The Camelot Company The Camelot Company Customs Clearance and Freight Forwarding Wed, 22 Nov 2017 19:47:41 +0000 en-US hourly 1 From the President’s Desk… Wed, 20 Jan 2016 19:53:54 +0000 January 20, 2016. The Camelot Company today celebrates its 39th year in business.  Gee, whiz, […]

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January 20, 2016.

The Camelot Company today celebrates its 39th year in business.  Gee, whiz, when I think back, the company’s first capital investment was a Smith-Corona typewriter from McDade’s for $225.00.

When Camelot began, I always was able to beat my competition because as a company of one, I did it with speed.  When I hired my first employee, I had to create another marketing advantage.  With each successive enhancement to the company, I kept seeking that new advantage, that thing that made Camelot different from our competition.

If there is one maxim that has held true over the years, it is that we always want to know more than our competitors and our goal is to share it with our customers first.  We still strive to do our best on each and every file we transact for our customer.

With that, I say thank you to each of you who has made Camelot what we are today; one of the leading Customs brokers and freight forwarders in Chicago.

Tom Case


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Paul Anderson Guest Column: Personal Penalty Liability Thu, 15 May 2014 22:31:08 +0000 In the past we have touched upon Customs penalties under the main penalty statute, 19 […]

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In the past we have touched upon Customs penalties under the main penalty statute, 19 USC §1592 (generally referred to as §592 of the Tariff Act of 1930).  Although Customs administers many different laws, many of which are penal in nature, §592 penalties are the most pervasive and can be serious.


These penalties are based on material violations where there is an act of commission or omission by the violator which is effected through fraud, gross negligence or negligence.


The importer of record (IOR) as designated on the CBP Form 7501 is the party assuming primary liability for that entry.  The importer of record generally may be the seller or purchaser of the imported merchandise, the Customs broker, or a consignee, and may be a non-resident (foreign) corporation.  Although the IOR may be an individual, it is typically a corporation or similar limited liability entity that actually acts as the importer of record.  Just as with conducting day-to-day business, the corporate entity is organized and utilized in order to shield individuals conducting that business from personal liability.


Most penalty cases are pursued against a corporate entity acting as an IOR, but there are situations where a corporate officer or individual within the corporation may be held personally liable for Customs penalties even when that individual is not the IOR.  Situations where individuals and corporate officers are pursued by Customs are not particularly frequent, but they occur often enough to cause concern.  A fairly recent case decided by the U.S. Court of Appeals for the Federal Circuit (CAFC), United States v. Trek Leather, Inc. and Harish Shadadpuri (No. 2011-1527 dated July 30, 2013) has an excellent discussion on this issue and ultimately found that the individual in that case was not liable for penalties in conjunction with the penalty assessed against the corporation.  The actual decision was limited to the specific fact situation before the court.


However, this case was significantly important and controversial so as to recently result in the CAFC granting a Petition for Rehearing where the court will again reconsider these issues.  It is worthwhile to outline the general issues discussed in the original decision because they are interesting.  However, we necessarily will have a follow-up article once the court issues its subsequent decision on the Rehearing.


The underlying penalty case, as with so many penalty cases under §592, involved a failure to declare assists to Customs.  Trek Leather, Inc. (TLI) was the importer of record and a separate corporation was the consignee of the imported men’s suits.  Mr. Shadadpuri (the “individual”) was president and shareholder of TLI and also a 40% shareholder of the consignee.  During the Customs investigation leading up to the penalty demand it was discovered that the individual had previously failed to declare assists for a different corporate importer.  This apparently contributed to the issuance of the subject penalty case.  TLI and the individual refused to pay the balance of duties owing for the assists and the government filed suit for a penalty of about $2.4 million initially, alleging fraud.  The government also alleged gross negligence and negligence in the alternative.


During the argument of these issues, TLI contested the fraud allegation but conceded that the company had acted with gross negligence.   The government proceeded on the negligence claims but, importantly, abandoned its fraud claim against the corporation.  The individual’s defense regarding personal liability was that he could be personally liable only if the government “pierced the corporate veil” of TLI or established that he had either committed fraud, or aided and abetted fraud by TLI.  The lower court agreed with the government on all its claims and granted summary judgment against the corporation for gross negligence and against the individual jointly and severally for the same penalty.


After consideration of the arguments set forth by the parties, the CAFC reversed the CIT’s judgment with respect to individual liability for Mr. Shadadpuri.  The court stated that in order for the government to prevail against the individual personally it must have shown 1) that TLI committed fraud and that the individual aided and abetted that fraud, or 2) the government could have pierced TLI’s corporate veil.  However, the government declined to pursue either one of these options on the theory that it would prevail against the individual on a negligence basis.  The court considered all arguments and concluded that the government chose not to pursue the fraud and corporate veil options, and held that negligent action by the individual was not sufficient under the law for personal liability.  The CAFC clearly stated the potential problem with the government’s theory is that it could expose all corporate officers and shareholders to personal liability for negligent acts taken on behalf of the corporation.  The CAFC felt that this is a much broader reach than Congress intended and would also be directly contrary to long-standing principles of common law.


