A “virtual” apparel manufacturer with globally subcontracted operations inadvertently failed to accurately declare the correct identity and origin of the finished product upon importation into the US. This oversight ultimately resulted in a demand for duties several months later by Customs of over $70,000, plus penalties and interest. The additional costs imposed were written off as unrecoverable, negating a significant share of the profits earned for the contract in question.
Unpacking the Lessons Learned
A number of issues become evident from this case. The first and foremost is that Vendor relationships are very important in situations like this. Can you imagine having a discussion like this with a vendor who you have a casual or weak relationship with. Strong relationships can allow you to at least have open dialogue about this issue and it’ s direct impact on your bottom line.
The second lesson is that Vendors who are part of the process of delivering a final product on your clients must be part of your trade compliance strategy. In this case the vendor manufactured the product and delivered a finished good for distribution. As an example think of how do you ensure that your vendor is compliant and understands NAFTA determination rules?
One tip we use is to provide a NAFTA indemnification clause for inclusion on purchase orders, below is the text we recommend you use:
This purchase order is conditional upon receipt of a valid NAFTA Certificate of Origin prior to delivery. Vendor to indemnify against all costs and duty arising from misrepresentation or false declaration in the Certificate of Origin.
Of course this raises the issue that perhaps as part of your trade compliance strategy you include not only your trade partner but your legal partner to ensure that the sourcing process you use indemnifies you for problems like in this case.
While not in existence today if we look at the stated future direction of customs agencies around the globe, what we hear is the constant messaging that they all want to share more information with each other to create a supply chain that is focused on the health, safety, and security for their citizens.
In this case the issue was found by CBSA for one importer and by looking back at their database they found this vendor supplied others including the importer in this case study. The did a detailed NAFTA audit with the vendor, determined that the vendor was making a mis-declaration. They knew that the issue then applied to all importers who buy from this vendor. If customs agencies are able to share data across borders, imagine the impact if the data was shared with CBP. This domino effect in future would flow from issues found from sourcing to sales. As you see from this case the foundations of an Integrated Trade Compliance Strategy are reflected in the integrated manner that sourcing process to sales process would cover not only addressing the compliance issues of vendors who would be part of the trade compliance strategy, but also resulting compliance issues that could flow through the supply chain.