Customs Proposes New Regulations to Recognize Use of Statistical Sampling and Allowable Offsets; Notice of Proposed Rulemaking

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1 Client Alert October 2009 Customs Proposes New Regulations to Recognize Use of Statistical Sampling and Allowable Offsets; Notice of Proposed Rulemaking By James Sawyer U.S. Customs and Border Protection (CBP) published a Notice of Proposed Rulemaking (NPRM) in the Federal Register ( pdf) October 21, 2009, to amend existing regulations and expressly authorize the use of statistical sampling methods in CBP audits and prior disclosure cases. The proposed regulations also provide guidance for allowing offsets of duty over and under payments when calculating any loss of revenue in an audit conducted under 19 U.S.C. 1509(b). Background of Proposed Amendments The use of statistical sampling in completing audits conducted by CBP Regulatory Audit and by individual importers when performing large scale compliance reviews is becoming commonplace. Given the large volume of trade, it is often impractical, if not impossible, for importers or CBP to perform comprehensive audits or internal reviews in a timely fashion. Statistical sampling techniques provide a reasonable alternative to what once required intensive time and long hours to review hundreds, if not thousands of individual entries. For several years, in the context of the CBP s risk-based approach to auditing, CBP has utilized statistical sampling as a means to test importers internal controls and compliance in various import risk areas. Details regarding CBP s statistical sampling methodologies are provided within Exhibit 6 and Exhibit 6A of CBP s Focused Assessment Program documents available on CBP s website at ( cgov/trade/trade_programs/audits/focused_assessment/fap_documents/). While the agency has employed the EZ Quant statistical software program to complete its reviews, the NPRM does not require the use of any particular statistical sampling program. The proposed regulations seek to formally recognize CBP s and the trade s use of statistical sampling as a viable, legal option, and also provide discussion on the interpretation of

2 such statistical sampling results. The proposed regulations also clarify the allowance of offsets of duty underpayments with duty overpayments identified within a CBP-approved statistical sampling review. The proposed changes regarding statistical sampling methods are designed to ensure that the Customs regulations reflect current practice recognized by both industry and government as the most practical and expeditious way to accurately assess the large volume of entry transactions typically encountered during an audit or internal review in the present commercial import environment. Use of Statistical Sampling to Support Prior Disclosures (19 U.S.C. 1592) And Corresponding Loss of Revenue Calculations. While the use of statistical sampling in the context of a Focused Assessment audit is not news, formalizing these processes within the customs regulations is an important step. More significantly, the NPRM formally recognizes importers rights to employ the same statistical sampling techniques in their internal reviews and prior disclosure submissions pursuant to 19 U.S.C While many importers have been employing these techniques to streamline internal reviews and prior disclosure filings, CBP s NPRM seeks to amend the prior disclosure regulations to formally authorize the use of statistical sampling. The NPRM does, however, seek to place some restrictions on the use of statistical sampling by an importer when calculating any loss of revenue associated with disclosed violations under the prior disclosure statute. For example, CBP has asserted in the NPRM that a prior disclosure will only be approved (or considered perfected) when the sampling plan and its execution are approved by CBP. CBP has noted that such approval may be obtained from the appropriate Fines, Penalties, and Forfeitures Officer or through coordination with Customs Regulatory Audit. The importer also should be able to support the need for statistical sampling as an alternative to calculating any loss of revenue and be prepared to provide all relevant details regarding the sampling technique, universe selection and support for the audit results. These new prerequisites will require strategic planning when moving forward with a prior disclosure incorporating statistical sampling methods to aid in calculating any loss of revenue. The NPRM further provides that CBP has sole discretion concerning whether to employ statistical sampling in any given case, authorize a person being audited to perform selftesting and use statistical sampling, or accept the statistical sampling used by a private party conducting an independent review and calculation of lost revenue in a prior disclosure case. Importantly, under the NPRM, once a statistical sampling plan has been approved and is pursued as an alternative method for the calculation of any corresponding loss of revenue, the importer waives its ability to challenge the validity and methodology of the sampling plan at a later date. In other words, once the statistical sample plan has been accepted by the importer and CBP, only limited challenges for computational or clerical errors will be allowed. This may be a cause for concern when the selected sample truly provides anomalous results or is otherwise demonstrated to not be representative of the importer s entries. The NPRM also states that CBP s authority to conduct the audit or 2