The aspects of the CAFC decision that are important to bear in mind are that generally there is no personal liability for corporate officers and shareholders in the absence of fraud.  Under the culpability levels specified in §592, actions that are grossly negligent or a result of ordinary negligence would be subject to penalties but the corporation would be the appropriate party from which to seek penalties.  If an individual was also incorporated, but acting as an “alter ego” of the corporation and the corporation was merely a “sham”, the corporate veil could be pierced resulting in personal liability.  Finally, where an individual “aids or abets” a corporation in fraudulent conduct the individual may be personally liable, even when not the importer of record.  However, certain issues peculiar to this case will be addressed again at the Rehearing and it is likely that some of these conclusions may be altered.  We will update when the new decision is reached which will certainly have some interesting discussion of these issues.

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Paul Anderson Guest Column: Free Trade Agreements Fri, 15 Nov 2013 16:34:54 +0000 Most importers are aware of the existence of various free trade agreements and special programs […]

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President Bush signs bilateral Free Trade Agreement with Singapore.
President Bush signs bilateral Free Trade Agreement with Singapore.

Most importers are aware of the existence of various free trade agreements and special programs but due to the large number of these programs, along with the complexities of varying rules of origin and required percentages of local content, a great deal of uncertainty exists as to their mechanics.  This month I will try to simplify and organize these trade preference programs and will focus on the various content percentages and applicable rules in order to qualify for origin under a particular agreement.

We tend to think of free trade agreements generically, but from a technical point of view there are Free Trade Agreements and Special Trade Programs.  The most notable Free Trade Agreement (FTA) is, of course, the North American Free Trade Agreement or NAFTA.  NAFTA is a multilateral free trade agreement in that it has three countries as signatories.  Most of our FTAs are bilateral and include a wide variety of agreements between the United States and countries such as Australia, Bahrain, Chile, Israel, Jordan, Korea, Morocco, Oman, Panama and others.  There are also several “trade promotion” agreements such as the Colombia and Peru Trade Promotion Agreements.  These agreements are bilateral and involve only the United States and the relevant second country.

Special Trade Programs are programs designed to impart trade benefits to larger geographical areas or specific countries throughout the world that happen to qualify for the specific origin requirements of the STP.  The most prominent example of the latter would be the Generalized System of Preferences (GSP) which is a program designed to assist qualifying beneficiary developing countries (BDCs) by granting duty-free treatment where the relevant rules of origin are met.

As a general rule, the FTAs usually contain origin requirements which involve tests as to whether the merchandise is obtained or produced entirely in a NAFTA country or countries and/or whether the articles have been transformed through tariff shift rules and regional value content (RVC) rules that may be applicable.  STPs generally rely on a rule of origin whereby the direct costs of processing operations and costs of component materials produced in the BDC comprise at least 35% of the appraised value of the merchandise as imported into the U.S.  Still other FTAs are designated as free trade agreements but actually assume the origin rules more generally associated with the STPs such as the GSP program.  Certain alternative tariff shift and/or substantial transformation requirements may be present but the major qualifying aspect is that 35% of the finished article as imported into the United States be comprised of “local content”, i.e., the direct costs of processing operations and the cost of component materials produced in the BDC.

Let’s take a look at some of the percentage requirements and rules in some of these free trade agreements so as to provide a better understanding as to how they work and note some distinguishing features between the types of agreements.

1.         NAFTA.  NAFTA is the most prominent and well-known of the free trade agreements, yet its rules of origin still are widely misunderstood and misapplied.  This article is not a detailed survey of all NAFTA rules of origin, but only intends to point out that origin under NAFTA is generally not governed by a specific percentage such as GSP.  The major exception to the notion that origin is not percentage-based under NAFTA occurs where there is an application of a regional value content (RVC) requirement to any rule of origin situation.  To summarize, NAFTA rules of origin require that the finished article be wholly obtained or produced in a NAFTA country or utilize only materials that have been wholly obtained or produced in the NAFTA country or are otherwise deemed to be originating components.  Or, if this scenario does not apply, then application of the “tariff shift” rules set forth in the NAFTA agreement would occur.

The tariff shift rules are organized by HTS heading and subheading and specifically outline the requirements of any tariff shift.  A “shift” refers to consideration of the tariff classification of the finished article versus the classification(s) of imported non-originating components.  Many of the tariff shift rules also require an RVC in addition to a shift.  The percentages vary according to choice of methodology used to calculate the RVC which is at the discretion of the party performing the origin analysis.  In cases where the transaction value method of calculation is employed, the RVC will be 60%.  In cases where the net cost method of calculation is employed, the RVC is 50%.

One other percentage is important for NAFTA purposes.  There is a de minimis exception under the NAFTA rules.  The general rule is that the finished article must be made from originating materials.  This means that components imported from outside of Mexico, the United States or Canada must become “originating” by meeting the applicable tariff shift rules.  NAFTA also allows a de minimis amount of 7% of the components to not be “originating” as an exception to this general rule.

2.         GSP and Other Special Trade Programs.  GSP is the oldest of the STPs and provides a general template for many of the other STPs and some of the FTAs.  The qualifying percentage in such cases is 35%.  The rules of origin under GSP require first that direct costs of processing incurred in the BDC are to be included in the 35% threshold.  Also to be included are the costs of materials produced in that BDC.  This has been interpreted to mean that components that are wholly made in the BDC will be considered as originating therein.  However, when components are imported from outside the BDC into that country, they must undergo a substantial transformation in order to convert those components into BDC origin.  Customs has also developed an interpretation that in order to include these components in the 35% calculation there must be a “double substantial transformation”.  This means that the imported components are first substantially transformed into another component or sub-assembly of the finished article which confers origin on that component.  Those components, in turn, must be substantially transformed into the finished article that will be imported into the United States.  So long as 35% of the appraised value (value used for appraisement purposes and declared on the Form 7501) is comprised of “local content”, the finished article will meet the threshold.

