The JOC ran an article, entitled "Old idea is new again", involving importer bonds. We felt it was appropriate to respond and set the record straight. Below please find the article as well as a link to our letter to the editor.

Journal of Commerce
Monday, March 03, 2008
By: R.G. EDMONSON

Customs and Border Protection requires importers to post bonds to ensure that the agency will get the duties and penalties it's owed if the importer fails to pay. Right now, all importers put up 10 percent of their annual import value, but Dan Baldwin, assistant commissioner for

international trade, wondered why companies that are proved low-risk players should be treated the same as everybody else.

Three weeks ago, Baldwin asked members of COAC, the Departmental Advisory Committee for Commercial Operations of Customs and Border Protection and Related Agencies, why shouldn't companies that are well-established of the Customs-Trade Partnership Against Terrorism and the Importer Self Assessment program get a break on the amount they must put up for bonds?

"Should highly compliant importers have the same bond formula as a newbie, or a company that has no trade experience and doesn't participate in those things?" Baldwin asked. "I propose that the answer is no, the formulas should be different. They should be treated differently, and obviously, the obligations they are meeting calls for a different kind of bond."

Some COAC members greeted the proposal warmly, but giving highly compliant importers a break on their bond is no sure thing. The idea is something old that's new again. Three years ago, reduced bond requirements were suggested as a benefit for C-TPAT importers that had achieved "green lane" status, but the idea never really gained traction. Customs commissioned a study in 2006 that found "no clear commonality" in partnership programs and bond requirements.

Customs' bond formula hasn't changed in 17 years, and bonding was one of the few agency activities that hadn't been scrutinized in the light of risk management, Baldwin said. COAC could start with the continuous bond, the basic instrument that protects Customs against revenue loss, and go on to cover the whole field of bond-setting and risk mitigation.

"This is one of those broad concepts that COAC should be bringing to the commissioner, as one of the chief federal advisory committees in all of federal government," Baldwin told The Journal of Commerce. "Ten percent doesn't sound like a whole lot of risk management, because it's just a 10 percent fee. The one thing that's come to light certainly in my experience in the past few years is how expensive bonds can be to the corporate bottom line."

Baldwin said there have been cases recently where the continuous bond was not enough to cover Customs' losses, but there were just as many cases where bonds are being overwritten, "so the cost to the highly compliant importer seems to be pretty out of whack.

"There are companies that demonstrate a high risk or high liability and probably deserve to have an increase in those bonds," Baldwin said. "By the same token, there are probably a lot of tremendously strong corporate citizens that should be entitled to a reduced bond because they have demonstrated they are little to no risk. We need to take a look. We need to find a balanced equation."

In 2005, Customs tried to change the bond formula to improve collection of anti-dumping and countervailing duties. A year later, the Government Accountability Office, the congressional watchdog agency, said the changes lacked consistency or transparency, and recommended an overview of the bonding process.

Customs is just beginning to brainstorm the problem, Baldwin said. "This is a good place for the government-private sector partnership to come together to say how do we turn this into a reality? I'm sure that there are a lot of hidden issues that we're all not aware of until we get down in the weeds."

The proposed importer security filing, or 10+2 rule, has again focused attention on importer bonds. The proposal that Customs published on Jan. 2 includes a provision that would allow the agency to collect liquidated damages for the full value of an importer's entry, if the importer failed to provide any of the 10 data elements it was obligated to report.

"It would be naive to assume that as a surety, that you would know today what the impact of 10+2 is going to be, other than any time you introduce reasons to penalize an importer and the bond, there's going to be some change," said Scott Wolney, president of Avalon Risk Management, one of the leading underwriters. "Customs would like that participation in

C-TPAT or ISA would have some commercial benefits - and we would, too - but I think you have competing imperatives. Compliance could reduce the likelihood of liquidated damage claims, but it doesn't reduce the credit risk.

"There is a disconnect in that the compliance programs don't have any real relationship with the financial viability of an importer," Wolney said. "They can be compliant, they can do everything right, and they still can go out of business. The thing that causes the majority of the claims is the financial dissolution of the company, the company going bankrupt, or the company disappearing from the face of the earth. That's where I'm not sure Customs always makes the connection."

