A Message from CBP on Chinese LDP Transactions: Don't Do It!!

Though her style of delivery was light and frequently amusing, the message to the California Fashion Association from Janet Labuda, CBP's Director of Textile Enforcement and Operations, was quite sober and serious: Importers bringing in textile goods from China under LDP/DDP terms of sale are engaged in risky business.

Speaking to the group of importers, brokers and attorneys on May 11, Labuda explained how her department's Special Enforcement Initiative on China Undervaluation grew out of an investigation that began with 800 textile importers and settled on a targeted group of 30 such importers in Los Angeles, and another 30 in downtown Manhattan.

What Labuda and her team found must have harrowed the souls of these CBP enforcement officers, and accounts for their current zeal in pursuing these LDP/DDP transactions:

• gross undervaluation of goods, by as much as 300 to 500%;
• "importers of record" that could not be found;
• front men for these IOR's, sometimes several layers deep, acting with no knowledge of the underlying transactions, (including one woman who got paid a penny a garment to make entry in her name);
• multiple (up to 5) invoice schemes in which LDP importers received merchandise different from that described on the customs invoice declared at entry;
• customs brokers who admitted they didn't know who these IOR's (their customers) really were, (including one broker who provided two different powers of attorney for the same account with two different names); and
• more than half of the importers investigated did not have the right to make entry.

On top of the damage to the Treasury in lost duties which could range in the hundreds of millions of dollars, Labuda pointed out that the lack of transparency and accountability in these transactions raise serious supply chain security concerns which counter the recent efforts of the trade and Customs to strengthen that chain in view of our national security interests.

Moreover, the serious undervaluation causes our trade deficit statistics, which are based on entered value and which are important to a whole range of policy issues, to be skewed. On top of all that, with so many people gaming the system, legitimate importers find it difficult, and sometimes impossible, to compete with the scammers, Labuda commented.

Why Is Right to Make Entry So Important:

Under federal law, only an "importer of record" ("IOR") has the right to make entry of goods using "reasonable care." (19 USC 1484.) Corresponding to that right, it is the IOR who will be held liable for all Customs-related aspects of the import transaction.

This legal requirement, that only those persons with "the right to make entry" may enter goods into the commerce of the US, is a key concept for CBP in administering the customs laws. It allows only those people with a significant financial stake in the import transaction the right to enter goods, which protects CBP and the revenue by assuring that only those who are accountable for and interested in the goods, those who have some "skin in the game, " are allowed to play.

The requirement also ensures that the party entering the goods will have access to the documents necessary to establish the proprieties of the transaction in terms of proper valuation, classification, country of origin, marking and other matters.

The liability buck stops at the IOR, so from CBP's perspective, that party must be someone who will be around tomorrow to answer the bill for extra duty, or explain country of origin, or be there to pay the penalty. (For a more detailed discussion of Right to Make Entry, including the impact on parent-sister corporations, please see the article on this site, "Importer of Record" and Right to Make Entry.")

Who is an "Importer of Record?"

"Importer of record" is defined as the owner or purchaser of the goods, or when designated by the owner, a licensed customs broker. "Owner or purchaser" is in turn defined as including:

"...any party with a financial interest in a transaction, including, but not limited to, the actual owner of the goods, the actual purchaser of the goods, a buying or selling agent, a person or firm who imports on consignment, a person or firm who imports under loan or lease, a person or firm who imports for repair or alteration or further fabrication, etc.

Any such owner or purchaser may make entry on his own behalf or may designate a licensed Customs broker to make entry on his behalf and may be shown as the importer of record on the CF 7501.

The terms 'owner' or 'purchaser' would not include a 'nominal consignee' who effectively possesses no other right, title or interest in the goods except as he possessed under a bill of lading, air waybill, or other shipping document. " (Customs Directive 3530-00A, dated June 27, 2001, superseding Directive 3530-002 of November 6, 1984.)

In the context of LDP/DDP transactions, it is clear that a foreign factory's agent does not have right to make entry, nor will any customs broker, unless acting for the "owner or purchaser. " As in all import transactions, nominal consignees or nominal "importers" do not have the right to make entry.

And, since the CBP enforcement team found fraud and many other errors in import transactions by non-resident importers, entries by non-residents are being held to higher scrutiny, and are likely to be the subject of revised regulations.

