Courtesy of F. Gordon Lee, Partner in the Law firm, Nossaman, LLP
You have noticed that we have posted a number of pieces recently about NAFTA related topics. Why is this such a hot topic for such an old trade agreement? Simple answer is easy pickings for North American Customs Agencies. Because the trade agreement has been around so long now, importers and exporters are getting sloppy and not ensuring that all aspects of compliance related to using a NAFTA declaration are in fact true and supportable, it may have been a decade ago when they created the original NAFTA decalaration, but with globalized supply chains is that still true today?
Here is F. Gordon Lee’s Insight from a recent E-Alert:
As companies and individuals engaging in international trade among the United States, Canada and Mexico well know, a key element to qualifying merchandise for preferential duty treatment under the North American Free Trade Agreement (“NAFTA”) is a Certificate of Origin. But keep in mind, the haphazard preparation and use of a Certificate of Origin can be costly.
The Certificate of Origin is the document used to certify that a product being exported either from the United States into Canada or Mexico or from Canada or Mexico into the United States qualifies as an originating good for purposes of preferential tariff treatment under NAFTA. For United States producers of goods, there are significant responsibilities associated with executing a Certificate of Origin when exporting products to Canada and Mexico, irrespective of whether the producer is also the exporter or not.
Exporters and importers alike must know that executing a Certificate of Origin carries with it the presumption that the goods involved do, in fact, qualify for preferential duty treatment. Those who have even a passing familiarity with NAFTA realize that making the determination of whether a good qualifies for preferential treatment frequently can be a difficult determination.
The deciding factors can be based on either relatively simple determinations of whether the good was wholly obtained or produced in a NAFTA party country or as complicated as whether regional value content and sophisticated inventory methods are met. Further, costs, sourcing and ingredient percentages may be variables in the ultimate determination. This means that a change in one of the variables could cause a product first determined to qualify for NAFTA preferences no longer to qualify. The reverse can just as easily be true.
An Ongoing Project
When preparing a Certificate of Origin, numerous factors must be considered and those charged with responsibility for the preparation of the document must have access to all pertinent information. The preparation of a Certificate of Origin must be viewed as an ongoing project. Any time there is a change in the information used in determining that a product qualifies for NAFTA treatment, the individual responsible for the Certificate or Origin must reanalyze the product to determine that it still qualifies for NAFTA treatment.Therefore, the preparation of a Certificate of Origin and the analysis that goes into its preparation must be a cooperative effort by all those in the company who have relevant information.
Penalties
Under the Customs laws of the United States, draconian civil and criminal penalties can be assessed against importers for entering merchandise into the United States based on inaccurate Certificates of Origin. Typically, the penalties are based on allegations of negligence, gross negligence or fraud lodged by the United States Customs and Border Protection (“Customs”). The penalties assessed range anywhere from a multiple of the amount of duties not paid to the full domestic value of the imported merchandise. Penalties can easily escalate into the tens of millions of dollars, and even a small amount of underpaid duty on an individual entry will quickly multiply when identical merchandise is repeatedly entered into the United States over a period of months.
Clearly, United States importers must be concerned that the Certificates of Origin that underlie their imports of merchandise from Canada or Mexico are accurate. United States manufacturers preparing Certificates of Origin for exports of goods to Mexico and Canada should likewise be concerned. Aside from any Mexican or Canadian penalties that may be imposed for false Certificates of Origin, the United States can also impose significant penalties against United States companies that provide false Certificates of Origin used to improperly secure NAFTA preferential treatment for shipments of merchandise to Mexico or Canada. Too often those preparing Certificates of Origin for exports from the United States believe that just because the product came from their factory in the United States it must qualify as a United States good for NAFTA preferential treatment. This is not true as the appropriate analysis must be performed to determine whether preferential treatment applies. Do not be caught in what could be a costly mistake of thinking that just because goods are made in the United States it is safe to issue a United States Certificate of Origin to your customer in Canada or Mexico. NAFTA does not work that way. Determining whether preferential treatment applies must involve the appropriate analysis and the correct decision is not something that can be intuited. There are specific rules to apply and just because an outcome may seem logical does not mean it is correct, as it may not comply with the rules.
Customs statutes and regulations provide that a false certification by an exporter or producer in the United States that a product intended for export to Canada or Mexico qualifies as an originating good has the same legal consequences as importing a product into the United States under false documentation. The same civil and criminal penalties can be assessed by Customs against a company or individual that supplied a false Certificate of Origin as are levied against a United States importer for using a false Certificate of Origin in importing goods into the United States and obtaining preferential duty status.
Thus, it is of paramount importance that a United States producer prepare an accurate Certificate of Origin and be able to document the Certificate of Origin, even if the producer is in no way directly involved in the export or import of its goods. A request for a Certificate of Origin should never be taken lightly even when the company providing the Certificate is not directly involved in exporting, but rather selling goods to a third party who will export them. The potential penalties are too great for any Certificate of Origin to be prepared without due care.
F. Gordon Lee is a partner in the Washington, DC office of Nossaman LLP. He has more than three decades of experience in customs, export control, and international trade law. He has successfully represented major multi-national companies, as well as medium and small-sized companies, and individuals on a wide range of import and export issues before numerous government agencies. Please visit nossaman.com/fglee for more information on Mr. Lee’s practice.
