Evaluating Customs Risks

Evaluating Risks and Exposures
In Customs Transactions

June 20, 2012

Presented by
George R. Tuttle, III
George R. Tuttle Law Offices
One Embarcadero Center, Suite 730, San Francisco
Tel: (415)986-8780
Fax (415) 986-0908
E-mail: geo@tuttlelaw.com

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About the Speaker
George R. Tuttle, III, Esq.
George R. Tuttle, III is an attorney with the San Francisco law firm of
George R. Tuttle, P.C.
For the past 25 plus years his practice has focused on import
regulation, Customs and Export Control matters. He has a wide range
of experience handling Administrative, Judicial and enforcement
matters, including classification determinations, rulings and regulatory
interpretations, disclosures, investigations, and penalty cases. He also
assists importers develop, and implement compliance programs.
Mr. Tuttle is a frequent speaker and instructor on Customs and export
matters for various trade groups, including: AAEI, the Professional
Association of Exporters and Importers (PAEI), Women-in-International
Trade-Northern California (WIT-NC), San Francisco Customs Brokers
and Freight Forwarders Association and the International Compliance
Professionals Association (ICPA).
Mr. Tuttle can be contacted at:
George R. Tuttle Law Offices
One Embarcadero Center, Suite 730, San Francisco
Tel: (415)986-8780
E-mail: geo@tuttlelaw.com

2 Tuttle Law Offices (c) 2012

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Why Evaluate Risks and Exposures
In Customs Transactions?

 Compliance extends beyond
voluntary programs like ISA
 Basic obligation of all importers
 Cost of non-compliance
– Disruption of business
– Disruption of supply chain
– Distraction to employees and
management
– Penalties and Liquidated
damages
– Detention and seizure of goods


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Evaluating Risks and Exposures In
Customs Transactions

 Like in life . . .
– It is not what you see that
can hurt you . . .

– It is what you don’t see . . .


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What is a Risk Assessment?

 “Risk Assessment and Self-testing Plan” described
in Appendix I to the 2011 ISA Handbook
– CBP allows flexibility and does not dictate specific
testing requirements
“[E]ach company must perform its own risk assessment,
develop its own control procedures, and design its own self-
testing program in order to monitor and mitigate risk and
ensure that import transactions are accurate and compliant.”


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What is a Risk Assessment?

 Appendix I -- August 2011 ISA Handbook
states:
“Risk is the degree of exposure that would result in
loss to the trade, industry, or the public.”
“Potential risk exists in ordinary day-to-day
transactions as well as those extraordinary
transactions that happen infrequently or
unintentionally.”


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The Risk Equation

 How do we measure risk?
Subject + # transactions + Cost = Risk
 Cost of noncompliance
– Monetary (duty/ fee under or overpayment/
fines)
– Operational (i.e., supply chain impact)
– Reputation


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Common Customs Penalties
 False Statements 19 USC 1592
– 2x to 4x loss of Revenue (Negligence (+)
 Liquidated Damages
– 1 to 3x the entered value
 Record keeping
 Up to $10K and loss of SPI benefit
 C/O Marking
– Detentions, Liq damages or 10% of value
 Imports contrary to law 1595a(c)
– Detain and seized


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Risk Matrix (Example)

Subject Transactions Cost of Risk
Area Noncompliance

Classification All High High

Valuation Many Medium Medium

Origin Few Low Low

Special Trade None None Low

Recordkeeping All High High


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Risk Matrix


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Evaluating Your Risks and Exposures

 What is a “risk assessment?”
– Identify transactions that are
risks to CBP compliance
– Evaluate risks for effects, and
– Design control activities to
manage/ minimize those risks.


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Where to Begin?
 Identify Customs programs use
by your company
 Identify persons knowledgeable
about products and programs;
 Assemble compliance team
 Review regulations and legal
requirements
 Determine what records must be
maintained and/or procedures
that must be followed


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Evaluating Your Risks and Exposures

 Common subject areas associated
with risk assessments --
– Classification
– Valuation (multiple sub categories)
– Special Trade areas / Transshipment
– Quantity
– Recordkeeping
– Antidumping/ Transshipment
 New “risk” areas include:
– Product safety—CPSC/ FDA/ Medical
– Trademark / trade names


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Where to Begin?

