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How to Answer a U.S. Customs and Border Protection Survey to Help Minimize the Chance of an Audit

March 27, 2018

By Ralph Loggia

US Customs and Border Protection (CBP) have, with more frequency, been sending surveys to Customhouse Brokers that contains approximately 75 questions to answer in lieu of conducting full scale audits. While completing the CBP survey can take a few hours, improper completion is likely to lead to a full audit, which can drag on for weeks.  Standard language for the survey may begin with the following:

U.S. Customs and Border Protection, Office of Regulatory Audit, is conducting a survey of your brokerage. As part of this process, we are sending you the attached questionnaire related to your brokerage activities. The questionnaire is designed to give the Office of Regulatory Audit a general understanding of the brokerage’s policies and procedures as it relates to conducting Customs transactions and identify any significant issues. The review of the questionnaire responses may then be followed up by a broker interview, a walkthrough of selected transactions, and a review of select powers of attorney.

The purpose of this questionnaire is to obtain information about the brokerage’s organizational structure and procedures related to U.S CBP transactions. The questionnaire is designed to give the CBP team a general understanding of the broker’s operations.

The CBP uses the surveys as a way to determine who is picked for an audit. An audit is time consuming, expensive and examines all aspects of a broker’s business.

The questionnaire tends to focus on the broker’s controls and procedures and the process that is in place. The CBP is also looking to verify how the broker exercises responsible supervision, the execution of POAs, relationships with freight forwarders, and recordkeeping.

Employees should be educated in this area, including having access to the Harmonized Tariff Schedule of the US (HTSUS) and CBP regulations. Have a process and procedures in place to train new employees and document employee background checks.  It is also recommended to have an employee manual covering these matters.

Due to the many pitfalls involved, the CBP also scrutinizes Powers of Attorney (POA). The CBP is looking to see if the POAs are executed properly and signed by a person who has the authority to do so, if they are validated, if they are dated prior to the broker conducting business on an importer’s behalf, if they are expired, if they have the authority to conduct specific activities, if they are strictly followed, and if the POAs are direct from the importer or from a freight forwarder.

The CBP looks to see if the broker makes a contemporaneous record of the steps taken to verify the importer’s identity.  This implies that the CBP wants the broker to demonstrate how the POA is valid and document the procedures taken in order to accomplish this.

A ruling was issued that a freight forwarder acting under an importer’s POA may sign for the importer another POA which appoints a licensed customhouse broker as the importer’s agent.

The CBP also examines the relationship with unlicensed persons such as freight forwarders. Are the broker’s dealings with freight forwarders consistent with CBP regulations and does the broker transmit a copy of his invoice and a copy of the entry directly to the importer?  If not, is there a waiver in place?  The CBP will look to see if the freight forwarder has marked up the duty, since this is an inappropriate transaction.

Section 111.36 of the Code of Federal Regulations addresses relations with unlicensed persons. It states that a broker may compensate a freight forwarder for referring brokerage business, subject to the following conditions:

  1. The importer is notified in advance by the forwarder or broker of the name of the broker selected by the forwarder for the handling of his customs transactions;
  2. The broker transmits directly to the importer a true copy of his brokerage charges if the fees and chargers are to be collected by or through the forwarder, or a statement of his brokerage charges and an itemized list of any charges to be collected for the account of the freight forwarder, if the fees and charges are to be collected by or through the broker;
  3. No part of the agreement of compensation between the broker and the forwarder prevents direct communication between the importer and the broker.

Welke Customs Brokers USA Inc. (Welke) is an example of a request for a ruling involving fees for a broker with an unlicensed person. This is a violation that could lead to penalties and other sanctions.  The agreement was based on commissions which are not permitted under the regulations.  If the agreement was based on a flat amount that was not tied to any particular transaction, a violation of the regulations would not have taken place, since compensating a licensed customs broker to solicit business is not a violation.  The Entry Process and Duty Refunds Branch ruled that unlicensed independent agents may not accept commissions from Welke for promoting its brokerage services.

Regarding record retention, a broker needs to maintain its customs records for five years from the date of entry.

So if you should receive a questionnaire, do not take it lightly. Don’t make up procedures, the CBP finds that this is worse than not having a formal process in place. Demonstrate corrective actions on an ongoing forward basis. And feel free to reach out to Mazars USA – we can assist with the process of designing and properly documenting key internal controls, getting prepared for a visit by the CBP, offer advice and issue an audit report to substantiate the operating effectiveness of internal controls that are in place. This will help to minimize the chance of a full-blown CBP audit.

 


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