Customs may lower its bond requirements for compliant importers, but premiums will go down only if there are lower claim rates, Wolney said. Compliance aside, there are other factors in the risk equation that have to be considered. For example, more importers are paying duties and fees as monthly statements using Customs' Automated Commercial Environment. That extends a surety's risk exposure because importers have up to a month plus 20 days to pay duties that previously were due 10 days after entry. If an importer wanted to trade high compliance for low premiums, Customs would have to start looking at its financial statements.

"If Customs changes its bond formula to require smaller bonds for compliant importers, as long as the likelihood of claims on that bond limit isn't increasing at a higher rate, it would theoretically benefit the importer in the cost of the bond," Wolney said. "In the total equation, sureties are going to have to look at the potential benefit that the industry might get from increased compliance and the consequence of fewer claims, and the overall increased risk from all the other programs."

R.G. Edmonson can be contacted at bedmonson@joc.com.

On September 22, 2005 in the Federal Register, Customs and Border Protection (CBP) formally announced elimination of the bond rider requirement for participation in Periodic Monthly Statement processing (PMS). The primary reason for CBP's decision to eliminate the rider is to open participation on the PMS test to the widest number of importers. The rider was viewed by CBP as an impediment to participation.

As previously commented on our website, the key features of the notice are as follows:

- In lieu of a rider, sureties will be notified electronically by CBP of a bond principal's participation in the PMS test.

- Any bond principal who is late with an estimated duty payment by more than (2) business days will be denied further PMS privileges and be required to file entry summary documentation with estimated duties and fees attached before merchandise can be released. PMS privileges will remain suspended until full payment of any unpaid estimated duties and fees that have become due under PMS.

- Sureties will be permitted to terminate bond for those bond principals participating in PMS within (3) business days if the surety, upon receiving notification, does not accept the risk relating to participation in the PMS test or the bond principal is in default of its obligations under PMS.

Although the rider has been eliminated, sureties will continue to underwrite bond principals who are participating in PMS and additional premiums and/or security requirements may apply. A complete copy of the Federal Register notice may be obtained by clicking the following link FR 9/22/2005.

Based on discussions with the trade, to better promote participation in the Automated Commercial Environment (ACE) the successor to the current import system the Automated Commercial System (ACS), Customs and Border Protection (CBP) has recently proposed elimination of the requirement that importers file a separate rider to participate in Periodic Monthly Statement processing test (PMS).

With the elimination of the rider, CBP has indicated they will electronically notify a surety if a bond principal for whom they write a bond is participating in PMS.  Since the surety’s liability is extended for entries processed under PMS, those importers who participate under PMS may be subject to higher bond premiums and other underwriting requirements imposed by a surety to account for the increase in risk.  Elimination of the rider will restrict a surety’s ability to underwrite a principal prior to participation in PMS; however, CBP has also proposed to allow sureties to terminate bonds for those principals participating in PMS with three business days written notice to the bond principal and CBP.  This shortened termination time frame may only be utilized when the bond is being terminated due to the principal’s participation in PMS or a failure to perform an obligation arising from participation in PMS.

Lastly, according to CBP, to enforce timely payment of duties under PMS, any bond principal who is late with a monthly statement estimated duty payment by more than two business days will be notified by CBP that it will be immediately required to file entry summary documentation with estimated duties and fees attached before its merchandise may be released from any Customs port.

CBP plans to formally announce these changes in an upcoming Federal Register Notice.

For further information, please contact our office.

Effective November 22, 2004, U.S. Customs and Border Protection has completed a pilot program whereby they have transferred the processing of all CF301-1 importer/broker bonds from the individual service ports to a central location at the National Finance Center in Indianapolis, Indiana. In support of this decision, Customs has offered the following statement:

In an effort to establish a more efficient and effective bond program for U.S. Customs and Border Protection (CBP), the Continuous Transaction Bond program is being centralized at the National Finance Center (NFC) in Indianapolis, Indiana. The bond centralization effort will include the filing, approval and maintenance of all Continuous Transaction Bonds. The major objectives of the program are:

• Uniformity
• Bond sufficiency
• Fair and consistent application of regulations and policies

Our office has worked in conjunction with Customs to make the transition to bond centralization as seamless as possible for our clients. Since this is a vast undertaking to centralize bond processing within Customs, certain delays have been unavoidable. To ensure consistent and fair policies to all who file bonds Customs has given notice to the trade that going forward the processing of bonds will take a minimum of (5) business days from the date of receipt of the bond forms in Indianapolis. In the instances where an existing bond is being terminated and replaced by a new bond Customs will require a minimum of (10) business days as cited in the Code of Federal Regulations.

