Customs looks to streamline audits - Trade View - clothing industry - Column

Criticized for an inadequate compliance database, the U.S. Customs Service has been feverishly rewriting the import audit rules.

More than five years ago, the Customs Modernization Act's "informed compliance" mandate rocked the burden of responsibility between the U.S. Customs Service and U.S. importers. It now appears that increased trade and some less publicized actions by the U.S. Congress and its investigative unit - the General Accounting Office (GAO) - are causing the biggest tremors of change. As a result, Customs' Office of Regulatory Audit, which has come under recent scrutiny by the GAO, has been feverishly rewriting its rules in a quest to demonstrate improved compliance levels among importers.

The Customs Modernization (Mod) Act originated the catch phrases "informed compliance" and "reasonable care" in reference to shared responsibilities between the government and importers. Under the act, the Customs Service is responsible for providing importers with the information necessary to enter goods correctly, while the importers must seek out that information and routinely apply it to their business practices. As a result, responsibility for determining issues such as classification and valuation of merchandise was transferred from Customs to the importers. Along with the rearrangement was the assumption of greater reliance upon post-entry audit processes.

To date, criticism of Customs' regulatory responsibilities under the Mod Act has increased concurrently with strong import growth that has not been supported with additional personnel. (The number of auditors has remained relatively unchanged since 1995, lingering at about 400.) Meanwhile, the number of importers has moved steadily upward, from 350,000 to 443,000, with the annual volume of imports now headed toward $1 trillion. Further, the GAO has taken Customs to task for not having fully exercised its responsibilities under the Chief Financial Officers Act. The reason: Customs did not have a database in place for evaluating the effectiveness of its enforcement efforts in bringing about improvements in compliance.

Revisions, Revisions

Faced with all of these concerns, Customs and its Office of Regulatory Audit have initiated numerous changes in their operations. Importers should pay close attention to these changes, because the agency has revised its policies and practices several times since the Mod Act went into effect, and more changes are likely in the future.

First, in response to the GAO's criticism, Customs conducted a number of surveys, by tariff classification, to identify the accuracy of importers' submissions. That information also has served as the basis for Customs to determine whether informed compliance programs are resulting in improved levels of compliance.

Second, Customs changed its approach to audits. Previously, audits were primarily a function of referrals by import specialists at the ports. Today, the size of the importer and the type of goods being imported identify most audit targets. The largest importers in the most significant industries now receive the greatest amount of attention. Customs has identified that the top 1,000 U.S. importers alone account for more than 60 percent of the country's annual imports.

To further hone its list of audit targets, Customs also identified a limited number of approximately 10 "priority focus industries." They include the textile, apparel, footwear, steel, automobile and automobile parts sectors. It also includes mass merchants, which are generally defined as discount retailers that import a large variety of goods, which by individual category might not add up to a large volume, but together account for a significant amount of trade.

This approach should permit the agency to develop an accurate statistical base of information from which to measure changes - and hopefully compliance improvements - over an extended period of time. This is because the target companies, based upon the size and value of their entries, have the capability to affect overall compliance levels as well as industry compliance levels.

Good Intentions ...

Initially, the Office of Regulatory Audit spoke optimistically of auditing large importers from primary focus industries once every five years or so. However, with only 400 auditors and audits typically taking well over a year - and sometimes several years - it did not take long for officials to recognize the limited likelihood of achieving this objective. Instead, in late 1995 Customs created "compliance assessments." These are intended to be a "first-step" audit, with a full-blown audit following only if an assessment reveals that an importer is not compliant.

Under compliance assessments, auditors generally focus on entries during a one-year period, instead of the more extended periods typically studied in full audits. They also rely upon "sampling" to review a relatively small number of lines within those entries. The compliance assessment looks at compliance in a number of areas, including classification, value, quantities, record keeping and special trade programs (such as 807-type entries).

Despite good intentions, as of January 1999, 400 compliance assessments had been initiated but only 187 had been completed. And these compliance assessments have been taking just as long as full audits. Customs has come up with several responses to this problem, and has now stated a new goal of completing compliance assessments within nine months.

To help meet this goal, the agency is promoting importer "self assessments," which have been urged by auditors since the compliance assessment program was established in 1995. Self assessments offer a means for addressing more importers, and the process for these reviews is becoming increasingly formalized.

For example, auditors usually hold a "pre-entry" conference with importers before beginning a compliance assessment, during which they indicate that they will postpone the compliance assessment for several months if the importer will conduct a self assessment that follows the outlines of a compliance assessment. That gives the importer a chance to identify problems and correct them before the auditors arrive.

In early 1998, Customs took another step and proposed a "self governance" program for small- and medium-sized importers that it regarded as too time consuming to audit. It called for companies to self-audit import functions following the outline established under the compliance assessment program. Once finished, importers would certify to Customs annual audit results, including any problem areas where compliance improvements are necessary.

By the end of 1998, Customs dropped self governance in favor of the "Importer Compliance Monitoring Program" (ICMP). It looks and sounds a lot like self governance, but importers have to apply to participate in the plan and, more importantly, it is only for large importers. In other words, because the compliance assessment program has not helped Customs touch base with as many large companies as it had hoped, it is looking for ways to encourage large companies to self assess import functions, and then make regular reports to Customs.

With the base of information that ICMP will generate, Customs hopes to develop the statistics to verify current compliance rates and how they are trending. Right now, ICMP is in a test mode. Twenty-nine companies are participating in the pilot, which will run through next month. Assuming it works well, applications for participation in the program are likely to be solicited beginning January 2000. Under the outline provided to date, priority will be given to applicants that are among the top 250 companies within a priority focus industry, and within that pool to companies with account managers.

Customs also is reconsidering its compliance assessment program, looking at ways to streamline it. For example, Office of Regulatory Audit officials are considering a reduction in the number of lines sampled. Currently, compliance assessments look at 220 lines. Under the streamlining proposal, auditors will look at 100 lines.

In another move, Customs is now contemplating a new record keeping standard that would consider whether information in a record is sufficient to make classification and value determinations. It would replace a standard that assumes every requested piece of paper must be made available within a set time period, without regard to its specific importance or relevance.

Moreover, Customs is proposing to change how it handles "special programs" under compliance assessments. Currently, if one of the lines within the pool of lines reviewed involves a special program, such as an entry under the Generalized System of Preferences or an 807 program, the auditors would then do an expanded review of entries under the special program. Customs now indicates that it will not do a separate review if the importer has less than $10 million in imports in such a program.

Significantly, Customs is also planning to give importers who make "prior disclosures" a break if a line subject to one is included in the sample lines reviewed. (Prior disclosures are admissions of violations before Customs detects them and entitle importers to lesser penalties.) Under the proposed change in compliance assessment measurements, prior disclosures could improve compliance rates for importers.

Agency officials indicate that they expect to issue a new Compliance Assessment Team Kit, known as the CAT Kit, this spring. It will reflect the changes made to the program since it began in 1995. For those importers who have already undergone, or are still undergoing, compliance assessments, there may be good reason for grumbling. The new CAT Kit is likely to show that those companies yet to have a compliance assessment have a better shot at a less burdensome process than those who were first in line.

This is clearly an evolving program. But even the 1999 CAT Kit is likely to undergo changes as the agency continues to grapple with meeting the competing demands of its limited resources, growing trade and inevitable criticisms.

Brenda A. Jacobs is Counsel in the Customs and Trade Group of Powell, Goldstein, Frazer & Murphy LLP, in its Washington, D.C., office. She may be reached at tel.: 202-347-0066, by e-mail at bjacobs@pgfm.com or on the Web, at www.pgfm.com.

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