foreign sourced information. Importers need assurance that the stated country of origin is correct. This also relates to AD and CVD covered goods.
Considering the above, as well as other areas of compliance, and the fact that Customs is about to engage in a new form of spot audits, now a good time for managers of the customs function to conduct internal reviews to ensure that there are procedures in place to establish and maintain compliance and that all bases are covered.