CBP Forced Labor Update & Recommendations

Dear Friends,

We are writing to provide you with an update on the developments with regard to U.S. Customs and Border Protection’s (CBP) enforcement of the U.S. import ban on goods made with forced labor (19 U.S.C. § 1307).  The last few months have seen both significant changes in the law and in CBP’s enforcement activity.  While the reputational risks of a forced labor entanglement remain as high as ever, these changes mean that (1) the likelihood of encountering enforcement activity has increased, and (2) the elements of a “compliant” forced labor program are evolving.  We have summarized the background, recent developments and our recommendations below.

Background – Import Ban & Loophole

As you may recall, in early 2016, Congress removed a loophole in the near-80 year old statute banning the importation of goods made with forced labor.  The effort to remove this loophole was led for many years by Senator Bernie Sanders, and was later championed by Senator Sherrod Brown.  The loophole had permitted goods made with forced labor to be imported whenever U.S. demand outstripped domestic supply (the “consumptive demand exception”).  The consumptive demand exception resulted in there being little application/enforcement of the import ban for most of its history.

CBP’s Old Enforcement Mechanism

Within weeks of the consumptive demand exception being removed, CBP initiated four new enforcement actions under a mechanism the agency adopted in the 1960’s.  This older enforcement mechanism allows CBP to issue “withhold release orders” (or WROs) for shipments of articles manufactured by a specific named foreign entity, which CBP has reason to believe may have been produced with forced labor.  An importer may challenge the imposition of a WRO, but only on a shipment-by-shipment basis.

The WRO mechanism has shown itself to be a blunt instrument.  Companies named in a WRO are likely to suffer significant economic harm, with little-to-no opportunity to review or respond to the allegations before the WRO is put in place.  The relative ease with which CBP can impose a WRO (upon information which “reasonably, but not conclusively” indicates the presence of forced labor) corresponds directly with the profound difficulty in having a WRO removed.  As we have explained previously, once a WRO is in place, it is difficult to have it removed (the standard for imposing a WRO is relatively low, but for removal is quite high).

CBP’s Emerging Approach to Enforcement

While the WRO mechanism remains a viable tool for CBP’s enforcement of the forced labor ban, CBP has also begun taking steps to hold U.S. importers more directly accountable for forced labor compliance.  Most notably, CBP recently updated its informed compliance publication governing “reasonable care” to specify that importers are expected to have documented controls in place to mitigate the risk of importing goods made with forced labor.  Specifically, CBP expects importers to be able to answer questions such as (but not limited to):

Have you taken reliable measures to ensure imported goods are not produced wholly or in part with convict labor, forced labor, and/or indentured labor (including forced or indentured child labor)?

Have you established reliable procedures to ensure you are not importing goods in violation of 19 U.S.C. § 1307 and 19 C.F.R. §§ 12.42-12.44?

Have you obtained a “ruling” from CBP regarding the admissibility of your goods under 19 U.S.C. § 1307 (see 19 C.F.R. Part 177), and if so, have you established reliable procedures to ensure that you followed the ruling and brought it to CBP’s attention?

CBP has broad authority to determine “admissibility” (whether an article presented for importation complies with “the requirements of the laws of the United States”) and to detain articles until compliance is confirmed.  As a result, importers who cannot answer these questions run the risk of having their goods detained or seized.  CBP is laying the groundwork for it to be able to (1) deny entry of merchandise that an importer cannot prove was not made with forced labor, and (2) assess penalties for forced labor violations against companies without adequate controls.

CBP has recently begun issuing requests for information (via CBP Form-28s, or informal requests from ISA account managers) asking importers to produce documentation regarding their forced labor policies and controls.

North Korea Forced Labor Presumption

In August 2017, as part of an wide-ranging sanctions bill, the forced labor ban was again modified.  The statute now specifies that merchandise made by North Korean laborers, regardless of location, is presumed to be made with forced labor, and, therefore, subject to the import ban.  No official guidance has been provided to use in determining whether North Korean laborers may be present in a given supply chain.  The risk of North Korean labor appears to be especially high in northeastern China, but North Korean laborers are known to be working in more than a dozen industries across more than 40 countries, according to the U.S. government.  Recent statements by U.S. government officials have made it clear that importers are expected to have updated their forced labor (and/or CSR) policies to take this change in the law into account.


