Focused Assessment and Enforcement Actions

1
Overview of Duty Preference Programs
James Sawyer Partner Drinker Biddle
Reath 312-569-1156 James.Sawyer_at_dbr.com
2
Special Duty Programs

• Beyond tariff classification, there is the
  additional necessary step of qualifying for
  potential preferential trade programs.
• Allow for special duty treatment beyond the
  Column One, general rate of duty determined by
  tariff classification and country of origin.
• Requires affirmative action and a system of
  internal controls, i.e., reasonable care.
• May also require additional supporting
  declarations at the time of entry.

3
Special Duty Programs (cont.)

• Programs are OPTIONAL.
• Look first to general, column one duty rate.
• Review all available duty preference programs
• Chapter 98 (U.S. programs)
• International Agreements (Civil Aircraft,
  Pharmaceuticals)
• Free Trade Programs (e.g., GSP, CBI)
• Free Trade Agreements (e.g., NAFTA, DR-CAFTA).
• Avoid imposing unnecessary administrative
  burdens.
• If you determine use of duty preference program
  is cost effective, must ensure that appropriate
  internal controls are in place.
• All duty preference programs are not created
  equal!

4
U.S. Free Trade Agreements Currently in Effect

• Bahrain
• Effective August 1, 2006
• CAFTA-DR
• Effective March 1, 2006
• Morocco
• Effective January 1, 2006
• Australia
• Effective January 1, 2005
• Singapore
• Effective January 1, 2004
• Chile
• Effective January 1, 2004
• NAFTA
• Effective January 1, 1994
• Jordan
• Effective December 17, 2001
• Israel
• Effective January 1, 1985

Costa Rica has not yet implemented CAFTA-DR
agreement passed by nationwide referendum in
October 2007.
5
2008 U.S. Trade Agenda
Colombia
Peru
Panama
DOHA
KORUS
6
2008 U.S. Trade Agenda

• U.S. Peru Trade Promotion Agreement
• Congress passed the FTA on December 4, 2007 and
  President Bush signed it into law on December 14,
  2007.
• Agreement will enter into force once Peru takes
  necessary steps to ensure implementation of its
  obligations.
• U.S. Imports are mostly duty-free under Andean
  Trade Preference Act (ATPA) (set to expire
  December 31, 2008).
• Benefits for U.S. Exports
• 80 of consumer and industrial products duty-free
  to Peru
• Textiles and apparel duty-free and quota-free
  immediately
• Key Exports auto parts, scientific and medical
  equipment, construction equipment, agriculture.
• Especially during a time when the U.S. dollar is
  weak, exporting is advantageous because American
  goods are offered at sale prices.
• Once implemented, use of ATPA and Generalized
  System of Preferences (GSP) for imports from
  Peru will be unavailable.

7
2008 U.S. Trade Agenda

• U.S. Colombia Trade Promotion Agreement
• FTA signed by parties on November 22, 2006
• Awaiting Congressional approval of legislation
• Possible delays due to
• anti-labor union violence in Colombia
• Trade Adjustment Assistance legislation
• U.S. Imports are 92 duty-free under ATPA
• Benefits for U.S. Exports

8
2008 U.S. Trade Agenda

• Argument for the U.S. Colombia TPA
• Currently, there is a disparity in treatment of
  Colombian v. US goods

9
2008 U.S. Trade Agenda

• KORUS (U.S. South Korea)
• FTA signed by parties on June 30, 2007
• South Korea is 7th largest U.S. trading partner
• U.S. is 3rd largest South Korean trading partner
• Awaiting Congressional approval
• Delays expected
• South Korea has banned U.S. beef exports
• South Korea has not opened its automotive market
  to U.S. cars and auto parts

10
2008 U.S. Trade Agenda

• U.S. Panama Trade Promotion Agreement
• FTA signed by parties on June 28, 2007
• Awaiting Congressional approval
• Delays expected
• Pedro Miguel Gonzalez, head of Panamas National
  Assembly, who is wanted for 1992 murder of U.S.
  soldier, must step down before Congress will
  approve this FTA.
• Trade Adjustment Assistance legislation
• Typical exports grain and other agricultural
  products, auto parts, service equipments,
  apparel, medicine
• Currently, U.S. imports from Panama duty-free
  under GSP

11
2008 U.S. Trade Agenda

• Doha
• Multilateral Free Trade Agreement in WTO
• On February 8, 2008, USTR announced that draft
  texts were released by the chairs of the
  Agriculture and Non-Agricultural Market Access
  negotiating groups, which USTR is closely
  analyzing.
• On May 9, 2008, the Doha Agriculture Negotiations
  Chairperson announced he is reworking the draft
  of the "modalities" (assessment of what WTO
  members might agree to and how it should be done)
  and will be circulating the draft among WTO
  members for purposes of further negotiations.
• According to the USTR and President Bush, the
  United States is committed to the conclusion of a
  strong Doha Round in 2008.
• International trade agenda will also likely
  include trade security issues and product safety
  concerns.
• Trade with China
• Import safety
• How do we make China listen and comply?
• How can we regain trust in the Made in China
  brand?