 Select a Subject (i.e., Class, Value, FTA, etc)
– Where should my data come from?
 ACE/ ITRAC/ Special Broker Reports
 Company Business Reports
– Purchase Order Reports
– Payment Records Reports
– Receiving Records Reports

– Period of Review?
– What is my sample size?
 Statistical
 Judgmental


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Where to Begin:
Data Collection and Analysis

 Obtain copy of importer activity
report “ITRAC” or ACE reports from
Customs
– Review data for information on
 Exporters/manufacturers
 values
 tariff classifications
 Special duty /preferences
 Link CBP web page
– http://www.customs.gov/xp/cgov/admin/fl/foi
a/making_a_request/itrac/itrac.xml


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Where to begin:

 Available ITRAC information includes:

– Filer Number
– Country of Origin
– IOR
– Related Party Status
– Ultimate Consignee
– Special Program Indicator
– Entry Number
– Liquidation Date
– Entry Date
– Entry Type
– HTS Number/Desc.
– Mode of Transport
– Entered Value
– Discrepancy Types
– Manuf. Id
– Export Date
– Est. Duty/ Rate
– Exams
– Country of Export


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Specialized Broker Reports

 Practice Tips
– Considered Specialized Broker Invoice line item Reports
(See example)
– Brokers/ Filers can added information to 7501 for:
 Supplier Invoice Number
 Purchase Order
– Can you trace supplier/ vendor payments to Customs
Entry?
 Do payment records reference vendor name and invoice
Number or Purchase Order?


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Specialize Broker Reports


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Risk Review Process

 Review the company’s risk environment, such as:
– Imports from specific manufacturers or suppliers
– Large volumes of imports under special duty provisions or
special trade programs
– Large volumes of imports under tariff classifications with no or
low duty rates or complex classification requirements
– Shipments from new suppliers or vendors
– Use of “First sale” or multi-tiered” purchase transactions
– Imports subject to antidumping, textiles and other sensitive
Customs issues


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Tariff Classification Risk Reviews

 Practice Tip
– Use PO or Receiving Reports to
identify high value or high volume
SKUs
– Identify products with unique
classification requirements / duty
free / low duty rates
– Match part or SKU with import tariff
classification
– Test accuracy of tariff classification
for high value / volume SKUs


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Tariff Classification Risk Reviews

– Does company:
 Maintain a record of the tariff classifications at the part or SKU level
(product/classification matrix)?
 Document classifications with technical information and reference to
pre-existing rulings or HTS classifications and Explanatory Notes
 Rely on Broker to classify?

– Review high value or high volume SKUs
 “Top 20” by volume or value of imported products?

 Products that account for 70% of 80% of imports?

 New suppliers or new products?


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Valuation: Where to begin--
Valuation Issues

 Basis of Appraisement
– What is my company’s “Basis of
Appraisement?”
 Valuation methods
 When does “transaction value” apply?
– Do I have imports from related parties?
– Do I have no-charge shipments?
– Do I have shipments based on assembly charges only?


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Transaction Value

 When is transaction value appropriate?
– Must have a sale of the imported goods for export to the United
States.

– No restrictions on disposition or use, except those
 Imposed by law

 Geographical resale territory

 Which do not otherwise substantially affect the value


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Customs Valuation:
1401a(b)(2) The Related Party Rule

 The transaction value of imported merchandise shall be the
appraised value of that merchandise for the purposes of this
chapter only if -
– *** (iv) the buyer and seller are not related, or
– the buyer and seller are related but the transaction value is
acceptable

 Burden is on importer to establish that the relationship does
not affect the price

 Customs has published ICP on valuation for related party
transactions


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Acceptability of Inter-company Prices Based On
“IRS” Transfer Pricing Methodology

 CBP and IRS Transfer Pricing rules are not the
same --
– “Customs approach to related party transactions differs
from the IRS approach . . . the [IRS] methods review
profitability on an aggregate basis, not a product by product
basis.”
– “Customs generally analyzes related party transactions at a
more detailed product by product level . . .


