GAO Says CBP and ITA Should Work Together to Address AD / CV Duty Evasion

Evasion Techniques Include Transshipment, Undervaluation, Misclassification, Smuggling

GAO said there were 283 AD/CV duty orders in effect as of March 2012, of which 114 were on products from China (India was the next highest at 23 orders). Importers that seek to avoid paying AD/CV duties may attempt to evade them by using the following techniques: (1) Illegal transshipment to disguise a product’s true country of origin; (2) undervaluation to falsify the price of an import to reduce duty liability; (3) misclassification of merchandise so it falls outside the scope of an AD/CV duty order; and (4) failure to declare goods on entry documents in order to avoid paying AD/CV duties.

GAO said CBP assessed 252 civil penalties in fiscal years 2007 to 2011 totaling about $208 million against 237 importers that evaded AD/CV duties. Over the same period, CBP made 33 seizures related to AD/CV duty evasion, with a total domestic value of nearly $4 million. Furthermore, between fiscal years 2007 and 2011, ICE investigations of AD/CV duty evasion led to 28 criminal arrests, 85 indictments, and 37 criminal convictions.

CBP Detects & Deters Through Process of Identification, Verification, and Enforcement

According to the report, CBP detects and deters AD/CV duty evasion through a three-part process that involves (1) identifying potential cases of evasion, (2) attempting to verify if evasion is occurring, and (3) taking enforcement action.

Identification of potential evasion. CBP identifies potential cases of evasion using two primary sources of information: import data and allegations from external sources. Allegations are collected electronically through CBP’s e-Allegations system, and are mostly from sources associated with affected industries. In analyzing import data, CBP searches for anomalies such as:

• Import documents being filed under the same tariff code as a product that is subject to AD/CV duties but not being declared as subject to such duties
• Listing a country of origin that is not capable of producing the goods (or the quantity of goods) imported --- a potential indicator of illegal transshipment
• Showing a monetary value for the goods imported that appears to be too low for the quantity or weight of the goods imported --- a possible sign of undervaluation

Verification. Once CBP identifies a potential evasion, it can use a variety of techniques to attempt to verify if evasion is occurring. The techniques include: targeting additional shipments and conducting further analysis, requesting further information from the importer, sending referrals to Immigrations and Customs Enforcement to initiate criminal investigations and gather evidence from foreign countries, performing inspections of cargo, collecting samples of products, and auditing importers.

Enforcement Action. Finally, if CBP is able to verify evasion, it may take enforcement action by (1) pursuing the collection of evaded duties, (2) imposing civil penalties, (3) conducting seizures, and (4) referring cases to ICE for criminal investigation.

Some Challenges Faced by CBP are Outside of its Control

GAO said several challenges mostly outside CBP control impede its efforts to prove that evasion has occurred and deter parties from evading AD/CV duties. They include: (1) the inherent difficulty of verifying evasion conducted through clandestine means; (2) limited access to evidence in foreign countries; (3) the highly specific and sometimes complex nature of the products subject to AD/CV duties; (4) the ease of becoming an importer of record, which evaders can exploit; and (5) the limited circumstances under which CBP can seize goods brought in through evasion.

Difficulty verifying clandestine evasion. GAO said entities engaging in evasion are using increasingly complex schemes. For example, the use of the Internet has made it easy for importers to find companies willing to transship goods subject to AD/CV duties through third countries to mask the goods’ true country of origin. Undervaluation can be similarly difficult to prove, particularly if the producer and importer collude to create false values. Furthermore, verifying evasion can be time-consuming -- CBP said it can take over a year or more to collect the evidence needed to verify a potential case of evasion.

Limited access to foreign evidence. CBP and ICE said they have limited access to evidence located in foreign countries. To collect information, investigators must obtain permission from foreign governments. However, the level of host nation cooperation varies, according to CBP and ICE. For example, ICE officials said they have never received permission to visit facilities in China.

Products are specific and complex. Most of CBP’s targeting for potential evasion involves examining entries that have the same Harmonized Tariff Schedule (HTS) number as products subject to AD/CV duties, but, in many cases no unique tariff code exists for the specific products that are subject to the AD/CV order. For example, no tariff code exists for goods subject to the AD order on petroleum wax candles, and such merchandise enters under the HTS number for all candles. Other products may be covered if, for example, they meet certain requirements for chemical composition, which cannot be verified by sight alone.

Ease of becoming an importer of record. Entities engaging in evasion that exploit the ease of becoming an importer of record can impede CBP’s ability to target and take deterrent action. Companies can easily adopt new importer names and identification numbers, according to GAO, and a minimal amount of information is collected from companies applying to be importers of record. Foreign companies and individuals are also allowed to serve as importers of record.

For this reason, GAO said, as of February 2012, CBP had collected about $5 million or about 2% of the approximately $208 million it assessed in civil penalties between 2007 and 2011. CBP or Congress could act to heighten requirements for becoming an importer of record, GAO said, but such an action could impose significant new burdens on CBP and importers.