In certain other cases of STPs such as the African Growth and Opportunity Act (AGOA) and the Caribbean Basin Economic Recovery Act (CBERA), there are additional percentages that are relevant.  The underlying 35% threshold still applies in these cases but up to 15% of that amount may be accounted for by components sent from the U.S. to that BDC and used in production of the finished article.  This is quite distinct from the GSP program generally which does not allow U.S. components to count towards the 35% threshold.

3.         Other FTAs.  The balance of the FTAs generally fall within two categories.  FTAs such as those with Bahrain, Israel, Jordan, and Morocco utilize a 35% threshold similar to the GSP discussion above.  Some, such as the Jordan and Israel agreements, allow up to 15% of U.S. costs to be included in the 35% threshold.  Others such as Morocco allow unlimited U.S. content towards meeting the 35% threshold.

Other FTAs such as those involving Australia, Chile, and Singapore do not have a 35% threshold requirement.  They adhere typically to the rules similar to those set out in the NAFTA agreement involving articles that are either wholly obtained in a NAFTA country or is subject to a tariff shift and/or also subject to an RVC.  In these cases the RVC is typically 60% by the transaction value method of calculation and 50% by the net cost method of calculation.

This is merely a quick overview of some of the trade agreements and basic underlying origin concepts.  Perhaps the best take away from this is the fact that although these Free Trade Agreements and Special Trade Programs were designed to foster international trade and benefit the signatory parties, the actual mechanics of these agreements are very complex in practice and may not necessarily “simplify” trade as intended by the negotiators of the agreements.  Nonetheless, potential duty-free and similar treatment can be well worth the effort of exploring potential applicability under these agreements.

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Paul Anderson Guest Column: Substantial Transformation Sun, 15 Sep 2013 13:07:05 +0000 The phrase “Substantial Transformation” is one frequently used to describe a variety of situations where […]

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The phrase “Substantial Transformation” is one frequently used to describe a variety of situations where components are subjected to processing operations resulting in a different, and frequently finished, article.  Substantial transformation as a concept typically is relevant in cases involving origin such as country of origin marking, quotas, and similar circumstances.  It is also particularly important in cases under the Generalized System of Preferences (GSP) in determining whether an article is eligible for duty-free treatment under that program.  This month’s article takes a look at this phrase which is generally not fully understood and attempts to shine some light on both its meaning and situations in which it is used within the Customs statutes.

Substantial transformation in its broadest sense pertains to situations where components or semi-finished articles are subjected to sufficient manufacturing processes so as to be “substantially transformed” into a different article.  One of the most common instances where this occurs is in the country of origin marking regulations at 19 CFR, Part 134.  Those regulations at §134.35 indicate that an imported article or component that is substantially transformed by the importer / manufacturer will not have to be marked with the country of origin because the manufacturer will be considered the ultimate purchaser of the imported component.  In other words, the imported component becomes a different article through the manufacturing process.

The test that is set forth in the regulations goes back to the court case of United States v. Gibson-Thomsen Company decided in 1940.  This stated test for substantial transformation is whether the imported component is subjected to a process which results in an article having a new name, character, or use which is different from that of the imported component / article.  This test was later re-affirmed and clarified in another landmark case in a slightly different context, Texas Instruments Inc. v. United States decided in 1982, which noted that a substantial transformation occurs “when an article emerges from a manufacturing process with a name, character, or use which differs from that of the original material subjected to the process.”  Both tests have often been extended to include terminology to the effect that the transformation results in a new and different article of commerce.

Although this test has been utilized for quite some time and generally forms the basis for determinations of the origin of a product in many circumstances, the test is necessarily subjective in that judgments are always made as to the nature and extent of the operations involved.  The test was designed to distinguish a situation which is a mere finishing or assembly process from a bona fide manufacturing process.  In cases where two components are merely glued together or attached with screws, and the overall process is quite simple, there is little likelihood of finding a substantial transformation.  The hard questions arise as to operations that are more than typical finishing operations which are generally thought of as cleaning, inspecting, repackaging, polishing and the like.  For instance, where a component metal has been subjected to a heat treatment process, a distinction has been made between those processes that merely anneal the surface as to those that result in a chemical and structural change in the metal.  For country of origin marking issues the test remains the same as stated in Gibson-Thomsen in most cases.Factory welder at work

Substantial transformation can also affect the duties that are paid on imported merchandise.  One of the more prominent examples of this is the GSP Program.  This program is designed to afford duty-free treatment to imports from developing countries so long as certain origin criteria are met.  Certain components produced in the beneficiary developing country (BDC), along with direct costs of processing performed there, are a part of the calculation requiring that 35% of the article imported into the United States be comprised of materials, or costs of processing, of the BDC.  The substantial transformation issue arises when components are imported into the BDC from a third country and are subjected to manufacturing operations in the developing country.  In such cases, the test applied is the Texas Instruments test as noted previously.  However, in GSP cases there is actually a requirement of a “double substantial transformation”.  This requires that components imported into the BDC must be substantially transformed into a separate and identifiable “intermediate article”.  This article is then considered a component of that BDC.  Because of the rules of GSP, that intermediate article must then be subjected once again to a sufficient substantial transformation operation so as to result in a finished article ready for export to the U.S. and to be included in the content calculation.  Because of the subjective nature of this test, issues frequently arise that can be cumbersome and difficult, and which lack predictability.