In view of these developments, we have the following recommendations.

  1. Update your CSR/forced labor compliance program to reflect the recent changes in the law, including the presumption with respect to North Korean labor.  An effective forced labor compliance program will be tailored to a company’s forced labor risk profile (e.g., industry, area of the world, type of production, direct/indirect sourcing, etc.).  It will include updated policies around vendor/factory set-up and audit, and may include revisions to master sourcing agreements, POs and/or vendor contracts.  Depending on the risk profile, it may also include changes to sourcing activity.
  2. Prepare a memorandum explaining your forced labor compliance program to CBP.  All importers (and those in certain higher risk industries, such as apparel and footwear, in particular) should anticipate getting a question about their forced labor compliance program and prepare accordingly.  While many companies have robust CSR programs (that are hopefully now updated to account for the recent changes in the law – see #1 above), we believe it will be important to “translate” that program into “Customs speak”.  Stated differently, if CBP is going to ask about your forced labor controls (an area in which it has little expertise), it is in your interest to have an answer that addresses its concerns, in a language it understands.  Just like one should not provide CBP solely with transfer pricing documentation in response to an inquiry about the acceptability of intercompany customs values, one should not provide CBP solely with CSR documentation in response to an inquiry about the admissibility of goods due to forced labor concerns.  Producing documentation that recognizes CBP’s concern and summarizes your program from a customs perspective will go a long way to minimizing the interaction; whereas providing just the underlying CSR documentation and hoping CBP finds what it needs will likely prolong it.
  3. Ensure that any query you receive from CBP relating to forced labor (whether by CBP Form-28 or other means) is reviewed by counsel before it is responded to.  In our experience, companies can sometimes be eager to provide information to CBP which they believe it will cast them in a favorable light.  There will likely come a time and place for sharing such information with CBP, but doing so comes with risks, particularly if your forced labor/ CSR program has not yet been updated to reflect all relevant recent changes in the law.  If you receive any specific queries, please let us know.  We are advising several clients on these and related matters, and would be glad to assist.

We are working with several clients to implement these recommendations.  We have developed questionnaires to pull together the relevant aspects of a company’s existing CSR program, are updating those programs to account for the change in the law and are preparing reports summarizing the programs from a customs perspective (so the client’s have a response ready to provide CBP when needed).  We are also assisting several clients respond to general, as well as specific, inquiries from CBP in this area.

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We hope this is helpful.  If you have any questions about this evolving area of customs law, or how best to respond, please let us know.

Best regards,



Interesting Design Services/Assist Ruling

Dear Friends,

U.S. Customs and Border Protection (“CBP”) recently issued a ruling on a common customs valuation issue for the consumer goods/retail industry that we wanted to make sure you saw.  The ruling, Headquarters Ruling H287490, involved foreign product design services and whether such costs are to be included in the dutiable value of the goods those design services were indirectly used to produce.

In the ruling, the prospective importer, a U.S. apparel company, entered into agreements with unrelated designers in the Netherlands for services related to the creation of a new line of sleepwear.  Pursuant to these agreements, the designers would create an initial design package (concepts, patterns, color palettes, sketches, trims) and provide input on concept and marketing samples.  The importer will use the initial design package to create a technical package (“tech pack”) of garment patterns, bills of materials, size specifications and concept samples that it will then provide free of charge to an unrelated manufacturer in China for use in the production of market samples.  Using input from the designers, the importer will modify the market samples and send the modifications to the Chinese manufacturer for final production of the sleepwear garments.

In analyzing whether the foreign design fees are assists that should be added to the price actually paid or payable , CBP examined whether the design work is “necessary for production of the imported merchandise.”  CBP explained that design work necessary to production “does not merely convey a general concept as to what [ ] should be created, but instead imparts detailed instructions as to how [it] is to be created ….”  Citing its own precedent, CBP contrasted design work lacking in detail necessary for production (e.g., preliminary sketches) with more detailed plans, such as bills of materials and samples that a producer relies on for guidance when manufacturing.