Limited circumstances for seizure. Finally, although CBP is permitted to seize shipments brought in through other forms of evasion, such as falsifying country of origin (transshipment) or failing to declare goods (smuggling), U.S. trade law limits the seizure of shipments that are misclassified or undervalued, even though such methods are commonly used for AD/CV duty evasion. GAO said that of the 33 seizures CBP made between fiscal years 2007 and 2011, at least 28 were related to false country of origin or smuggling.

Poor Interagency & Intraagency Communication, Data Collection Could be Improved

GAO said CBP could improve its ability to detect and deter AD/CV duty evasion through better internal and external cooperation, as well as improved data collection. Specifically, GAO said: (1) CBP could devote more resources to detection and evasion through improved communication with the ITA; (2) identify possible evaders through better communication among ports; and (3) better target its efforts through improved data collection.

Retrospective system diminishes resources available for detection and deterrence. GAO said CBP officials cited the administrative burden of the U.S. retrospective system as a factor that diminishes the resources they have available for detecting and deterring AD/CV duty evasion. Specifically, liquidation of entries (and assessment of AD/CV duties) must occur within six months of receipt of liquidation instructions from ITA after ITA conducts its often-lengthy investigation or administrative review. Particularly if litigation is involved in the ITA’s proceedings, a backlog of entries can build up that can be very difficult for CBP to liquidate in the prescribed time period, because each entry must be liquidated through time-intensive manual data entry.

Furthermore, the ITA does not provide CBP with advance notice of liquidation, so CBP cannot plan its workload in order to effectively manage personnel decisions to mitigate the impact of the liquidation process on CBP’s efforts to detect and deter invasion. GAO said the ITA, in response to a CBP request, has recently provided some advance notice of liquidation, but the ITA said it does not know when courts will reach decisions on cases in litigation that affect liquidation of entries.

Lack of info sharing on STB requirements allows “port shopping”. According to GAO, CBP has encouraged the use of higher bonding requirements, called single transaction bonds (STB), which can be one to three times the total entered value of the merchandise plus duties, taxes and fees, depending on the revenue risks, to protect AD/CV duty revenue from the risk of evasion. However, decisions on whether to collect an STB are made by individual ports, and CBP has not ensured that a port requiring an STB shares this information with other ports in case an importer withdraws its shipment and attempts to make entry at another port to avoid the STB (“port shopping”).

Data collection. CBP does not systematically track or report key outcome information that CBP leadership and Congress could use to assess and improve CBP’s efforts to detect and deter AD/CV duty evasion. According to GAO, although CBP has made efforts in recent years to improve its collection of data, it lacks such important statistics as:

• The total number of confirmed cases of AD/CV duty evasion
• The total amount of duties assessed and collected for confirmed cases of evasion
• The country of origin, product type, and method of evasion for each confirmed case
• The number of confirmed cases of evasion involving a foreign importer of record

GAO said, for example, that CBP could identify which types of commodities have led to penalties most often and decide whether to focus more resources and detection efforts on those types of commodities

According to GAO, CBP said it addresses all allegations it receives, including e-Allegations received online, but does not routinely track or report on the outcomes of such evaluations. As a result, Congress and industry stakeholders lack information about the outcomes, which, according to GAO, both parties cited as a cause of concern.

GAO Recommends ITA Provide Notice of Liquidation, CBP Collect and Exchange More Data

In order to address its concerns, GAO has made several recommendations to CBP and the ITA. Specifically, to ensure CBP receives the information it needs from the ITA to plan its workload and mitigate the impact of the liquidation process on its efforts to address evasion, GAO said the ITA should work with CBP to: (1) regularly provide CBP advance notice on liquidation instructions; and (2) notify CBP when courts reach decisions on AD/CV duty cases in litigation.

Also, to minimize the risk of port-shopping by importers seeking to avoid higher bond requirements, GAO recommended CBP create a policy and a mechanism for information sharing among ports regarding the use of higher bond requirements.

Finally, to inform CBP management and enable congressional oversight, GAO said CBP should develop and implement a plan to systematically track and report on: (1) instances of AD/CV duty evasion and associated data; and (2) the results, such as enforcement outcomes, of allegations of evasion received by third parties.

(See ITT's Online Archives 11121514 for summary of discussion of CBP AD/CV Action Plan to improve detection and deterrence of AD/CV duty evasion at the December 2011 COAC meeting, as well as COAC's draft recommendation to develop a prospective AD system, and 11121609 for summary of CBP bond committee discussion of STB centralization at the same meeting. See also ITT's Online Archives 11100604 for summary of discussion of creation of "Re-Engineering Dumping" team at the October 2011 COAC meeting identify the threats, challenges, and vulnerabilities to AD/CV duty evasion at each step of the AD/CV process, and 11082902 for summary of CBP’s work with the USTR to explore the use of “jump teams” to verify production, as well as the inherent weakness of a retrospective AD/CV system, discussed at the August 2011 COAC meeting.

See ITT's Online Archives 11052734 for summary of May 2011 testimony by CBP, ICE, GAO and the ITA on AD/CV duty evasion, where officials estimated that the federal government had been unable to collect over $1 billion in AD and CV duties.)