There has been a movement in certain areas to promote more objective determinations due to the subjectivity of the test and the possibility of differing substantial transformation determinations for similar manufacturing operations,.  For instance, the NAFTA Agreement provides for duty-free treatment of articles that are considered to be “originating” in Canada, Mexico or the United States.  In making the origin determination an attempt is made in the NAFTA Agreement to use tariff classification analysis for the substantial transformation test.  One of the most frequently utilized methods of proving origin so as to qualify for NAFTA is the “tariff shift rule”.  In simplistic terms, there are specific rules set out based on tariff classification of the imported article.  The tariff classification of that article governs the rule of origin that will apply.  Each specific rule spells-out whether components that are classified under different tariff classifications may be considered substantially transformed by the applicable process which results in an article that has a different tariff classification.  Of course no system is perfect, and many anomalies are evident in the NAFTA Agreement, but the tariff shift rules do provide for certain consistency in outcome.

The same general scheme has been used for purposes of rules of origin for textile articles.  Due to the inherent manifold and complex processes where several countries may be involved in the manufacture of a textile article, an attempt has been made to objectify these determinations.  The rules of origin for textiles at 19 CFR §102.21 set forth some basic considerations such as where the textile material was woven or produced, where a fabric making process occurred, where the article was knit to shape and where major parts of the article were made.  The rules also make reference to tariff shift rules in application of these tests.

Although substantial transformation applies mainly to country of origin marking issues, it is a relevant concept in other cases where origin may be important such as determining country of origin for antidumping and countervailing duty cases; determining origin under the Government Procurement and Buy America Acts; under certain tariff provisions in Chapter 98 of the HTSUS; and many other preferential trade programs where duty-free treatment depends on the determined origin of the product.

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Paul Anderson Guest Column: Liquidated Damages Thu, 15 Aug 2013 15:43:30 +0000 One bright morning you walk into the office and there is a certified letter from […]

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One bright morning you walk into the office and there is a certified letter from Customs waiting for you.  You open the letter and see a document entitled “Notice of Penalties or Liquidated Damages Incurred” and immediately you are struck by the line item as to the amount demanded – $600,000!  After your heart stops racing and you have recovered from a small fainting spell, you say to yourself “what in the world are liquidated damages and I didn’t even know we did anything wrong.  This cannot possibly be correct as we always exercise reasonable care.”  Welcome to the world of liquidated damages at CBP.  This month we will discuss the topic of liquidated damages and clear up some misconceptions regarding these troublesome claims.Penalty-Camelot

The first thing to understand is that liquidated damages technically are not “penalties” under the Customs laws.  This may not make you feel any better as an importer when you are facing a large monetary demand, but penalties are separate and apart from liquidated damages.  Penalties are generally treated under 19 USC §1592 and involve culpability under levels of fraud, gross negligence, or negligence.  With liquidated damages, there are no culpability factors such as for fraud or gross negligence.  Liquidated damages are amounts that are contractually assessed for the breach of a contract, in this case the breach of the appropriate bond that the importer has filed with Customs.  When an importer makes entry of merchandise Customs will require a general importation bond and usually the type chosen is a continuous bond rather than a single entry bond.  These bonds set forth many conditions that the importer agrees to abide by when importing merchandise.  When a violation of these conditions occurs it will result in a breach of the bond and a resulting claim for liquidated damages.

Liquidated damage claims may arise for many different reasons.  Moreover, the amounts that may be demanded by Customs as liquidated damages vary greatly according to the breach involved.  For instance, a common situation arises where entry summary 7501 forms are filed late or not filed at all.  Similarly, where Customs duties are paid late or not paid at all, the same would apply.  In these types of relatively routine situations Customs will issue a liquidated damages claim to the importer.  It will be the responsibility of the importer to address the liquidated damages claim through the appropriate channels specified by Customs.  Some claims for liquidated damages are much more serious such as violations of the Food and Drug Administration’s regulations and where prohibited merchandise is released into the commerce of the United States.  In those situations there will be a demand for three times the appraised value of the imported merchandise representing liquidated damages.

Other situations that may result in liquidated damages are a failure to comply with the terms of a temporary importation bond, merchandise removed without an appropriate permit, merchandise misdelivered by an in-bond carrier and similar circumstances.  A frequent situation involving a claim for liquidated damages pertains to a failure to redeliver merchandise to Customs custody.  This typically arises with country of origin marking issues and accompanying notices of redelivery.  In such cases Customs may question the appropriateness of the country of origin marking of the imported merchandise and issue a marking notice.  A marking notice typically allows for a correction of country of origin marking of the merchandise to Customs’ satisfaction, and/or will require that the merchandise be redelivered to Customs’ custody where the importer refuses or cannot actually correct the country of origin marking on the offending articles.  When an importer fails to redeliver merchandise according to a subsequent notice of redelivery Customs will then issue a liquidated damage claim due to the breach of the terms of the importation bond.

A demand for liquidated damages can be astronomically high, but fortunately Customs allows for a petitioning process which may result in mitigation of these claims to a lesser amount.  In cases where fairly routine situations occur, such as with a late entry filing, the notice will typically mention that the matter may be resolved by utilization of the so-called “Option 1” procedure.  Where this procedure is utilized, the violation is treated almost as a parking ticket and the claim will be discharged upon payment of a set amount, generally $100 in the event of the first violation.  In other cases, the importer might choose not to utilize Option 1 and may pursue the petitioning process for mitigation in order to reduce or cancel the claim.