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Related Party Imports

 Inherently A “Risk”
– Need to evaluate related party transactions
against CBP Rules, i.e.,
 “All costs plus a profit”
 Other methods may be acceptable
 New Ruling from CBP dealing with Post-import transfer
price adjustments
– Customs Bulletin and Decision dated May 30, 2012 (Cust.
Bul. and Dec., vol. 23, no. 46)
– Broker errors in categorizing supplier as (R)


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Valuation: Other Valuation Issues

• Focused Assessment Questionnaire Valuation Issues
 Price Actually Paid or Payable
 Assists (e.g., Materials / Component Parts, Tools, Dies, Molds,
Merchandise Consumed, Engineering, Development, Art Work,
Design Work, Plans)
 Packing Charges
 Selling Commissions
 Royalties and License Fees
 Proceeds of Subsequent Resale
 Transportation Costs (e.g., International Freight, Foreign inland
Freight, Insurance)


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Valuation: Other Valuation Issues

 Retroactive Price Adjustments (such as: Periodic and year end
transfer price adjustments)
 Price Reductions to Buyer to Settle debts (e.g., Reductions for
Defective Merchandise)
 Price Increases
 Rebates and Allowances
 Indirect Payments to 3rd Parties that benefit seller
 Payment of Seller’s Debt by Buyer (e.g., quota)
 Purchases on Consignment
 Currency Exchange Adjustments


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Valuation: Where to begin

 Obtain financial information
related to:
– Accounts Payable and Vendor
reports
– Sort ITRAC or ACE entry line
by MID code and determine
total value for period
– Sort vendor payments for
same period
– Compare totals and determine
reason for discrepancies


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Valuation: Where to begin

 Review high value and/or
high volume suppliers
– “Top 10” suppliers by volume or
value?

– Suppliers that account for 70%
of 80% of imports?

– New suppliers or new products?


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Price Paid Risk Analysis

 Example:
– Rank Supplier Transactions by value & quantity
 MID # 1 - 20% by value of all import transactions
 MID # 2 -- 23% by value of all import transactions
 Others?
 Low value but high entry or line count
 Use ACE or ITRAC
– Consequences
 Under/ over report customs value
 Under/ over paid customs duties and/or fees (MPF)
 Potential Monetary penalties: 20%-40% value of merchandise
– Risk – High


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Valuation: Price Paid

 The Generra Rule
– All payments made by a buyer to a seller, or a
party related to the seller, are part of the price
actually paid or payable for the imported
merchandise. (Generra Sportswear Co. v.
U.S., 8 CAFC 132 (1990))


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PRICE ACTUALLY PAID OR PAYABLE

 Importers are often invoiced separately by vendors /
suppliers for:
– tooling, molds, packaging items
– Expedited or “hot lot” manufacturing fees
– Small lot or small quantity surcharges
– Product modifications
– NRE or separate tooling charges for startup production costs
– Testing costs -- 542187 dated Nov. 7, 1980 (TAA No. 11); 543645 dated
Feb. 17, 1987.


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PRICE PAID OR PAYABLE

 Use P/O and Accounts Payable Data For
Vendor selection and review:
– Review account data, journal entries and
descriptions
– Match payment transactions to import entries
 If there are there differences in value, why?
 Are there payments for separate services/ tooling/
Equip?


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Customs’ Four-way Match

(1) Purchase Order (2) Invoice

(4) Customs
Entry Value

(3) Payment


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 Key Business Documents
– Finance Dept -- what are key general ledger accounts used
to record payments for goods, materials, equipment,
royalties/ license fees and R & D ?
– Supply Contracts
– Production Agreements
– Royalty or License agreements
– R & D or Design and Development Cost Sharing
Agreements


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Assists: What are they?
 Generally, tangible items sent by the buyer
– Directly or indirectly to the foreign supplier;
– Free of charge or at reduced cost;
– For use in connection with the production or the sale for export to the
United States of the merchandise.
 Legal Definition 1401a(h)
– Materials, components, parts, and similar items incorporated in the
imported merchandise.
– Tools, dies, molds, and similar items used in the production of the imported
merchandise.
– Merchandise consumed in the production of the imported
merchandise.


