From time to time companies importing ask us whether it is advisable to move their customs brokerage function in-house for the purpose of filing its own entries to save some money. Our answer is always “NO, don’t do it.”
One Importer’s Nightmare
One of our clients to be, a Southwest based importer, hired a customs broker in-house to handle and file its customs entries. A clerk designated by this broker to work on filing the customs entries made a number of errors, became distressed, and hid them from the customs broker. The customs broker did not supervise the employee adequately, and did not himself fully understand the particular import process. Before long, this employee was not filing timely entries for merchandise withdrawn from the warehouse. One thing led to another and over a year nearly $1,000,000 had been withheld from Customs. The merchandise was subject to very high rates.
The company learned of the errors, went to Customs, and gave them a check for the amount owing. Customs responded by sending out investigators, involved criminal prosecutors, and attempted to indict the company, the responsible clerk and customs broker, as well as the president and executive vice president of the company – the latter two had no knowledge whatsoever of the errors, except in connection with disclosing them to Customs.
The upshot, after months of threatened criminal action against all of the above, it was a humiliating day in the criminal court where the president pleaded the corporation guilty to a criminal charge. This was followed by a civil penalty of about $1,000,000, which the company fought, but finally paid under threat of even harsher action by Customs.
Rationale for Using Only Independent Customs Brokers
Customs brokers interface between the importer and CBP to enter imported merchandise. They are licensed by CBP to perform this function as an agent of the importer in accordance with the applicable laws and regulations, pursuant to the importer’s power of attorney.
If the only role a customs broker played in the import transaction was to file CBP entries correctly and efficiently, it would be easy to compare hiring a customs broker in-house versus using an independent third party. And, it is possible that your company would be able to attract and hire a first-rate employee with a customs broker’s license, and that your company would be able to provide him or her the resources necessary to properly handle the job (including whatever employees are needed to assist). If so, it does seem that substantial dollar savings would result.
However, there is another, much more important consideration that weighs heavily against any company bringing the customs brokerage function in-house, no matter what the savings. The independent customs broker serves as a very effective shield against the impact of unreasonable customs officers and investigators enforcing terribly harsh customs penalty laws (both civil and criminal) against the company, and perhaps more importantly, against the managers and officers of the company. This is because:
- The experienced independent customs broker is usually better at being a customs broker, because, in addition to providing professional customs brokerage services, he must always act in the best long-term interests of his business. This forces him to keep fully abreast of the customs laws, regulations, procedures, and CBP’s changing concerns. And it ensures that both he and the importers he represents always try hard to comply with the customs laws and regulations. He can lose an importer-customer and survive – but he cannot lose his customs brokers license and survive. If violations occur, it’s usually despite the customs broker’s best efforts to ensure that he and his importer-client comply with all of the customs laws and regulations.
- On the other hand, when the customs broker is in-house, in business matters he or she is acting strictly on behalf of the company and at the direction of the company. He is pressed to perform his duties such that his boss is happy (e.g., with an eye toward quick releases). Keeping his boss happy is not necessarily consistent with strict compliance with the customs laws and regulations (e.g., a little “fudging” of the dates on his documents). Absent are the internal controls which are second nature to an independent customs broker.
- The importer’s legal burden is to properly interpret and apply the law respecting the entry of its merchandise, which it can meet by the exercise of “reasonable care.” And, one of the primary ways in which an importer can demonstrate reasonable care is by showing that, after communicating the relevant facts accurately to an expert (such as, among others, a customs broker), it relied upon the advice of that expert in the conduct of its CBP business. When errors do occur, it is much easier to demonstrate reasonable reliance on an outside customs broker’s expertise and advice (over which the importer has no control) rather than any in-house person’s expertise and advice (over which the importer has great control), even if the in-house person is demonstrably an expert (e.g., a licensed customs broker).
- Finally, and vitally important if things go wrong, an in-house customs broker is far more likely to have had unsupervised contact with corporate managers and officers. This close contact can have disastrous consequences, should an investigation ensue.
CBP has a knee-jerk reaction to significant errors made by importers or by customs brokers on their behalf. It penalizes them – and, if there is substantial money involved or the facts seem to warrant it, CBP sends investigators out to investigate the circumstances. These are HSI investigators, all of whom conduct both civil and criminal investigations simultaneously. They have a definite bias for finding criminal violations rather than civil violations. The agent is more apt to obtain a “victory,” because almost everyone settles criminal charges rather than risk trial. And, the difference between “civil fraud” and “criminal fraud” is classically unclear.
Importantly, they target not only the company, but the highest corporate managers or officers that they can identify with some active involvement in the wrongful conduct. Unsupervised or unwitting contact between corporate managers or officers and the in-house customs broker exposes those officers to personal liability for errors by the in-house customs broker.
No one, not the company, and certainly no corporate officer wants to face a criminal investigation or charge because of mistakes or wrongdoing on the part of the customs broker. It is the worst possible outcome.
This is the reason that the largest companies in the United States have brought the customs brokerage function in-house only with ongoing extreme compliance oversight. Better that your company have a strong customs compliance group in-house (one or more may be licensed customs brokers for greater expertise), and keep the customs brokerage function outside the company – at arms-length. Ensure that the customs brokerage fees are competitive, and consider any possible foregone savings as insurance against the worst case scenario.