Each claim will be considered separately and Customs will consider all of the arguments set forth in the petition for mitigation.  These petitions typically clarify the facts underlying the violation.  An important aspect of the petition and subsequent decision is whether this is a first, second, or third violation or worse, and will also consider a wide variety of other mitigating factors.  The factors are specified according to type of violation and are set forth at Customs ICP publication Mitigation Guidelines: Fines, Penalties, Forfeitures and Liquidated Damages.  The mitigation matrix depends on the number of violations and seriousness of the breach.  It may also consider such factors as inability to pay, prior good record, inexperience in importing, and contributory error by Customs.

An additional word of caution is in order.  Liquidated damages involving issues strictly pertaining to Customs regulations such as late entry filings, TIB breaches, failure to redeliver merchandise and the like may be subject to significant mitigation, particularly for a first-time offense for an importer with an excellent record.  Of course, it depends upon the specific incident but there may be an opportunity for significant reduction.  It must also be noted that Customs enforces the laws of many other government agencies and those agencies will be consulted regarding liquidated damages and that agency’s regulations.  For instance, FDA violations are generally known for their severity in that they claim three times the appraised value of the shipment in question as liquidated damages.  Moreover, there is generally little or no relief in the form of mitigation in these situations.

In sum, even a prudent importer exercising reasonable care may encounter situations resulting in a liquidated damages claim.  With liquidated damages the issue is breach of contract, not lack of reasonable care.  Although the initial notices and amounts can be quite alarming, there is generally a significant and realistic opportunity to mitigate these claims to reasonable levels depending upon circumstances involved.  An importer should not forego its right to the petitioning process unless the liquidated damage claim falls within the Option 1 type scenario as referenced above.  In those instances it is generally the best decision to merely pay the set amount and move on from there.

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Should your company pursue import duty refunds via drawback? Thu, 08 Aug 2013 12:57:39 +0000 The below is the second installation in our series giving companies greater information and knowledge […]

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The below is the second installation in our series giving companies greater information and knowledge about duty drawback, whether it is a sensible investment for their company and how to go about doing it.  The post is authored by Ron Jacobsen, President of Northstar Drawback Consultants, our Duty Drawback partner.

Duty drawback is an opportunity, but one that requires careful attention.
Duty drawback is an opportunity, but one that requires careful attention.

Now that you have decided to explore drawback, have determined that it makes sense and that you have both the recovery potential and documentation required, what to do now?

A close examination of your business model and reality will result in a determination of the type(s) of drawback that you are eligible for. It is quite common for an exporter to be eligible for 2 or 3 types of drawback simultaneously. These programs all result in duty refunds, but are structured and managed separately, even though there will likely be a single database. It is important to set out at the beginning what the stated objective will be so that proper and focused applications can be made to CBP, for exactly and precisely the types of drawback that will be filed.

You can easily find the types of drawback at the Customs website, so I won’t bore you with a lengthy dissertation here, but knowing what is available, and how your core business can make the puzzle pieces fit is an exercise of some considerable effort. Before engaging some clients, it isn’t unusual to explore for days on end the seemingly endless variables involved. We encourage this as it helps with the compliance component, and sometimes yields an entirely new stream of revenue.

For example, during this process of exploration, we will ask clients about domestic sales, even though those sales are not drawback eligible. You wouldn’t believe how many times we discover that a domestic sale later results in an export, due to re-sale. As long as the export is timely and proper tracking is available, these” domestic sales” become drawback eligible and the yield increases proportionally for our client, even though they aren’t  the actual exporter. The same is true on the import side meaning that your domestically sourced products that you later export, if imported by your vendor, can indeed become part of the overall drawback program also. To further cloud this for you, if you file substitution drawback, and both source product from a US entity and mix that domestically acquired inventory with foreign duty paid inventory, it is possible to be neither the importer, nor the exporter, nor the manufacturer (for that type of Drawback) and the exported product doesn’t even need to be imported. You can actually export products made entirely in the USA and gain the benefit of drawback and not be the importer, manufacturer or exporter.

Have I lost anyone yet?

We discover all manners of detail that either restrict drawback (such as NAFTA) or expand it, such as factoring in waste and scrap formulas, and sometimes making a small change to the way a company handles some detail or recordkeeping. Simply changing scrap recycling to destruction can mean a huge increase of recovery.

So, once this exercise has been exhausted and you know what the goal is, what then? Since CBP considers all drawback as a privilege (not a right, as is often believed) all drawback participants must make applications to CBP for the privileges being requested. These applications all have a common theme in that they are a series of statements, evidence, and legal commitment to being able to substantiate that the applicant has a viable and legal drawback objective, has the personnel, experience and determination to make it work properly and that CBP becomes convinced of this during the application process. It is common for CBP to request additional information during the application process and the entire process can take 6 months to a year for approval in some cases.

Once approved, applicants become drawback claimants for the privileges requested and are eligible to file drawback claims accordingly. These claims will often encompass up to 3-years of past exports and we recommend that specific time periods be delimited. You may reach back in one big drawback claim for past exports, or you may file incrementally with the oldest first. There are advantages to both techniques but we have found each claimant’s filing technique is dictated by the circumstances at hand.Autumn time

It is quite helpful to know how CBP “likes” to receive claims and more to the point how CBP does NOT like to receive claims. This experience comes from years of working with each of the drawback offices and knowing how to conduct business accordingly, such as what order the forms and support should be presented.

