United States: Should I File A Customs Prior Disclosure?

Last Updated: July 23 2018
Article by Olga Torres and Derrick Kyle

Many importers have experienced, at one time or another, that horrible, stomach-turning feeling that comes with the realization that merchandise they have been importing has been entered under the wrong HTS code or with the incorrect value. These and similar errors constitute violations of 19 U.S.C. § 1592, and upon such discovery, the importer must ask, "Should I submit a Prior Disclosure to U.S. Customs and Border Protection ("CBP")?" The answer to that question will depend on a variety of factors, which will be discussed in this article.

Any party, including importers, custom brokers, shippers, and foreign suppliers/manufacturers, involved in the business of importing into the U.S. can file a prior disclosure with CBP. A valid prior disclosure discloses the circumstances of §1592 violations to CBP before, or without knowledge of, the commencement of a formal investigation. Common examples of a §1592 violation include: undervaluation, misdescription of merchandise, misclassification, overvaluation, evasion of antidumping/countervailing duty. A valid prior disclosure also includes the tender of any loss of actual duties associated with the violation. Importantly, a party is not required to make a prior disclosure but can elect to make one.

If prior disclosures are not required, why would anyone choose to reveal this information to the government? The biggest reason to file a prior disclosure is the mitigation of potential penalties. When CBP discovers §1592 violations, it imposes penalties based on three levels of culpability: negligence, gross negligence, and fraud. (For further information regarding penalties under 19 U.S.C. § 1592, see our previous article, Import Violations: What You Need to Know about 19 USC 1592.) In most cases, a valid prior disclosure will result in substantial mitigation of those penalties. If a party discloses negligent or grossly negligent violations, the mitigated penalty will be the interest that has accrued on the owed duties from the date of liquidation until the submission of the owed duties.1 In prior disclosures of fraudulent violations (i.e., a knowing or intentional violation of the law) the maximum penalty is reduced to 100% of the duty loss.2 However, it is important to note that a prior disclosure for fraudulent violations does not prevent CBP from recommending the case to the Department of Justice for criminal prosecution, so a party that has committed fraudulent violations should be very careful when deciding to submit a prior disclosure. In general, a party deciding whether to submit a prior disclosure must make this decision based on the potential costs of the disclosure, the mitigation afforded from the disclosure, and the risk of CBP conducting an investigation into the party's violations and assessing penalties.

Before an importer decides to disclose errors that reside in a gray area of Customs law, it is important to note that CBP cannot meet the culpability requirements to support a penalty action if the importer exercised "reasonable care" in making the entry. Whether a party acts with "reasonable care" is ascertained on a case-by-case basis, but CBP has provided some guidance to assist parties in making that determination.3 If a party believes it has acted with reasonable care, and can support that assertion, a prior disclosure may not be necessary.

The regulations provide four elements that must be included in a prior disclosure. These elements are (1) the type of merchandise involved; (2) the entry number, the dates of import or export, and the port(s) of import or export; (3) the materially false statements, omissions, or acts, and an explanation of how they occurred; and (4) the true information that should have been provided.4 The decision of whether or not to disclose will also therefore depend on the party's ability to compile historical import data and documentation. Some of the required information can be gathered from Automated Commercial Environment ("ACE") import reports. However, the deciding factor may be a party's ability to provide the correct information that should have been declared to CBP upon importation. If an importer has not maintained, or cannot retrieve, sufficient records to provide correct information regarding its violating imports, the importer will have a difficult time preparing its prior disclosure. Common disclosed errors relate to HTS classifications, or valuation errors which may require analysis of a number of product SKUs, company entry records, invoices, proof of payment and other information.

It is also important to point out that the statute of limitations for negligent or grossly negligent violations of §1592 is five years from the date of the violation.5 In other words, if all the violations occurred more than five years ago, no prior disclosure is necessary.6 Assuming the violations are within the statute of limitations, a party that has decided to disclose should submit the prior disclosure as soon as possible. The longer a party waits, the higher the likelihood that CBP could launch a formal investigation, after which time the party will no longer be able to file a prior disclosure. If the disclosing party has not gathered all relevant information or documents related to the violations, CBP allows for the submission of an "initial disclosure," from which point the disclosing party has thirty days to "perfect" the disclosure by providing all required information. If additional time is needed, the disclosing party may request extensions of the original thirty-day period from CBP.7

Figuring out what to do once a potential violation has been discovered can be difficult. Generally, you should stop the errors right away and consider consulting with counsel regarding your options. If you have any questions regarding the preparation of prior disclosures, do not hesitate to contact us.

Footnotes

1 15 U.S.C. § 1592(c)(4)(B). Per CBP guidance, if the prior disclosure involves only unliquidated (i.e., open) entries, there will be no penalty enforced, though the disclosing party will still be required to tender owed duties. What Every Member of the Trade Community Should Know: Prior Disclosure, U.S. Customs and Border Protection, 8, Aug. 2017, available at https://www.cbp.gov/sites/default/files/assets/documents/2017-Oct/Prior%20Disclosure%20FINAL.pdf (last visited Jan. 19, 2018).

2 15 U.S.C. § 1592(c)(4)(A). The disclosing party will be liable to pay the owed duties as well as the penalty of 100% of owed duties.

3 What Every Member of the Trade Community Should Know: Reasonable Care, U.S. Customs and Border Protection, Sept. 2017, available at https://www.cbp.gov/sites/default/files/assets/documents/2017-Dec/ICPResCare2017revision.pdf (last visited Jan. 18, 2018).

4 19 C.F.R. §164.74(b).

5 19 U.S.C. § 1621(1).

6 The statute of limitations for fraudulent violations of §1592 is five years from the date CBP discovers the violation. So, if an importer discloses a fraudulent violation, the statute of limitations may not begin to run until CBP receives the disclosure. 19 U.S.C. § 1621(1).

7 19 C.F.R. § 162.74(b)(4).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Olga Torres
Derrick Kyle
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