Supply chain risks are higher than ever and we do not see this changing anytime soon. By taking the preemptive supply chain verification and substantiation measures described below, U.S. importers can manage and reduce these risk factors.
Three Supply Chain Scenarios, One Common Proposition
Consider, if you will, three different scenarios:
Scenario No. 1: A shipment of solar panels is unexpectedly detained for incorporating – alleges United States Customs and Border Protection (CBP) – silicone components made using forced labor in China.
Scenario No. 2: A shipment of ready-to-assemble (RTA) kitchen cabinets is detained by CBP at the request of the U.S. Fish and Wildlife Service on the suspicion that the merchandise is comprised, in part, of a genus/species of timber that enjoys protection under the Lacey Act.
Scenario No. 3: A shipment of quartz surface products (QSP) declared to be country of origin Malaysia becomes the subject of a CF 28 (i.e., a request for information) because CBP has reason to think the merchandise was not actually produced in Malaysia.
At first glance, the inquiries and actions described above may not appear to represent anything out of the ordinary. Just CBP going about its usual business, one might even be inclined to think. That conclusion is, however, in the context of today’s aggressive customs compliance and enforcement environment, mistaken. These three scenarios stand for the proposition that U.S. importers must, more than at any time prior, know, understand, and be able to trace (or “map”) the inputs and entities that enter into or connect with their supply chains. If not, they must be prepared to lose time, money – and potentially – the trust of CBP.
Preemptive Supply Chain Substantiation Measures
Luckily for U.S. importers, there are a number of measures that can be taken to avoid the disruptive outcomes noted above. These include:
- Requiring, as a condition of doing business, a vendor or supplier to provide upstream supply chain visibility. This should, for all regions and entities involved, extend back to the source of the raw materials and include supporting invoices, certifications, and transportation documents. A foreign vendor’s or supplier’s unwillingness to provide this insight should be viewed as a red flag by a U.S. importer. CBP will certainly see it that way, should the content of its supply chain ever become an issue.
- Vetting the regions from which products and components incorporated into finished goods are procured. Is a sourcing region known to have higher than usual levels of corruption? Is it known to be the scene of illegal activity (logging, mining, harvesting, smuggling, etc.)? Is it a known hub for illegal transshipment? Has it, per CBP Withhold Release Orders (WROs) and Findings, been identified as a place where forced labor is used? Does the region correspond to a country that is subject to OFAC regulation? If the answer to any of these is “yes,” a U.S. importer should consider developing an alternative sourcing strategy.
- Vetting the vendors and suppliers within the supply chain – again, all the way back to the extraction of raw materials. Have any of the foreign entities appeared in Enforce and Protect Act (EAPA) investigations or False Claims Act (qui tam) litigation? Are any the subject of WROs or Findings (note that WROs/Findings can apply to either regions or entities)? Where applicable, do foreign vendors and suppliers have current certifications from recognized certifying authorities (e.g., the Forest Stewardship Council Certification, in connection with wood and pulp products). Affirmative answers to any of the foregoing should, as was the case above, trigger a red flag for a U.S. importer.
- Creating an import compliance-minded transactional framework. Does a U.S. importer require the use of certified materials in its finished goods? If so, this requirement needs to be spelled out in purchase order and contract documents. By the same token, U.S. importers should, with an eye to being able to substantiate material inputs and overseas manufacturing practices, incorporate into their transactional documents clauses that require foreign vendors and suppliers to (i) cross-reference purchase orders and/or contract numbers on production records, (ii) furnish production-related documents (Bills of Materials, for example), if requested, and (iii) confirm that merchandise has not been illegally transshipped or produced with forced labor and is otherwise compliant with U.S. import laws and regulations. Addressing these requirements and expectations up front and in writing will make it easier for a U.S. importer to respond to subsequent CBP inquiries.
- Obtaining and submitting for laboratory analysis samples of materials subject to specific limitations or requirements. This practice can, when properly done, keep vendors and suppliers honest at the same time it enables U.S. importers to demonstrate reasonable care.
- Verifying, where appropriate, a vendor or supplier’s production claims and capabilities pursuant to the completion of one or more verification visits. Do not make the mistake of taking a foreign partner’s production-related claims or representations, no matter how legitimate sounding they might be, at face value. Failure to conduct a verification visit can open the door to being misled by the foreign vendor or supplier and being held accountable in the U.S. for the payment of unanticipated duties and penalties. U.S. importers should, in this vein, arrange to travel to a vendor or supplier’s factory for the purpose of confirming its existence and ensuring it has the machinery and staffing to fulfill production requirements. This commonsense measure goes a long way to avoiding enforcement exposure in the event the country of origin of an importer’s product comes under CBP scrutiny. There are few challenges in trade more difficult than trying to persuade CBP that merchandise was produced in a facility never actually visited by a U.S. importer.
As we continue to document in our customs and trade blog posts, import compliance and enforcement risk is higher than ever. And as recent experience suggests, this trend is not going to change anytime soon. By taking the preemptive supply chain verification and substantiation measures noted above, U.S. importers can manage and reduce these risk factors – and, in so doing, avoid becoming another CBP enforcement statistic.