CBP will always maintain the oversight of every clients program(s), but knowing what assistance the claimant has received during the application process and the claim preparation process carries an important but sometimes invisible attribute. Choosing the right partner can be and often is the pivot point to success. In my firm, we will occasionally be asked to “take over” a badly bungled application process. Once bungled, it’s hard to recover, so be sure you have chosen your business partner initially on the basis of competence, trust and experience.

In the next segment, we will share some stories; will discuss some of the records and documentation that form the basis of a compliant drawback program.

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Paul Anderson Guest Column: NAFTA Certificates of Origin Sun, 14 Jul 2013 21:40:36 +0000 In my monthly messages I have not yet touched upon the North American Free Trade […]

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In my monthly messages I have not yet touched upon the North American Free Trade Agreement (NAFTA) and the numerous issues which one may encounter.  Suffice it to say that NAFTA is a classic example of the best of intentions running squarely into reality, and the difficulties of the full administration of such a trade agreement.  NAFTA was intended to simplify trade and make it more cost effective, yet almost everyone comments on how difficult things are under NAFTA.  NAFTA LogoPeriodically, in the months to come, we will revisit areas of particular concern under NAFTA, but this month the focus will be on the basic document for duty-free treatment under NAFTA, the NAFTA Certificate of Origin.  NAFTA claims are based on the Certificate of Origin and failure to understand the document itself can result not only in denial of duty-free NAFTA claims, but also penalties.

The Certificate of Origin is a document, in the United States it is designated as CBP Form 434, which is executed by either the exporter or the producer and certifies that the information contained on the particular certificate is true and accurate.  NAFTA certificates are typically provided by the exporter or producer to enable the importer to make a NAFTA claim upon entry of the merchandise.  The certificate need not be provided by the importer with each Customs entry, but the importer must have a certificate in hand at the time of entry and be ready and able to produce the certificate upon request by Customs.  The party executing the certificate assumes liability as to the statement, but any importer must exercise reasonable care concerning the signing and circumstances of a certificate.

Certificates may be issued individually for a transaction, or may be executed for a blanket period, generally for one year.  The goods must be adequately described and information concerning the name, address, tax ID number and similar information for the executing parties, along with the importer name and address, must be completely filled in.  The most critical aspect of the certificate pertains to preference criteria.

In very brief terms, a NAFTA claim is dependent upon meeting the rules of origin as applied to the particular product in question.  There are four basic preferential criteria as set forth below.

Criterion “A”: Preference Criterion A is where a good is “wholly obtained or produced entirely” in the territory of one of the NAFTA countries.  This is a very stringent standard and requires that all components must be wholly made in the particular country, and all labor and related services must be performed in that country as well.  For instance, for a machine the iron ore must be mined; steel produced; all engines used in the machinery produced wholly in the country; all labor and related processes performed in the country; so as to result in a finished product.  Not too many products qualify for this stringent standard.

Criterion “B”: In this criterion the good is produced entirely in the territory of one or more of the NAFTA countries and satisfies a specific rule of origin as set out in Annex 401.  These rules may involve a tariff classification change, regional value content (RVC) requirement, or a combination of these items.  This preference involves the so-called “tariff shift” rule.  In essence, this rule is applied by consulting the rules of origin found in annex 401 and examining the rule attributed to the tariff classification of the product to be imported.  Tariff items for all of the items that are non-originating (imported from non-NAFTA countries) are compared, using the rules required, to the tariff classification for the finished article.  Each rule will state whether a shift from tariff heading 8420 to item 8412 (for example) will be required, and the like.  This exercise must be conducted for each and every non-originating component.  All separate rules must be met that apply to the finished article.  The preference also may specify RVC requirements in addition, or as a separate item.

Criterion “C”: The third preference is where a good is produced entirely in the territory of one or more of the NAFTA countries exclusively from “originating materials”.  This preference differs from Criterion A in that it requires production wholly from originating materials, but does not require that it be wholly produced or obtained in the NAFTA country.  The difference is that imported components may be brought into the NAFTA country and sufficient processing is done to the components so as to effectively transform them into “originating materials”.  So long as the finished product results from production exclusively from originating materials, this criterion will be met.

Criterion “D”: This final preference criterion provides for goods that are produced in the territory of one or more of the NAFTA countries but do not meet the applicable rule of origin (as referenced in Criterion B) because certain non-originating materials fail to undergo the required change in tariff classification.  However, these goods do meet the regional value content requirement specified and the criterion is limited to 1) where the good was imported into a NAFTA country in an unassembled or disassembled form but was classified as an assembled good pursuant to GRI 2(a), or 2) where the good incorporated one or more non-originating materials provided for as parts under the tariff schedule which could not undergo the requisite change in tariff classification because that heading provided for both the article and its parts.  Preference D is a rather difficult criterion to satisfy and is, to our knowledge, infrequently utilized.  In fact, several Customs personnel have advised that it is rarely seen and so difficult to satisfy that certificates claiming this preference stand out somewhat as a “red flag” and generally require further scrutiny.

The certificate must have the correct tariff classification for the imported article, the correct preference criterion must be designated, and whether the net cost method was used in determining preference if applicable.  Further, the certificate must designate whether the party executing the certificate is signing as a producer.  Lastly, it must also indicate the country of origin which, under a NAFTA analysis, is usually readily apparent.

