U.S. Customs Penalty Defense / Prior Disclosure

     Customs fraud is common, but the vast majority of it goes undetected due to the limited resources of Customs.  So when suspected violations are detected, there is a tendency to overreact and commence investigations with threats to impose the maximum amounts permitted by law, which are quite substantial even for unintentional violations.  The conventional belief is that Customs claims maximum amounts to make importers feel good about settling for lower (albeit still substantial) penalties.  If Customs target amount is $200,000, Customs knows that the best way to collect this amount is to formally claim $1 million, and then settle for the lower amount. Although the claim might rest on dubious grounds, Customs is aware that companies are averse to risking $800,000 on a U.S. Customs penalty defense that cannot be guaranteed.  The penalties are, of course, on top of restoring the underpaid duties.

     Sometimes the best U.S. Customs penalty defense is a good offense.  High penalties (and just as important high settlements) can be avoided by voluntarily disclosing the problem before Customs commences an investigation.  Prior disclosures are a good deal, especially for non-fraudulent violations, where the penalty is limited to the interest on any duty loss.  But they are an underutilized tool for managing exposure for two reasons.

     First, some question the benefit of confessing something where there seems little likelihood of the agency finding out on its own.  This is an ill-advised gamble.  Although Customs detects relatively few potential violations, in absolute terms they learn about a good number.  Opting for non-disclosure also places the importer in an awkward position with respect to future transactions where the problem can potentially repeat itself.  Declaring future imports properly -- which is required and highly advisable -- is apt to draw attention to the prior transactions that were declared differently.

     Second, there appears to be a widespread misperception that making a voluntary disclosure necessarily requires payment of five years worth of underpaid duties, and the associated expense of reviewing and documenting five years worth of entries. This type of comprehensive disclosure seems to be recommended far too often. It is true that Customs has a five-year statute of limitations for collecting underpaid duties, and thus that five years of entries are technically vulnerable.  Customs rarely pursue an importer for duties (or penalties) on five years of entries for a problem the importer voluntarily brings to light.  Pleased that the importer brought the issue to light, Customs, port officials typically require duty restoration only on unliquidated entries, generally entries less than ten months old.  In rare cases, port officials want to collect back duties on liquidated entries.  This is achieved by suggesting that the importer make a disclosure on earlier entries.  All cases are different, but generally it would be at this point that it makes sense to submit a comprehensive disclosure.

     The goal is not just to bring importers into compliance, but to bring importers into compliance in a way that eliminates or dramatically reduces vulnerability to penalties and increased duties on past transactions.