We wanted to draw your attention to an interesting piece in Saturday’s New York Times describing a customs compliance issue which blossomed into a worst case scenario. To be sure, there were plenty of compounding factors in this case which led to such a highly visible outcome, but the underlying customs compliance issues are common.
The core issue here involved inaccurate recordkeeping of articles entered into, and removed from, a customs bonded area in mainland China. This discrepancy was taken by China Customs as an indication that the company was removing merchandise from the bonded area for sale directly into China without the payment of customs duty, rather than for export. The company’s position was that the import/export discrepancy was so large (larger than the company’s entire annual global sales) that the only plausible explanation was user error by its personnel operating the recordkeeping software. China Customs did not agree, and threatened to levy $9.2 million in fines and unpaid customs duties.
This is where the story shifts from merely consequential to newsworthy—with the appearance of a shadowy shell company with government connections, promising to help make the customs liability disappear, for a fee. The article spins quite a tale from there and is worth a read.
While this is an extreme case, the result could have been avoided (or at least minimized) with robust internal customs compliance controls (i.e., if there was no major recordkeeping discrepancy there would be no major potential liability and, therefore, no need for a shadowy “fixer”). One of the key takeaways is that all companies engaged in meaningful import/export activity need to have documented internal controls over the activity and need to periodically test those controls to make sure they are working effectively.
If you have any questions about your import/export controls in any jurisdiction, please let us know.