Trade Compliance

GHY discusses changes to international trade regulations and explores cutting-edge compliance strategies.

Exercising “Reasonable Care” Saves Company Millions

Posted March 30, 2015


Since passage of the Customs Modernization Act (usually referred to as “the Mod Act”) more than 20 years ago, importers have been dealing with a compliance paradigm known as “shared responsibility” – an arrangement whereby Customs and Border Protection (CBP) is tasked with making “informed compliance” possible by fully apprising the importing community of all its legal responsibilities and importers (along with others engaged in customs transactions) are statutorily obligated to exercise “reasonable care” in complying with all applicable customs laws and regulations.

According to the Mod Act, importers are held responsible to “get it right” and to maintain records to enable CBP to determine if they have, in fact, done so. In addition to being aware of CBP’s informed compliance publications, customs regulations, rulings, court decisions and relevant statutes, importers are further expected to develop and implement reliable internal procedures to ensure they are capable of fulfilling their obligations and responsibilities when transacting business with U.S. Customs.   

The critical need for companies to rigorously exercise the principles of “reasonable care” with respect to their importing activities is clearly illustrated by a recent case cited today by the international trade law firm of Sandler, Travis & Rosenberg, P.A. (STR), on their Trade Report website, regarding a Canadian manufacturer acting as a non-resident U.S. importer that was assessed over $11 million in additional duties and penalties by CBP for allegedly having made false NAFTA tariff preference claims on almost 1,800 import entries over the period of six years.

The company had claimed duty-free treatment for its imports based on the goods in question incorporating U.S. sourced inputs which its supplier had certified as having satisfied the NAFTA rules of origin requirements. A subsequent review by CBP however determined that the company’s supplier did not have a valid inventory management system in place and was therefore deemed unable to properly verify the origin of the goods. By blindly relying on the supplier’s certificates of origin, the CBP contended that the Canadian non-resident importer had acted negligently and falsely claimed the preferential NAFTA tariff treatment on its imports. Customs officials also asserted that the company had “failed to exercise reasonable care because it did not consult with a CBP expert or customs broker, did not seek a binding classification ruling, and did not develop any corporate policy for ensuring customs compliance.”

STR, which represented the Canadian firm, managed to refute the allegations and get the enormous penalty assessment and duty demand overturned by successfully demonstrating to the CBP that their client had “made every attempt to exercise reasonable care” in accordance with relevant customs publications on the subject, that it had “worked with consultants, customs brokers and even CBP itself to determine the proper way to address NAFTA-related concerns” and furthermore, that the supplier’s certificates of origin were not only correct, but in fact allowed for “the tracing of NAFTA-qualifying inputs down to a very specific level.”

Although it is extremely unfortunate for the company that preventative compliance measures in this instance did not enable it to avoid altogether what in retrospect proved to be an entirely needless rigmarole with CBP, had the firm not actually been fulfilling its “reasonable care” obligations over the course of the past six years, the consequences otherwise would have been quite significantly more costly and potentially damaging.