3 employ sampling is not dependent on the audited company s acceptance of the specifics of the sampling plan. The NPRM suggests that the same sampling waiver requirements will apply in the context of a prior disclosure and corresponding loss of revenue calculation where CBP elects to conduct an audit or verification of a prior disclosure claim and corresponding loss of revenue calculation. Use of Offsetting Within Statistical Sampling Prior to an amendment of section 1509(b) by Trade Act of 2002, the finality of liquidation rule (19 U.S.C. 1514) precluded offsetting or netting when CBP issued a claim for lost duties, taxes and fees under 19 U.S.C. 1592(d). Subsequent to the amendments to section 19 U.S.C. 1509(b), however, offsetting is allowed under certain circumstances. CBP s proposed rule identifies several prerequisites prior to authorizing an offset, including: > The overpayments or over-declarations are identified by CBP during an audit (review or examination) conducted by CBP under 19 U.S.C. 1509(b); > The overpayments or over-declarations relate to liquidated entries (the law allows for the refund of duties and fees for unliquidated entries); > The overpayments or over-declarations are identified by CBP as having been made within the time period and scope of the audit as defined by CBP; and > The overpayments or over-declarations are determined by CBP not to have been made for the purpose of violating any provision of law, including the Customs laws and laws enforced by other agencies, including but not limited to, the Internal Revenue Service. CBP notes that offsets may be permitted where the overpayments were not made by the same acts, statements or omissions that gave rise to the duty underpayments, nor are such overpayments or over-declarations limited to having occurred on the same entry or entries that evidence the underpayments or under-declarations. Offsets, however, will not be allowed for duties paid on goods for which a duty allowance or preference was not timely claimed or established at the time of entry or within the time allowed after entry under applicable law or regulation. Moreover, while overpayments may be used to offset underpayments, no refunds will be authorized on liquidated entries unless the importer has followed the appropriate procedures to obtain such refunds (e.g., protest filing under 19 U.S.C. 1514). In addition, the NPRM limits offsets to those reviews conducted by CBP pursuant to 19 U.S.C. 1509(b), which may include a Focused Assessment, or other audit or verification conducted by Customs Regulatory Audit, with the exclusion of certain bonded warehouse or foreign trade zone reviews. CBP notes that it may allow the offsets when self testing is performed during the 1509(b) audit, when the self test is subject to the CBP auditor s review and approval. 3

4 The NPRM precludes offsets when the review is conducted by an agent, import specialist or inspection officer in the performance of his/her duties. It also precludes consideration of offsets for prior disclosures. Nevertheless, if CBP s Section 1509(b) audit is conducted as a verification of a prior disclosure, there appears to be an argument in support of offsets completed in the context of statistical sampling. Comments Requested CBP is requesting written comments on this NPRM. Comments must be received on or before December 21, Comments may be submitted electronically via the Federal erulemaking Portal at via docket number USCBP or by mail. Drinker Biddle would be happy to assist companies with drafting comments in response to this NPRM, or answer any questions regarding the NPRM, the use of statistical sampling or the formulation and execution of a statistical sampling plan in order to perform an internal review of the company s import operations. 4

5 For further assistance, please contact James Sawyer, partner, or any member of the. Kathleen Murphy Chair, Partner (312) Therese Ignich Trade Specialist Licensed Customs Broker (312) Joan Koenig Counsel (312) Karen Lobdell Director, Trade Security & Supply Chain Services Licensed Custom Broker (312) Randy Rucker Partner (312) James Sawyer Partner (312) Beata Spuhler Associate (312) Michelle Welsh Associate (312) Other Publications Sign Up /publications /publications/signup 2009 Drinker Biddle & Reath LLP. All rights reserved. A Delaware limited liability partnership Jonathan I. Epstein and Edward A. Gramigna, Jr., Partners in Charge of the Princeton and Florham Park, N.J., offices, respectively. This Drinker Biddle & Reath LLP communication is intended to inform our clients and friends of developments in the law and to provide information of general interest. It is not intended to constitute advice regarding any client s legal problems and should not be relied upon as such. CALIFORNIA DELAWARE ILLINOIS NEW JERSEY NEW YORK PENNSYLVANIA WASHINGTON DC WISCONSIN 5