12
On the Horizon Other Free Trade Agreements

• Awaiting Implementation
• U.S. Oman FTA
• Approved by Congress on Sept. 19, 2006.
• President signed legislation to implement on
  Sept. 26, 2006.
• In Negotiation
• Thailand
• United Arab Emirates
• Malaysia
• South African Customs Union

Thailand
United Arab Emirates
Malaysia
South African Customs Union
13
Is Anyone Really Using These FTAs?
U.S. Department of Commerce, International Trade
Administration, and Bureau of the Census
14
U.S. Free Trade Agreements Currently in Effect

• Each FTA has a dedicated General Note to the HTS
• General Note explains the general and
  product-specific rules for each agreement

15
FTA Qualification Requirements

• A good will qualify for preferential duty
  treatment under an FTA when it satisfies the
  criteria enumerated in the agreement.
• Rules of Origin
• Special duty preference is for originating
  goods.
• Various methods of qualification
• Wholly obtained or produced
• Wholly of originating materials
• Tariff shift
• Regional Value Content (RVC)
• Direct Costs of Processing Requirements
• Other
• For GSP-model agreements, must have a
  substantial transformation and the value of
  originating materials plus direct costs of
  processing operations must be greater than 35 of
  value of the article.

16
What is Originating?

• The term originating has special meaning for
  each FTA.
• Refers to goods that satisfy specific rules in an
  FTA and are eligible for preferential treatment.
• DOES NOT MEAN PURCHASED IN A PARTICULAR COUNTRY
  OR REGION.
• NOTE Simple combining or packaging operations or
  mere dilution with water or other substances does
  not qualify goods as originating.
• Goods cannot be further processed or manufactured
  in a non-FTA country, other than unloading,
  reloading, or any other process necessary to
  preserve the goods in good condition or to
  transport the goods to the other party(ies).

17
Rules of Origin
18
Importance of Tariff Classification for FTA
Analysis

• Tariff classification is a key component of FTA
  qualification and eligibility.
• May determine eligibility for FTA preference.
• May determine origin.
• Many FTA rules of origin and sometimes marking
  rules are based on tariff classification.
• Must have accurate tariff classification of
• Raw materials/components and
• Finished goods.
• Caution Improper tariff classification can have
  adverse effect on FTA eligibility analysis!

19
Rule of Origin Example

• NOTE Product-specific Rules of Origin are not
  identical for all FTAs.
• EXAMPLE Cleveland Envelope Co. paper-based
  self-adhesive label materials classified in HTS
  subheading 4811.21.

20
De Minimis Rule

• Almost all FTAs apply some level of de minimis
  standards to qualifying product as originating.
• Basic concept
• If you only have a few raw materials that fail
  to undergo the tariff shift, the tariff shift
  requirements may be excused.
• How much is a few?
• 7 (by value)
• NAFTA
• 10 (by value)
• Australia
• CAFTA-DR
• Chile
• Singapore
• Peru
• Colombia
• Exceptions may apply

21
Claims for Preferential Treatment

• Written or electronic certification by importer,
  exporter, or producer.
• Importers knowledge that good originates,
  including reasonable reliance on information in
  importers possession that the good originates.
• Make claim at time of entry by using Special
  Program Indicator (SPI) as prefix to tariff
  classification on entry summary.
• e.g., Chile FTA SPI is CL Australia FTA SPI is
  AU.

22
Certification Requirements

• Importer must be prepared to submit, upon CBPs
  request, the certification or other information
  setting forth reasons the good qualifies as
  originating.
• NAFTA Valid CO must be in importers possession
  at time claim is made.
• Others Does not need to be in importers
  possession at the time of claim.
• Format
• NAFTA must use NAFTA CO.
• Others no particular format, but requires
  certain data elements.
• Single or multiple shipments (up to 12 months).