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 Non-U.S. “intangibles” originating:
– Engineering,
– Development,
– Art and design work
– plans and sketches
 Necessary for the production of the imported merchandise.
 Will include U.S. and foreign based workers located at foreign
production/ Mfg site working on development/ production.
(excludes: management and QC services)


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Assists

 Interview Manufacturing/Production for assist issues
 Sort Accounts Payable by Vendor
– Review vendor activity
– Look for Vendors with high dollar value or frequent transactions
– Review A/P and requester
– Ask/ document whether assists (tooling/ components/equip) are
provided
 Identify high value/ quantity vendors and suppliers of imports–
– Review company export data/records from shipping for shipment of
components, tooling and equipment, to those vendors
– Obtain Capital or Fixed asset report and check location of equipment


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Assists

 Identify new product vendors or shifts in
production
 Review
 Supply Contracts
 Production Agreements
 R & D or Design and Development Cost Sharing
Agreements
 Profit split or profit sharing Agreements (may be
treated as “Proceeds of subsequent resale”)


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 Machinery and Equipment
– General treated as “fixed assets”
– Fixed asset ledger or register identifies the value and location of
company owned fixed assets.
– Fixed assets which have a useful life of less than one year are
not capitalized.
– Improvements or alterations made to an existing asset justifying
capitalization, such additions should be made to the cost of the
original asset.


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Valuation Issues

 Deductions for Transportation Costs (e.g.,
International Freight, Foreign inland Freight,
Insurance)
– Does company engage in:
 CFR — Cost and Freight
 CIF — Cost, Insurance and Freight
 DAP — Delivered at Place
 DDP — Delivered Duty Paid
 DAT — Delivered at Terminal


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Valuation Issues: Deductions

 Does Broker take deductions from Invoice Price
for:
– International Fright
– Insurance
– incidental international loading & transportation costs
 HQ H178135, November 22, 201; H092560, dated April 7,
2010; HQ H119858, dated September 9, 2010; and HQ
H119857, dated September 9, 2010.
– T.D. 00-20: importer may only deduct the actual costs for
these charges from the price actually paid or payable.


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Valuation Issues:
Royalties & License Fees

 Fees paid for patents generally part of “price paid or payable”
 Fees paid for trade marks and copyrights may not, unless paid as a
condition of “right to import”
 Does company have Royalties & License agreements?
– What are General ledger accounts?
– Are fees paid to exporter or party related to seller?
 Use G/L Account to identify existence of agreements
– Review language of Agreements
– Some agreements reference both right to use patents and trademarks
– Identify product suppliers and products


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Valuation Issues: Packing Charges

 Separately charged packing materials are part of “price paid.”
– See, HQ 545154 , dated June 3, 1994; HQ H028000, dated June
20, 2008.
 Review requirements with Purchasing
 Sort Accounts Payable by Vendor
– Review vendor activity or A/P reports
– Ask/ document whether
– Look for Vendors with high dollar value or frequent transactions
 Review A/P accounts with manager and requester


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Valuation Issues: Commissions

 True “Buying Commissions” are not part of price paid
 “Selling Commissions” are part of price paid
 Does agent take “title” or ownership of goods (independent seller)?
 Discuss Subject Matter with Procurement/ Buyers/ Sourcing teams
– Identify vendors or agents that receive a commission
– Evaluate relationship and/or language of specific agency agreement
– Review CBP Rulings & Informed Compliance Pub. on “Buying
Commissions.” See HQ H125835, May 18, 2011.
 Review A/P for possible unidentified commission payments
related to imported merchandise


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Valuation: The “First Sale” Rule

 The “First Sale” Rule
– CBP presumes that the price paid by the importer is the basis of
transaction value
– In a multi-tiered distribution system the manufacturer's price
constitutes a viable transaction value when the goods are:
 Clearly destined for export to the United States and
 the manufacturer and the middleman deal with each other at arm's
length.
 Manufacturer must have a “sale” to middleman for export to the United
States


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Valuation: The “First Sale” Rule

 What data will you use for your “First Sale” Risk Analysis?
– Vendor / AP list
– ITRAC or ACE entry line data

 Select transactions for testing:
– High value/ quantity (line item) suppliers
– High value/ quantity items
– Does price paid mach declared customs value?

 Is appropriate documentation available to support claim?


