Customs Compliance. What does it mean?

Customs compliance is a term that people working with import companies often hear without really knowing what it means and what it involves.

The laws, regulations and processes surrounding the customs industry have evolved in order to keep pace with the import-export market and comply with government management requirements. Nearly two decades ago, everything related to cross-border customs services was governed by Revenue Canada.

A few years after the events of September 11, 2001, the Canadian government followed the lead of our American neighbours by transforming customs services into the Canada Border Services Agency (CBSA). The role of this independent agency is to enforce the laws and regulations of all other government departments and ensure national security and monitoring of our trade activities.

Some background information

During the 1990s, release requests (customs clearance) were made manually using a declaration on paper. That’s why the biggest customs brokers basically had to have an office for each customs location in Canada.

A check was conducted during the customs clearance process to ensure the paperwork was in order. Next, a verification of the customs declarations was also carried out. These declarations were coded by hand by a customs officer who visually checked the documents.

The advent of electronic transmissions, an increase in imports, the North American Free Trade Agreement (NAFTA) and logistical changes like the Just in Time method that led to the principle of smaller and more frequent imports, contributed to the growth of couriers and integrators like FedEx, UPS and DHL.

The CBSA quickly realized that it couldn’t keep up and would have to reinvent itself. A consultation with stakeholders at different levels (Customs 2000: A Blueprint for the Future) resulted in the following:

Customs compliance
Administrative Monetary Penalty System (AMPS)
Customs Self-Assessment Program

The idea is to solve the problem at the source, i.e. make importers accountable for their tax obligations and statistics by introducing the concept of self-regulation and voluntary compliance. This way, the responsibility rests with the importers and other stakeholders in their respective roles.

It should be understood that, given the high number of transactions, the purpose of the CBSA is to facilitate the volume of transactions by contributing artificial intelligence to the process and conducting a compliance analysis through sampling.

AMPS

Obviously, there has to be an incentive that encourages companies to comply. The year 2002 marks the implementation of the Administrative Monetary Penalty System (AMPS or RSAP in French), which can impose monetary penalties in case of violations of the Customs Act, the Customs Tariff and its regulations. Financial penalties are also imposed for breaches of accreditation agreements and commitments. A long list of penalties may apply depending on the nature, frequency and seriousness of the offence. Most of the penalties are progressive and take importers’ track records into account.

Applications

A bit like the principle of tax returns for most people, it should not be assumed that all import declarations made by an importer are accurate – i.e. that they list the correct quantities, the exact value, the correct harmonized system (HS) classification code and that the duties and taxes have been paid, and so forth.

Once the transaction is carried out and completed, the CBSA can request information on a declared product, perform an analysis of a sampling of customs transactions or even conduct a full audit, including a visit to the importer’s premises. The importer is responsible for ensuring that the customs declaration is accurate.

To continue with this analogy, imagine your accountant mistakenly declares on your tax return that you have an annual income of $35,000, but in fact it is $55,000. You are responsible for verifying this information before signing the return. If the government has questions about your return, it will contact you and not your accountant. In the end, it is your tax return – and yours alone.

The same logic applies to the customs broker and your customs declarations. Don’t assume the customs declaration is error free – you are responsible for ensuring that, to the best of your knowledge, everything complies. As for the customs broker, he or she is responsible for issuing a release request and a customs declaration on your behalf, sometimes with time constraints and a lack of information.

While, in theory, compliant importers do not have to concern themselves with monetary penalties, situations can become more complicated in practice. The logistics chain involves several steps and many participants. A single misplaced invoice in a batch of invoices for a delivery can easily result in an undeclared goods situation at time of importation – as well as complications, penalties and potential seizures.

“We have always imported our goods this way and have never had any problems.” This is a comment often made by importers. The fact that you have imported and declared a product in a certain way for several years by no means guarantees that you are in compliance.

The importer is responsible for ensuring that what has been declared is accurate:

Nature of the product
Quantities and values declared
Classification of the products and their origin
Involvement of other government departments

Of concern to the importer is that the imports made are still subject to possible review up to four years following the date of importation. A product could be reevaluated and levied an additional customs duty on all transactions carried out during this four-year period. The odds are that this product will already have been sold and delivered, which means that the importer will not be able to recover this amount and will have to take a net loss.

Real-life examples of post-declaration problems

A company that has used the wrong harmonized classification system for one of its imported products must pay fines for the previous four years of declarations in the amount of $250,000 in additional customs duties following an audit from the CBSA. This amount is not recoverable since the products have already been sold.
A large company is levied anti-dumping duties representing millions of dollars; the company’s only excuse was a request for an opinion made by e-mail to a customs broker who was not the broker for the file in question.
An importer has received a penalty in the amount of $2,000 for failing to submit an invoice when crossing the border.
A few thousand dollars collected in GST and customs duties and penalties for merchandise leaving the country as part of trade fairs, which, at the time of return, did not have a valid proof of export.
A forgotten invoice on a declaration will result in a penalty of 20% of the non-declared value. This may represent a considerable amount.
Clothing manufactured in Burma, even if it is imported from France, cannot enter the country.
It is illegal to import Mickey Mouse watches for purposes of resale without a Disney product distribution license for Canada.
Several products, such as alcohol, cigarettes and automobiles, are monitored by other government departments, including Société des Alcools du Québec and Transport Canada. A large number of products that are imported without any previous checks could cause problems for the importer.

Importer’s responsibility

Generally speaking, an importer places an order for a product that will be imported and then declared by the customs broker.

The importer is responsible for…

Prior to import:

checking whether restrictions on the import of this product exist or whether it will be overseen by another government department
checking the product classification
checking the duties and taxes
checking the anti-dumping duties

At the time of import:

providing its customs broker with all the details

After the import:

ensuring that the customs declaration is in compliance, as quickly as possible
tracking the PO, goods received slip, customs declaration and payment to the supplier
taking necessary measures if there is reason to believe that there was an error in the past transactions, that an invoice might be missing or that a product is incorrectly classified

These measures can be taken by:

means of approval of invoices or spot checks based on an import report from the customs broker, directly from the CBSA or a combination of the two.
reviewing the company’s information flows and import/export processes to make sure that everything is consistent internally and that you are not the source of customs compliance problems. Note: this topic will be covered in a future blog.

To wrap up, as an importer you are legally responsible for overseeing customs declarations and ensuring their compliance.