It is very easy for an importer to treat NAFTA Certificates of Origin as an afterthought and either not have them prepared at the time of asserting a NAFTA claim or not taking care to ensure that they are executed correctly by the parties upon whom the importer relies.  This is an area that Customs continues to aggressively examine and an importer can expect a NAFTA verification at some point.  It may seem cumbersome at first, but ensuring accuracy in the certificates will almost certainly help to avoid large penalty amounts or denied claims.

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Paul Anderson Guest Column: Royalty and license fee payments Thu, 13 Jun 2013 16:59:28 +0000             Last month we took a look at certain items that […]

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            Last month we took a look at certain items that must be added to the “price actually paid or payable” representing the transaction value of imported merchandise when those amounts are not included in the price.  These potential additions include packing costs, selling commissions, assists, royalty or license fees, and proceeds of a subsequent resale of the merchandise that accrue to the seller.  The most common of these additions, by a wide margin, are assists which can be quite problematical and are probably the most typical items uncovered in an audit.  Royalty or license fees that are not included in the price paid or payable are also common.  Whereas assists are typically overlooked, royalties are typically misunderstood.  This month we take a look at royalty and license fees, and discuss some basic elements as to what makes these items dutiable or when they are to be treated as non-dutiable items.

Some royalty and license payments may or may not be dutiable.  Read the article for more details.
Some royalty and license payments may or may not be dutiable. Read the article for more details.

The best place to start is always with the statute itself.  In this case, 19 USC §1401a(b)(1)(D) provides that “Any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States” will be treated as an addition to value and a dutiable item.  A good rule of thumb is that royalty or license fees that are made for patents which cover processes to manufacture the imported merchandise will usually be dutiable.  On the other hand, royalties for copyrights and trademarks that are paid to third parties for use of the merchandise in the United States ordinarily will be considered not dutiable.

The best way to approach each potential royalty situation is to examine two factors specified in the Customs regulations found at 19 CFR §152.103(f), namely 1) whether the buyer was required to pay the fee as a condition of sale of the merchandise for export to the United States and 2) to whom and under what circumstances such fees were paid.  As in so many situations involving Customs’ interpretation of the law, determinations of these are made on a case-by-case basis.  Small changes in the facts may significantly affect the outcome and cause different results.

The two major considerations from the statute are stated above, but Customs has put forth a three-part test to be employed which involves queries as to 1) whether the imported merchandise was manufactured under patent; 2) whether the royalty involved is for the production or sale of the imported merchandise; and 3) whether the importer could buy the product without paying the fee.  As you can see, this expands upon the statutory factors.

Customs published a General Notice on Dutiability of Royalty Payments at Vol. 27, No. 6, Customs Bulletin and Decisions (Feb. 10, 1993) which also stated that Customs will examine several factors in relation to this three-pronged test.  Customs is not limited in examining these additional factors, but typically will examine 1) the type of intellectual property right at issue (e.g., patents covering a process to manufacture will generally be dutiable); 2) to whom the royalty was paid (e.g., payment to the seller or a party related to the seller are more likely to be dutiable then when the payments are made to an unrelated third party) ; 3) whether the purchase of the imported merchandise and the payment of royalties are inextricably intertwined, so as to result in a termination of the agreement and inability to import the merchandise upon a failure to pay the royalties; and 4) whether the agreement calls for payment of royalties on each and every importation.

When we attempt to untangle all these tests, the following general propositions are evident:

1.         Royalty payments made by the buyer to the seller are much more likely to be dutiable items than are royalty payments made to third parties.

2.         Patents which cover a manufacturing process are likely to be dutiable items.

3.         Royalty payments made  to third parties under trademark or copyright agreements for the right to sell or distribute certain products in the United States are likely to be non-dutiable items.

4.         Royalty payments made on each and every importation are much more likely to be considered a condition of sale for export to the United States and dutiable.

5.         License agreements that refer to the sale of imported merchandise or require the buyer’s purchase of merchandise from the seller, or allow termination for a failure to pay royalties, are more likely to be considered dutiable as a condition of sale for export to the United States.

Customs has held in various rulings that where an importer pays a license fee or royalty based on a percentage of net retail sales for the exclusive right to produce, market, distribute and sell products bearing a specified trademark, those payments are related to the imported merchandise, but are not considered a condition of the sale for export to the U.S. where the license fees are paid on products that are subsequently manufactured in the United States.  As such, these situations are typically viewed as non-dutiable payments.  Also, royalties for the right to use a trademark in connection with the sale of merchandise where the license agreement does not obligate or require an importer to purchase merchandise from a particular manufacturer or seller, and where such payments are not made to the seller or manufacturer but are made to third parties, are generally not dutiable items.  Customs has also held several times that where an imported article is manufactured under a patent which involved the subject merchandise and which could not be imported without payment of that license fee, the royalty is dutiable even where the buyer pays royalties on both domestically produced and imported patented products.

For anyone looking to obtain a ruling from Customs, it is most always a good idea to engage in this procedure.  Note that Customs will require a copy of the written licensing agreement to be submitted with the ruling request in order to definitively rule on the issue.  You should also note that occasionally Customs will determine that under any of those tests noted above the license payment is not dutiable as a royalty, but may be dutiable under the “catch-all” addition for proceeds of subsequent resales in the United States that accrue to the seller.