23
Data Elements for Certification

• List of data elements
• 1. Name and address of the importer
• 2. Name and address of the exporter
• 3. Name and address of the producer
• 4. Description of good
• 5. HS tariff classification number (to six or
  more digits)
• 6. Preference criterion (as provided in the
  Rules of Origin)
• 7. For single shipment, provide the commercial
  invoice number
• 8. For multiple shipments of identical goods,
  provide the blanket period
• 9. Authorized signature, company, title,
  telephone, fax, e-mail, and certification
  date
• 10. Certification statement

24
Post-Importation Claims

• To request a refund of duties or fees paid
• File claim under 19 U.S.C. 1520(d) within one
  year of importation
• NAFTA
• CAFTA-DR
• US-Chile FTA
• For other FTAs, file post entry claim via
• Post-Entry Amendment or
• Protest
• Post-importation claim is filed at the port of
  entry.

25
Recordkeeping

• Importer should maintain all records and
  documents necessary to demonstrate a good
  qualifies for preferential tariff treatment.
• Maintain for 5 years from date of importation
• What records?
• Certification of origin or other document
  containing required 10 data elements
• Records supporting RVC calculation
• Records concerning the purchase of, cost of,
  value of and payment for the good
• Records concerning the purchase of, cost of,
  value of and payment for all materials used in
  the production of the good
• Records concerning the production of the good in
  its exported form
• United States v. Ford Motor Company

26
Verification by Customs Administrations

• Either partys customs officer can conduct a
  verification.
• The burden of substantiating a claims validity
  is on the importer.
• Note for NAFTA burden is on exporter.
• CBP inquiries via
• Request for Information (CBP Form 28)
• Positive or Negative Determinations by Notice of
  Action (CBP Form 29)
• Civil penalties can result from failure to
  exercise reasonable care when making
  duty-preference claims.

27
FTA Tips

• When tariff shift is not met, determine whether
  the good qualifies under de minimis exception.
• Avoid RVC issues by strategic sourcing (i.e.,
  source key material or component only from FTA
  parties).
• Document qualification process and maintain
  appropriate records.
• Demand written certification of origin.
• Audit suppliers processes.
• Communication with suppliers.
• NAFTA strict liability concerns have the
  certificate of origin at the time of entry or do
  not make the claim.
• Develop written instructions and document foreign
  suppliers receipt and understanding of
  qualification requirements.
• Incorporate indemnification language within PO
  terms and conditions in the event claim is denied.

28
FTA Tips

• Watch multi-sourced raw materials/components and
  train sourcing personnel.
• If possible, always consider such articles
  non-originating when partially sourced from a
  third country.
• Respond promptly to all CBP Form 28s or CBP Form
  29s to avoid
• Denied claims
• Wider audit of preference claims
• Potential penalties under 19 U.S.C. 1592
• Take advantage of post-entry claim process if
  supporting documentation is not available at time
  of importation.
• File claims under 19 U.S.C. 1520(d) for NAFTA,
  CAFTA-DR, Chile FTA.
• File Post Entry Amendment (PEA) or Protest for
  other FTAs.

29
How These Risks Translate to aFTA Audit Red
Flags

• The company has insufficiently documented, poorly
  defined, or no internal controls for accurately
  reporting and determining duty preference claim.
• The company does not monitor or interact with its
  customs broker to ensure duty preference claims
  are authorized and supported.
• Company staff lacks knowledge of FTA
  requirements.
• The company lacks processes for monitoring and
  auditing duty preference claims.
• The company does not maintain supporting
  documents for duty preference claim.
• The company is unable to provide support from
  foreign vendor regarding qualification of
  originating good.
• Large number of foreign vendors for which duty
  preference claims are being made.

Control Environment The Company maintains an
environment that supports trade compliance,
provides a clear corporate mandate for
compliance, assigns competent personnel, uses
proper organizational structure, and possesses
adequate resources.
30
FTA Audit Best Practices

• Internal control for preference program are
  written and monitored and approved by management.
  Control Activities
• Personnel have adequate knowledge and training.
  Control Environment
• The company demonstrates good interdepartmental
  communication, especially with finance and
  sourcing personnel. Information and Communication
• The company conducts and documents periodic
  reviews and monitoring of its classification
  practices. Risk Assessment and Monitoring
• The company maintains a classification database.
  Control Activities
• The company provides written instructions to its
  customs broker(s) regarding use of duty
  preference claims. Information and Communication
  and Control Activities

