Customs Law Advisory - US General Accounting Office strongly criticizes the US Bureau of Customs and Border Protection

In a recent report, the US General Accounting Office (GAO) strongly criticized the US Bureau of Customs and Border Protection’s (Customs) enforcement of in-bond entry procedures.  As a result, Customs may soon tighten its controls on in-bond merchandise including, potentially, increased documentation requirements, higher bond amounts and larger claims for liquidated damages from importers found to make errors in connection with in-bond procedures.  Accordingly, we recommend that importers review their compliance measures for in-bond shipments, including the recordkeeping systems necessary to be able to promptly respond to questions from Customs on in-bond shipments.

Under the in-bond system, imports can travel through the United States, without payment of any duty, before formally entering the United States or being exported to a foreign country.  To use this procedure, the importer purchases a bond from a licensed surety company and the bond guarantees that the merchandise will not be diverted into the commerce of the United States.

A recent GAO report, “US Customs and Border Protection Faces Challenges in Addressing Illegal Textile Transshipment,” GAO-04-345 (January 2004), included a review of Customs’ enforcement of in-bond shipments.  GAO identified several weaknesses in Customs’ internal controls that cause or allow bonded cargo to be illegally diverted from its declared destination into the commerce of the United States.  This illegal diversion circumvents the payment of duties as well as other restrictions, such as quota requirements for textile and apparel products.  GAO reported that lack of automation, lack of coordination between ports and lack of resources all frustrate Customs’ ability to properly track in-bond entries.  GAO stated that it made recommendations for in-bond improvement in 1994 and 1997, but not all the recommendations have been implemented.

It is likely that Customs will attempt to increase inspection of in-bond shipments in order to respond to GAO’s criticisms.  Moreover, Customs has indicated that it is developing new guidelines that will set the bond levels using a risk-based approach based on type of commodity, history of carrier, and potential loss of revenue.  In addition, Customs may begin to more vigorously use liquidated damages, with less lenient mitigation, in order to toughen in-bond enforcement.  Accordingly, Customs may soon require importers (1) to prepare and present more detailed information on in-bond shipments, (2) to purchase and carry larger bonds, and/or (3) to pay larger liquidated damages amounts for in-bond errors.

In light of Customs’ likely response to GAO’s criticisms, we recommend that importers using in-bond procedures review their compliance measures, especially the recordkeeping systems necessary to be able to promptly respond to any questions from Customs on in-bond shipments.  Any inability to resolve such questions from Customs could result in significant shipment delays.

Please contact Greg McCue at 202.429.6421 if you have any questions.