Since the tech packs provided by the importer to the Chinese manufacturer include detailed plans, CBP concluded it is an assist within the meaning of 19 U.S.C. § 1401a(1)(A).  CBP then examined whether the foreign design work is a “dutiable step” in the production of that assist.  In its analysis, CBP focused on two factors: (1) whether the design activity was undertaken with the knowledge or intent that it would be used to produce the assist, and (2) whether the design activity plays a significant or crucial role in the production of the assist.  Applying these factors, CBP noted that the design activities performed in the Netherlands contribute significantly to the creation of the tech pack provided to Chinese manufacturer by the importer.  The designers generate the overall garment design and specify details such as their color, shape, pattern and material—features that are directly incorporated into the detailed production instructions provided to the manufacturer in the tech pack.  Moreover, CBP concluded that the designers are fully aware of the fact that their contributions will influence the instructions provided to the manufacturers since they will expect to review, and provide input on, both the concept samples and market samples.  For these reasons, CBP ruled that the designers’ fees must be included in the value of the assist.

This is an important reminder for all companies that provide U.S.-developed tech packs to foreign manufacturers for use in the production of articles imported into the United States.  If you do so, you should be asking whether the tech packs are based (in whole or in part) on design services provided by anyone outside of the United States – whether a design services company or a buying agent (since it Is common for buying agents to provide some level of design input/services).  If so, the extent of those services should be reviewed in light of the guidance provided in Headquarters Ruling H287490.

We hope this is helpful.  If you have any questions about this ruling, or its impact on your business, please let us know.

Best regards,

GSP Expiration

Dear Friends,

As those of you who import articles under the Generalized System of Preferences (“GSP”) program know, it is scheduled to expire in a little over two months — on December 31, 2017.  While it is possible that it will be renewed prior to December 31, 2017, Congress is cutting it close (e.g., the House of Representatives will be in session for only ~27 days between now and the end of the year).  So far, there has not been much movement on renewal. 

As a result, companies which rely on the program for duty savings should (i) continue pushing for renewal (e.g., through their trade associations, their Congressional representatives, etc.) and (ii) prepare for at least a temporary gap in coverage.  If the program is not renewed prior to December 31st, then importers will need to start depositing duties and merchandise processing fees.  This possibility should be raised internally, so that your finance colleagues can plan for the potential increase in cost.  Of course, if the program is eventually renewed, and renewed retroactively (as has happened in the past), then importers will be able to apply for a refund.  Nevertheless, given the (hopefully short-term) increase in cost, it is best to make sure your finance colleagues are prepared for this eventuality. 

If you have any questions about the GSP program, its expiration and/or potential renewal, please let us know.

Best regards,


Merging Accounts in ACE

Dear Friends,

We recently discovered a strange feature of U.S. Customs and Border Protection’s (CBP’s) automated commercial environment (ACE) that we wanted to flag for you.   

As you know, ACE provides importers with easy-access to a wide range of reports that provide extensive visibility into the company’s import activity.  ACE also provides specific functionality that allows the merging of top-level ACE accounts, which might be appropriate in the wake of a merger or acquisition.  (ACE guidance on the topic of merging accounts from 2012 can be found here:  Merging Ace Accounts.)  What we found strange is that what CBP describes as a “merging” of accounts, is really more like the “deleting” of an old account and the creation of a new sub-account that is unrelated to the old account (the old data is no longer accessible).

To illustrate, suppose Company A acquires Company B, and Company B will become a division of Company A, losing its old EIN, and continuing operations using a new suffix under Company A’s EIN.  Given that Company B’s import activity is being merged into the new consolidated entity, it might seem reasonable to “merge” Company B’s ACE account into Company A’s existing ACE account.  What’s odd is that merging accounts in ACE will cause the historical data from the subsumed entity to be eliminated.  Historical import data for Company B will no longer be accessible.  CBP plainly acknowledges this fact in the attached guidance, and recommends running ACE reports to capture the acquired entity’s import activity, prior to merging accounts.

