Customs Undertakes 'Knock and Talk' Program
U.S. customs officials are on the prowl for undervalued apparel goods coming through U.S. ports from China.
In recent months, U.S. customs officials have been opening up boxes, scrutinizing shipments and finding that much of the clothing coming from that country carries documents that underestimate the goods’ value by 100 percent to 400 percent to avoid paying higher tariffs.
Officials stopped one shipment of women’s wool blazers after paperwork stated they were worth $1 a piece. And they were flabbergasted to discover import documents stating women’s tops that normally sold in stores for $39.99 had a listed wholesale price of 42 cents per unit.
As director of the textile enforcement and operations division for U.S. Customs and Border Protection in Washington, D.C., Janet Labuda has handled her share of phone calls from apparel companies complaining that tightly squeezed competitors are trying to save money and boost profits by understating the value of their goods.
Apparel companies in the last year have been in a bind. Cotton prices skyrocketed more than 75 percent, and wages at Chinese apparel factories rose by about 25 percent. While manufacturers are seeing their costs swell, retailers are reticent about paying more for merchandise. So some apparel importers and manufacturers have taken to reducing their tariffs to make up for reduced gross profits.
Government officials estimate that 16 apparel companies in California have skipped out on $65 million in duties over the last 18 months and that one major U.S. retailer shirked shelling out $72 million in duties thanks to undervalued shipments.
“We have seen misdescriptions, undervaluations and the actual quantities reduced in shipments,” Labuda said, explaining how people are getting around paying apparel tariffs, which average around 16 percent. In 2009, about $10 billion, or 47 percent of all tariffs collected by customs, came from apparel and textiles. That was a 10 percent decline over 2008.
Almost all of the suspect goods have been shipped landed-duty paid, or LDP, which means the apparel companies don’t pay for the goods until they arrive at their doorstep, relying on someone else to bring the merchandise through customs.
Over the years, Labuda has routinely warned the apparel and textile world that customs would be taking a hard look at LDP transactions because of the amount of fraud involved in these kinds of shipments. The government recommends that companies send their goods free-on-board, or FOB. That means importers are responsible for shipping goods from overseas ports through customs and to their final destination.
Customs officials have found that many of the consignees designated to bring the LDP goods through customs do not have any financial stake in the goods, as required by law, and often list false addresses, Labuda said. Customs prefers to deal with licensed freight forwarders or customs brokers.
“About a year ago, we went to 181 companies in the United States who were the importers of record, and 55 percent of them did not have the right to make entry,” Labuda said. That was evenly split between New York and California with a few out-of-the way places such as Orlando, Fla., and Idaho.
In recent months, customs has initiated a program called “Knock and Talk,” where they knock on the doors of apparel and textiles importers to see if they know the consignees designated to make entry on the goods. “We are asking, ’Do you know the importer of record?’ ’Did you order these goods?’ ’Did you know they arrived?’” she explained.
Many customs attorneys have been advising their clients to work with the government and participate in “Knock and Talk.”
“If customs walks in, we say cooperate,” said Steve Zisser, president of Zisser Customs Law Group, headquartered in San Diego. “They have nothing to lose. They have to maintain a good relationship.”
Brian Murphy, a Los Angeles customs attorney who recently moved to Kansas City, Mo., to work with Miller & Co., said he heard that customs had visited several consignees named to bring in goods and found their business addresses didn’t exist.
If customs charges these consignees with filing false documents or undervaluing goods, he explained, these companies disappear or form new companies to avoid penalties.
Richard Wortman, a customs attorney with Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt in Los Angeles, said that customs has been aggressively tackling this problem over the last 18 months but has been visiting apparel companies more recently to see if they have any idea who is bringing in their goods. “They are making it difficult for some,” Wortman said. “It has been a very interesting and tough road.”
He noted that a detained shipment at the port can delay delivery by a few weeks to a month. To get apparel shipments through customs more quickly, Wortman said, some of his clients have agreed to pay duty on the higher LDP value of the goods rather than the actual merchandise cost. That adds thousands of dollars to the shipment. “Everything is difficult in this economy if you can’t deliver on time,” he observed.
In addition to undervalued goods, customs is putting under the microscope several Los Angeles–based companies that ship apparel to Mexico.
Red flags went up when customs discovered 200 apparel companies listed in the same Los Angeles zip code. The apparel concerns were sending duty-free shipments to Mexico under the North American Free Trade Agreement.
Customs suspects the companies might be sending Chinese-made apparel with a “Made in USA” label to the south-of-the-border country or that they are not using regional yarns or fabric for their goods.
U.S. customs undertook this project after Mexican apparel manufacturers complained about cheap goods flooding their market. “We’ve been working with the Mexican government on this,” Labuda said, “which tipped us off.”