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Beware the “change of banking details” email. It might be a fraudulent message. Thu, 06 Jun 2013 10:00:46 +0000 In the past two months, two of our clients have been caught in the following […]

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In the past two months, two of our clients have been caught in the following scenario:

A supplier overseas has their email hacked, and the hackers make a slight change (one character in the email address that goes unnoticed by the importer recipient) and notify the companies that they have new banking details.  When the clients place their orders, they wire the money, but unfortunately to the fraudulent bank accounts set up by the criminals.  By the time our clients and their vendors notice what has happened, the accounts are drained and the funds gone.  Police reports can be filed, but there is little that can be done to recover or reimburse for the stolen funds.

This appears to be a fairly prevalent scam in China that is gaining in popularity,

We spoke to a bank executive in supply chain finance who offered us the following advice:

A standard banking practice is to require an independent verification of new instructions.  For example when a relationship is established a Corporate Resolution or other Corporate Document is requested listing the officers of the company permitted to provide payment instructions, there must be at least two.  If “Mr. Smith” advises there are new banking instructions, a phone call (to a phone number found on the company’s website) is made to a different officer and a request is made of the second officer to confirm the new instructions.  In case of an overseas company the request is made by email (only to a corporate domain address) to the second officer and the reply must come from a corporate email address.

In addition with an overseas company many times it is required that “Mr. Smith” request his bank to provide the new instructions and even with instructions coming from an overseas bank it is still verified by forwarding the overseas bank email message to a different officer at the company and asking that they confirm the payment instructions are correct. 

Many small foreign manufacturers do not have a corporate email domain of their own, which is how these spoofs happen to Gmail, Hotmail, Yahoo and other free email services.  It’s a lot more difficult to spoof a domain that is owned by a company, but they are not as prevalent overseas as is in the United States.

The takeaway here should be:  Before accepting a change of payment instructions from a vendor, validate this change through another means such as a direct conversation online, phone or fax.

In addition to what we have explained above, talk to your financial institution and insurance provider about their fraud protection practices and policies.  It’s not a layer that adds complexity; it’s a layer that adds protection.

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Ron Jacobsen on drawback: Does it make sense for my company? Wed, 29 May 2013 22:31:34 +0000 What do you do when the subject of drawback comes up in a meeting or […]

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Northstar LogoWhat do you do when the subject of drawback comes up in a meeting or by the coffee machine? What would you say when the Senior Manager comes to your cubicle and informs you that you have been chosen to spearhead the new Drawback program. Lucky you, didn’t you just get assigned that cost analysis project also?Dollar Sign

You may know the term, may even understand the essential concepts, but what are the first steps that need to be taken? You Google drawback and you find a confusing array of folks trying to tell you to call them for help. You know you need help of course, but now what?

The answer nearly always involves networking. Your Customs Broker will either have the experience needed to assist, especially if your program is shallow in depth, but more importantly (s)he will be able to quickly determine if your program is over their heads, too complex, or too massive in scope. When that happens, most Brokers have networked with specialists to provide this service for their clients.

It’s a rare week this doesn’t happen in our shop. Sometimes we are given a number/name to call, sometimes we are told to expect a call, or sometimes we get a cold call from an exporter who’s Broker told them to call. Either way, it’s usually a little frantic due to the great “unknown”. Putting in a half hour of Google time has done nothing but to make matters worse and the issue more confusing.

That’s where the specialist comes in. A calm approach is often best, but with a focus on two primary issues simultaneously. After the pleasantries and small talk of identifying ourselves and a little about our respective firms and what we both do, I steer the conversation directly to the single most important issue. Money. I don’t like to beat around the bush and waste a lot of anyone’s time when the drawback yield potential doesn’t make sense. Please pardon us drawback specialists when it seems like we can’t get the money thing out of our head. That is because it is the most important thing to be able to account for. Simply stated, how much money will your drawback program yield?

The answer is easier than you might think and it’s almost universal. Figure out how much duty your company paid in Customs duty (CBP 7501 box 37) last year. If you don’t know that, ask your import Broker. Once you have that figure, go to the sales department and figure out the percent of product you exported in that same timeframe, whether you manufacture or not. Most of the clients we have worked with over the years tell me a range from about 10% to 20%. Now you have all you need to answer the money question. Solve for “X” is easy. Real Money

The next subject is how long has this hemorrhage been going on? We have the potential of recovering 3 years of past exports, so if that $150,000.00 has remained static for that period, you now are talking $450,000.00. But, if your annual recovery is under $25,000.00, it probably isn’t going to be as “worth it” as you might think, so getting this answer, you see…is pivotal.

The second issue we try to get through in an initial call concerns vetting a viable program. It then becomes a matter of answering a myriad of questions I will pose to a company to see what type(s) of drawback they are eligible for, where the data will come from, who has records and in what condition and so forth. Most specialist have been through this so many times, we use checklists and tools to understand in as short a time as possible from a Drawback perspective, if a program is viable and can be adequately supported. If the records or systems required don’t exist, the money doesn’t matter.

In the next installment, we will cover what those documents and systems are and who must be the “Project Manager” for the program. Often times this is a person in accounting but that may not always be the best choice. We will also cover the effect NAFTA and other FTA have on drawback as well as making applications to CBP. Despite what you might feel about it, CBP considers Drawback a privilege, not a right and treats is very much that way.

If you have any questions about drawback, contact Camelot and we will happily talk through the process and potential recoveries with you.

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