This seems odd, to say the least (Company A should be able to continue to access Company B’s historical data in such a situation – it most likely assumed the liability for it).  We asked CBP’s ACE Business Office if they could explain why the system is designed in this way.  We were told that (1) CBP aims to “prevent unauthorized access by one (new) IOR of another no longer existing (old) IOR”, and (2) CBP aims to “prevent unauthorized access [by the old ACE account users] to the data they no longer own.”  While there certainly is an interest in maintaining the security of data in ACE accounts, it is difficult to discern the rationale for deleting historical import data for which the acquiring entity will, in most circumstances, bear liability on a going forward basis. 

If faced with the fact pattern described above, it may be better for Company A to allow the Company B ACE account to remain intact.  Post-acquisition, user accounts within Company B’s ACE account could be cancelled (as needed) and the Trade Account Owner might be swapped out (e.g., if the former TAO of Company B is not staying on is part of the new consolidated Company A).  That way, Company A would preserve access to the historical data of Company B it acquired—and now likely bears liability for—when it purchased Company B.  This advice may become especially important if CBP eventually eliminates the ability of companies to request historical ITRAC data, as has been rumored with the ACE transition.

So, in short, be wary of “merging” ACE accounts because, as things currently stand, you may lose access to the historical data of the entity being merged.

We hope you find this useful.  If you have any questions, please let us know.

Best regards,

Customs Conference Update

Dear Friends,

Yesterday, I had the privilege of speaking at ACI’s Advanced Forum on Customs & Trade Enforcement here in Washington, DC.  I spoke on a panel with an attorney from US Customs and Border Protection (CBP) Headquarters about the interplay between transfer pricing and customs valuation.  I have attached the slides from our presentation here for your reference.

I also wanted to pass along a tidbit I picked up from one of the other panels that addressed CBP audits.  As we have advised previously, CBP is conducting more audits, but fewer of those audits are traditional Focused Assessments (FA’s).  Instead, with the transition of enforcement responsibilities to the Centers of Excellence and Expertise (CEE’s), CBP is conducting many more “targeted” or “single-issue” audits (e.g., quick response audits, survey audits, etc.).  These focused audits are aimed at issues of perceived non-compliance, rather than at the internal controls the company has in place over one or more areas (like a traditional FA).  Also, the CBP speaker on the audit panel made it clear that, while the primary benefit of the Importer Self-Assessment program (ISA) is being removed from the CBP audit pool, that means being removed from the FA audit pool only.  Stated differently, ISA member can be (and frequently are) the subject of the targeted audits being directed by the CEE’s and conducted by Regulatory Audit.  If CBP is conducting fewer FA’s, and more targeted audits, this calls into question whether ISA members are really getting much benefit from the ISA program.

We hope this is helpful.  If you have any questions about either intercompany customs valuation or the audit issues discussed above, please let us know. 

Best regards,


An Interesting Customs-Related Whistleblower Case

Dear Friends,

We are writing to let you know about a recently unsealed customs-related False Claims Act (“FCA”) case involving low value e-commerce shipments imported under “Section 321” (so-called “de minimis” value shipments that are permitted to enter the United States without entry duty and tax free).  There are a number of details that make this case interesting.


The original whistleblower complaint was filed by an aggrieved former employee in May 2016.  As is customary, the case remained under seal until the United States decided to join the litigation.  Once the United States entered the case, the complaints were unsealed in July 2017.  While this is only the most recent in a series of False Claims Act (“FCA”) cases involving customs valuation, this is the first known False Claims Act case specifically involving Section 321.

The complaint asserts that the Defendant, a UK-based online retailer of women’s apparel, routinely split individual U.S.-bound orders into shipments that fell below the de minimis threshold for the explicit purpose of avoiding the payment of customs duties.  Under Section 321, shipments below the specified dollar threshold (historically $200, but recently increased to $800) to a single customer on a single day may be entered duty and tax free.  U.S. law expressly forbids the splitting of shipments to get under the dollar threshold.

