Old idea is new again

Posted on: March 3rd, 2008 • In Bonds

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.

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