Also Customs will closely examine all new bonds and bond applications for accuracy of certain information and reject those bonds for which there is missing, incomplete or inaccurate information. This may cause additional delays. Due to discrepancies and problems which have occurred in the past, a key piece of information which Customs is seeking to verify on new bonds is the bond principal’s FEIN (Federal Employer Identification Number) or Tax I.D. Number. In many instances Customs requires copies of the following U.S. Tax forms to make this verification:

Although Customs has not yet made this a mandatory requirement and to reduce the chance of the bond being rejected, we strongly suggest at least one of these tax forms be returned with the completed bond forms in order to allow Customs to verify the FEIN number provided on the bond forms.

Under bond centralization, it is important to allow sufficient time for bond processing and to avoid any interruptions in bond coverage. If it is imperative to have a bond be effective by a certain date, we suggest returning the completed bond forms to our office at least (10) business days for new bonds and (15) days for replacement bonds prior to the requested date.

Should you have any questions or need additional information please contact us at bonds@cashea.com or by telephone at (201) 568-2810.

The Bureau of Customs and Border Protection (CBP) has announced plans to conduct a National Customs Automation Program (NCAP) test concerning periodic monthly deposit of estimated duties and fees. Currently, estimated duties are required to be deposited (10) days after release of the merchandise to the importer, however, periodic payment participants in NCAP will deposit estimated duties and fees on a monthly basis. There are several requirements to participate in this test, one of which will be the posting of a bond rider covering the periodic payment of duties. Presently, the rider will only be required of test participants and not the importing public at large. Further information regarding the test and the requirements can be found in the Federal Register/ Vol. 69, No. 23/ Wednesday, February 4, 2004.

Pursuant Federal Register Notice dated June 24, 2003, Lumbermens Mutual Casualty Company, American Motorists Insurance Company and American Manufacturer’s Mutual Company have been terminated from U.S. Treasury Circular 570 effective June 12, 2003. This is yet another unfortunate result of the downgrade experienced by Kemper.

According to the notice and based on discussions our office has had with U.S. Customs personnel, those active bonds written by any one of the above referenced companies will continue to remain in effect up to the next anniversary, however, they must be replaced by an acceptable surety prior to the renewal date. In this regard, our office is continuing the process begun in April of seeking a replacement surety for those bonds our office administers written by a Kemper Company. If you are a broker who has a Kemper bond administered by our office, you will be contacted at least three months prior to the anniversary date to begin the replacement process.

We are fortunate to have numerous other surety markets such as CNA, St. Paul Travelers, ACE, RLI, Chubb, Zurich - F&D and Safeco for whom we place business with. Should you wish to have your clients bond written in a specific company, you may indicate so upon receipt of our renewal correspondence.

While we are making the transition process as seamless as possible, we appreciate your patience due to the volume of bonds being replaced.

Subsequent to the recent downgrade of Kemper Insurance Companies by A.M. Best, Kemper Insurance Companies has announced they will exit the surety market and have sold the renewal rights of certain lines of surety. It is the decision of Kemper not to offer renewal of bonds administered by our office after April 1, 2003.

Accordingly, C.A. Shea & Company has begun the process of replacing Kemper bonds that are scheduled to renew on April 1, 2003 and after. If you are a broker or agent and have a Kemper bond administered by our office, you will be receiving correspondence and/or bond forms to facilitate the replacement process. Kemper, is just one of the many surety markets Shea conducts business with. Along with Kemper, our office currently writes bonds for CNA Surety, St. Paul Travelers, Ace Bond Services, RLI Surety, and Zurich.

Please note, all bonds administered by our office, which are on Kemper paper, continue to be in full force and effect until terminated. Based on our technology and relationship with U.S. Customs, we will endeavor to make this transition as seamless as possible to you and your clients. As always, Shea will provide the highest level of service and expertise to you and your clients no matter the surety.

To maintain uniform procedures with regard to payment of Customs bills, importer sanctions and bill inquiries, U.S. Customs has clarified it policies to the trade community. A text version of these procedures can be obtained by clicking on the following link Bill Payments.

It is important to adhere to these procedures to ensure payment of Customs bills are timely and accurately applied to avoid problems such as additional interest or the possibility of sanction. Should you have any additional questions, please contact our office.