The complaints include eyebrow-raising allegations— e.g., an excerpt from an employee handbook with detailed instructions on how and why orders were supposed to be split; an alleged conversation among supervisors “boasting” about duty evasion and acknowledging its illegality.  The government’s complaint is too large to attach here.  If you would like to see it, however, just reply to this message and we will send it to you.


While some of the facts alleged seem to suggest this is a more extreme case, it nevertheless holds important insight for all companies importing into—or even just selling into—the United States.  A few thoughts:

  • Extraterritorial reach of U.S. customs law. This is one of the few cases we are aware of where the government has pursued only a non-U.S. entity for violations of U.S. customs law.  The government’s complaint goes on at length to establish why it has jurisdiction over the Defendant (which counted the United States as its most important market).  This suggests a willingness on the part of the U.S. government to hold entities outside the United States liable for U.S. customs violations.  While the U.S. government has regularly exercised such jurisdiction in other trade contexts, this is rare in the customs context.  In addition, it appears that the U.S. government will have help in this context. The New York Times has an interesting article on this case that focuses on the U.S. law firms that are seeking potential UK and EU whistleblowers for future cases.
  • Risk of high volume, low value shipments.  The case challenges common assumptions about the customs risk associated with selling in the U.S. market.  One common assumption is that high volume, low value shipments present a lower customs risk than larger value commercial shipments, particularly when sent by express courier or U.S. mail, and especially when the seller is not the importer of record into the United States.  This case provides a powerful counterpoint to that line of thinking.  The FCA authorizes the government to collect “treble damages”—that is, three times whatever damages it actually suffered as a result of the false claims. In this case, the potential loss of revenue to the government might be in the single digit millions of dollars, so treble damages is a meaningful sum.  The False Claims Act, however, also authorizes a penalty on a per infraction basis (recently raised to $10,000 per infraction).  This apparently modest FCA penalty provision could prove to have enormous impact in the e-commerce space.  Just a few hundred offending monthly shipments across a 5 year window could easily yield a mandatory penalty in the range of hundreds of millions of dollars.


We have recommended in the past, and wish to reiterate again, the importance of having not only effective internal controls over customs matters, but also an effective avenue for employees to notify company leadership about potential compliance issues (to reduce the feeling that they need to go outside the company to effectuate change).  We have significant experience advising companies on how to test and improve trade-related internal controls in a cost-effective manner and would be happy to discuss that experience with you.

We hope this helpful.  If you have any questions, or would like to discuss these issues further, please let us know.

Best regards,

The Future of KORUS

Dear Friends,

As you have likely seen in the press over the past few days, there has been a good deal of speculation about whether the Trump Administration would withdraw from the Korea-U.S. Free Trade Agreement (KORUS).  While it is still a possibility, it appears that the decision has been placed on hold for the time-being.

As you know, one of the big focuses for the Trump Administration is addressing bilateral trade deficits (i.e., a country exporting more goods and services to the United States than the United States exports to that country).  This view drives much of the President’s trade policy (and rhetoric).  The effort to combat trade deficits is central to the U.S. position in the NAFTA renegotiations (and our relationship with Mexico, in particular), as well as our relationships with China, Germany and others.

As for Korea, there is more than just trade involved here (e.g., North Korea).  These other geo-political concerns likely played a big role in the decision not to withdraw from KORUS at this time.  We expect that the parties will continue to negotiate to address the Administration’s concerns (the United States ran a net trade deficit of $17 billion with Korea in 2016 — for just goods, the deficit was $27.7 billion; but for services there was a surplus of $10.7 billion).  If the deficit concern is not addressed to the Administration’s satisfaction (which Korea has not done to date), withdrawal is a real possibility.

As a result, we recommend that all companies that rely on KORUS, either for imports into the United States, or exports to Korea, review their long-term contracts to make sure they are covered in case the Administration does decide to withdraw.  For example, if you entered into a contract assuming that the goods would be able to be imported duty free (into either country), would you (or your customer) be able to get out of the contract if the U.S. withdraws from KORUS?  Who will bear the significant increase in duties?  Better to think about these types of issues now, so you are prepared if it actually happens.

We hope this is helpful.  If you have any questions about these issues, please let us know.

Best regards,