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Risk Analysis: Special Trade Programs

 Sort ITRAC or ACE entry line data by SPI codes or tariff
classifications (i.e., 9801/ 9802/ 9813)
 Select entry line transactions for testing:
– High value/ quantity claims
– High value/ quantity (line item) suppliers
– High value/ quantity items

 Is appropriate documentation available to support claim?
– Do you need certifications and/ or Mfg affidavits?
– Do you need access to underlying production or Mfg source documents?
 §181.22 NAFTA Certificate of origin and supporting records


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Risk Analysis: Special Trade Programs

 9801/9802 claims require (19 CFR 10.1):
– Foreign Shipper Declarations
– Evidence of US export
– U.S. Manufacturer declarations
– Has company applied for and received waiver
from Port?
– Review HQ H007668, dated June 20, 2007


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Recordkeeping

 Importers are required to maintain entry records and related
documentation for five years from date of transaction
 Entry Records ((a)(1)(A) List) subject to Recordkeeping
penalties (examples):
– 7501 and other “entry” forms
– Commercial invoice
– Bill of lading
– Declarations/ supporting document for special claims
– FDA/ FCC/ TSCA-- other OGA forms
 Appendix to Part 163-Interim(a)(1)(A)List


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Record-keeping Risk Review

 Sort ITRAC entry line data and summarize by entry and filer.
 ACE Entry Summary report (AM_68) by date
– Perform 100% entry audit against (AM_68) or ITRAC to insure
100% entry records
 Can do monthly, quarterly or annually.
 (a)(1)(A) List Document Check
– Create (a)(1)(A) document check List
– Determine sample size/ stratification for you
– Stratification ideas: broker/file and supplier


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Risk Analysis: Dumping & CVD

 Scope of case may or may not include HTS
 Goods may be transshipped through non-assessed country
 Broker/filer may use wrong assigned rate
 Summary of AD/CVD cases:
http://pubapps2.usitc.gov/sunset/


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AD/CVD order In Place


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Department of Commerce AD/CVD
Scope Descriptions


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Risk Analysis: Quantity

 Quantity
– Unacceptable practices: declaring numbers of containers
rather than number of units
– Does Receiving report unresolved quantity discrepancies
to Trade Compliance?
– Audit receiving discrepancy reports for accuracy
– Does Trade Compliance report quantity discrepancies to
CBP?


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Conducting Your Risk Assessment

 Identify risks and compliance goals
– Identify legal and regulatory compliance objectives
– Sample entry and financial transactions
– Identify errors and causes, and
– Share results with other affected groups
– As a group determine how errors can be eliminated
– develop written procedures that “reasonably ensure”
compliance objectives are met.


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What Are “Internal Controls”

Definition

 A process directed by company
management and other personnel
 Designed and implemented to provide
reasonable assurance that any given
import transaction fully complies with
U.S. import requirements.


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Preparing Internal Controls

 Each control should include
– A statement of purpose (why control is
necessary)
– Define accountability and responsibility for
reporting in internal control documents and job
descriptions.
– Description of procedure(s) to be followed
– Explanation of verification process
– Process for reporting & correcting errors, as
appropriate using PEA or similar program


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Preparing your Internal Controls

 Each process should explain . . .
– Who does what?
– What do they do?
– When do they do it?
– How do they document that they do it?
– Who checks that they did it?


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Preparing your Internal Controls

 Keep procedures simple!

 Don’t reinvent the Wheel

 Say what you are going to do
& Do what you say!

 Test and verify to make sure you
have done what you said you were
going to do!


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Resources: Customs Publications

– Customs Valuation Encyclopedia of Rulings and Decisions
– Informed Compliance Publications
• Bona Fide Sales & Sales for Exportation to the United States
• Buying & Selling Commissions
• Customs Value
• Determining the Acceptability of Transaction Value for Related
Party Transactions
• Importation of Commercial Samples
• Proper Deductions for Freight & Other Costs


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Resources: Customs Publications and FA
Guidance

– Exhibit 4F - A Guide for Supporting Generalized System of Preferences (GSP) Claims

– Exhibit 5E - HTSUS 9801.00.10 - U.S. Goods Returned - Technical Information for
Pre-Assessment Survey (TIPS)

– Exhibit 5H - HTSUS 9802.00.80 - U.S. Articles Assembled Abroad - Technical
Information for Pre-Assessment Survey (TIPS)

– Exhibit 5M - Generalized System of Preferences - Technical Information for Pre-
Assessment Survey (TIPS)

– Exhibit 5Q - Israel Free Trade Act (IFTA) - Technical Information for Pre-Assessment
Survey (TIPS)

– Exhibit 5R - African Growth and Opportunity Act - Technical Information for Pre-
Assessment Survey (TIPS)

– See Exhibit 5S - Quantity - Technical Information for Pre-Assessment Survey (TIPS)


Evaluating Customs Risks

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