Customs' Enforcement Will Cast the Burden of Proving Value on the LDP/DDP Purchaser.

LDP/DDP purchasers have been drawn to these types of transactions not only because of perceived financing advantages, but also because they provided a way of avoiding some of the potential difficulties (additional duties, marking, country of origin, transshipment) for which an IOR is liable.

Faced with the enormous enforcement difficulties inherent in schemes where identities of the real parties in interest are buried and the folks in question just keep "moving along, " Customs has come up with an approach that places the LDP/DDP purchaser right where they never wanted to be: in the spotlight.

When reviewing transactions where the LDP documents do not match up with the contents of the shipment and the value of the goods, and the IOR is nowhere to be found, Customs will reject the entry on the grounds that the importer has no right to make entry, causing not only enormous delay in the import process but threatening the eventual clearance of the goods.

Next, Customs will throw out the transaction value represented in the LDP documents, and turn to the LDP/DDP buyers, the ultimate purchasers, and take their purchase price as the starting point for calculating dutiable value.

This approach, from CBP's point of view, puts the burden on the only US-based party with a demonstrable interest in the goods that CBP can (figuratively) get its hands on: the LDP/DDP purchaser. CBP has imposed duty in these transactions that is much higher than the factory price paid to the LDP/DDP vendor which is usually declared.

LDP/DDP Purchasers of "Branded" Merchandise: Beware!

It is very common for LDP/DDP purchasers, particularly of textiles, to "cause" the importation of "branded" merchandise, that is, goods with the purchaser's or a customer's brand or logo applied. "Domestic" purchasers of such merchandise should be aware that CBP's enforcement efforts against LDP/DDP purchasers may likely start with "branded" transactions.

CBP's argument is that by requiring the application of a logo or brand to the merchandise, these purchasers set themselves apart from a typical domestic purchaser, and provide the nexus between the purchase and the import transaction giving rise to a finding of liability for the entry and importation under federal law.

Federal Statutes Provide Ammunition for Customs Enforcement Efforts.

CBP has indicated that it will pull out all stops to crack down on the abuses represented in these transactions. Their arsenal includes civil penalty statutes and even criminal statutes.

Under the federal commercial fraud statute, CBP will make use of the aiding and abetting language to include LDP/DDP purchasers in their sights. That statute, 19 USC 1592 states:

"...no person, by fraud, gross negligence, or negligence --
(A) may enter, introduce, or attempt to enter or introduce any merchandise into the commerce of the United States by means of -- (i) any document or electronically transmitted data or information, written or oral statement, or act which is material and false, or (ii) any omission which is material, or
(B) may aid or abet any other person to violate subparagraph (A). (19 USC 1592, emphasis added.)"

Worse yet, CBP is not shy about threatening to use a criminal statute, 18 USC 1001, in its China Undervaluation enforcement initiative. That law reads in part:

"...whoever, ..., knowingly and willfully --
(1) falsifies, conceals, or covers up by any trick, scheme, or device a material fact; (2) makes any materially false, fictitious, or fraudulent statement or representation; or (3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry; shall be fined under this title, imprisoned not more than 5 years ..." (18 USC 1001, emphasis added.)

Ms. Labuda concluded her remarks to the California Fashion Association on the LDP/DDP transactions issue by stating, in a word, "Don't!! " For those intrepid traders who insist on wading into these troubled waters, she advises:

• Finding out who the IOR really is, including making a surprise visit to their "offices";
• Determine if there is a legitimate business or is it a sham, ("virtual" office space; is anyone physically at the location?);
• If someone can be located, ask them if they know the details of the transaction, (determine if, they are merely a "front" man or woman);
• Determine how many layers there are in the transaction;
• Ask for and review the customs entry, matching the entry data (description, quantity, value) to your purchase order;
• Find out who is the customs broker, and if the broker has met the IOR and knows who is orchestrating the transaction.

Doing business under LDP/DDP terms of sale is a business decision that may offer many benefits to your company. But in light of Customs' new enforcement initiative, it is a business decision that should be entered into only after careful consideration of the dangers, and after your "reasonable care" research into the nature of the transaction and the parties involved.