Control Environment The Company maintains an
environment that supports trade compliance,
provides a clear corporate mandate for
compliance, assigns competent personnel, uses
proper organizational structure, and possesses
adequate resources.
31
FTA Audit Best Practices

• The company has qualified and training personnel,
  supported by management with a clear, written
  policy toward compliance, and management approval
  of written internal controls. Control Environment
• The company has incorporated within its sales
  contracts or purchase orders vendor compliance
  commitments under the particular FTA. Information
  and Communication and Control Activities
• The company consults with a Customs expert to
  assist in determining qualification or obtains a
  Customs ruling. Control Activities
• New vendor set up incorporates analysis of duty
  preference program qualification, and where
  possible, incorporate site visits to foreign
  vendor. Risk Assessment and Control Activities
• Procedures are in place to identify sourcing
  changes and process to notify import compliance
  and review FTA qualification. Information and
  Communication and Control Activities

Control Environment The Company maintains an
environment that supports trade compliance,
provides a clear corporate mandate for
compliance, assigns competent personnel, uses
proper organizational structure, and possesses
adequate resources.
32
QUESTIONS ????
33
Importing and Exporting in 2008Tipping the
Scales in Favor of Trade Compliance and Trade
Security
The International Trade Customs Broker
AssociationIndustry Perspective on Making an
Import/Export Compliance Program WorkMay 20,
2008
Presented by Janet Reuter, Rockwell
Automation Michael Zecchino, GE - Aviation Les
Polgar, Freight Expediters
34
(No Transcript)
35
GE - Aviation

• Quick Facts
• Headquarters Cincinnati, Ohio
• Revenues 16.8 B
• Total Worldwide Employment 38,000
• Importer Profile
• Import Entered Value 7.2 B
• Estimated Duties 12.7 M
• Entry Summaries 43,000
• International Trade Compliance (ITC)
• Licensed Customs Brokers 6
• Importer of Record Numbers 41
• Focused Assessment
• Importer Self-Assessment (ISA)
• Sarbanes-Oxley 5-Pillars of Risk Management
• Control Environment Risk Assessment Control
  Activities Information Communication
  Monitoring

36
5-Pillars of Risk Management Applied

• Control Environment
• The Spirit The Letter
• Business-Wide Compliance Manual
• Risk Assessment
• Pre-Entry / Broker / Onsite Audits
• Control Activities
• Broker Reduction Initiative
• Information Communication
• Customs Council
• myLearning.ge.com
• Monitoring
• Corporate Shared Services
• Importer Self-Assessment (ISA)

37
Rockwell Automation

• Janet Reuter
• Director, Global Trade Compliance

38
Rockwell Automation At A Glance
Leading global provider of industrial automation
control and information solutions

• Annual Sales 5 billion
• World Headquarters Milwaukee,
  Wisconsin, USA
• Trading Symbol ROK
• Employees About 20,000
• Serving customers in 80 countries

39
Export Control Environment

• Corporate policy
• Corporate responsibility
• Corporate compliance position
• Organizational structure
• Management support
• What behavior will not be tolerated
• Ombudsman

40
Export Risk Assessment

• Know your business
• Financial transactions
• Physical transactions
• Data/systems transactions

41
Export Control Activities

• Export Management System IT/Documented
• Customer Screening
• Review (classify) product/software/technology for
  commercial or military
• Obtain licenses if required
• Export compliance information on export
  documentation
• Record retention quote to cash
• Management of freight forwarders
• Training

42
Export Information Communication

• Cross functional havent found a department we
  dont touch
• Clearly communicate requirement/risks and impact
  on business
• Timely explanation of regulatory changes to
  management/stakeholders
• Communication to those who support export
  compliance process

43
Export Monitoring

• Report to board under Global Compliance Program
  legal vs. best practices
• Internal audit
• Periodic general compliance review with
  management of region/countries
• Self audit
• External
• Measure export management program
• Results
• Distribute reports
• Corrective actions identified with responsible
  party and deadline

44
Freight Expediters
Customs Brokers - International Freight
Forwarders International Trade Consultants
Les Polgar, Regional Manager and Senior Consultant
Company Mission to be a professional,
customer-driven organization that understands
and meets the needs of its customers.
45
Freight Expediters

• Communication
• basis of positive relationship between importer
  and broker, exporter and forwarder
• basis of effective in-house compliance efforts
• Control environment
• broker instructions
• post-entry audit process
• product design and purchasing process
• Compliance responsibility
• designated individual(s) within company
• Mod Act implications

46
Any Questions?