INTRODUCTION

TORONTO, October 10, 1996..."Speaking in Toronto today, Revenue Minister Jane Stewart announced a series of measures that will streamline the customs commercial clearance process. These measures, developed as part of the department’s Smart Border strategy, will use modern risk management techniques, state-of-the-art technology, and tailored processing options to help business be more competitive in a global economy". So read the first paragraph of the press release which introduced the importing community to the NEW BUSINESS RELATIONSHIP (NBR). One of the components of the NBR was the post entry audit, known today as Compliance Verification. Why was it necessary to change?

EVOLUTION OF CUSTOMS

Traditional Customs activities and processes associated with border protection and revenue collection had to be redefined to reflect ever increasing volumes and the requirement to reduce administrative costs. Compliance, Border Protection (including Interdiction of Illicit Drugs and other Contraband, the Health and Safety of Canadians) are key components of the Customs mandate. CBSA also continue to administer the requirements of other Government departments (OGD’s) such as the Canadian Food Inspection Agency; Health Canada; Transport Canada etc. Trade agreements, such as NAFTA, relegated revenue collection to a less significant role. Canada Customs evolved into the Canada Customs and Revenue Agency and subsequently the Canada Border Services Agency (CBSA).

"What does this all mean to you?" The goal of this guide is to assist you to prepare for and, when the time comes for your audit, to provide guidance throughout the process.

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WHY COMPLIANCE VERIFICATION?

The Compliance Verification program resulted from a change in focus by Customs from a process based on transactional review to one based on audit. While CBSA do not refer to the process as an "audit", that is what it is. It is a key component of CBSA strategy today. Verification has proven to be an effective tool in measuring levels of compliance, correcting non-compliance and is the primary methodology the CBSA uses to ensure compliance with various aspects of international trade activity.

WHAT IS VERIFIED?

• Valuation
• Origin - NAFTA and other Preferential Tariff Treatments *
• Tariff Classification
• Documentation
• GST and Excise Tax on imported goods
• End Use; Diversions
• Marking
• Permits
• Anti-dumping and countervailing duties under the Special Import Measures Act (SIMA)
• Requirements of other Government departments (OGD)
• Statistics Canada requirements for Trade Data
• Internal links between:
  - purchasing
  - receiving
  - accounts payable
  - data processing
  - other departments
• (Note: A complete verification of origin is generally not part of a Compliance Verification)

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PREPARING FOR THE CUSTOMS COMPLIANCE VERIFICATION

How can you ensure compliance and how can you prepare for the arrival of the audit team? Following is some practical advice and recommendations.

The CBSA Verification Team will be investigating every aspect of your Customs related activities. Communications, internal and external, will be examined and, if found to be adequate, will have a positive impact on the duration and eventual outcome of the Verification. In addition to corporate processes relating to the import and export of goods, the Verification team will attempt to understand some of the broader internal workings of your company. The ultimate aim is to determine whether processes and controls are in keeping with the regulations and requirements of the CBSA and OGD’s.

Executive and Senior Management "buy-in"

This is one of the most serious failings encountered. The upper level of management must be convinced to treat a Customs Compliance Verification as seriously as a Tax Audit.

Flow chart the processes impacted by your import and export business

All aspects of your Customs business will be reviewed, from initial purchase order to ultimate payment for the goods. This applies to both imports and exports. If you have one or can compile one, a flow chart indicating how you manage these processes will be an effective tool.

Appoint a Team Leader

A team leader is your liaison between the various departments within your company and the Customs Verification Team. This should be an individual who has the ability and authority to make things happen and, conversely, make sure certain things don’t happen. This person will be the primary contact with the verification team leader, acting in the role of facilitator. This person should explain your corporate mandate, import procedures, internal systems, accounting process and organizational charts. The team leader should also escort the audit team on a tour of the facility following the initial meeting when such a tour is requested.

Identify Departments Involved

Identify all departments involved in the import process. Depending on the structure of the company this may include: Accounts Payable; Customs; Finance; Information Systems / Information Technology; Inventory Control; Operations; Purchasing; Receiving; Sales; and Traffic. Although there may be some common functions, all companies are different. The key is to ensure that all appropriate departments are identified and adequately represented at the initial meeting (eg: Accounts Payable Manager, possibly accompanied by an Accounts Payable clerk but not the latter on their own).

Don’t Make Rash Promises

It is important that your personnel do not make commitments on behalf of other departments not under their jurisdiction (eg: Do not commit to provide a report that is not available; this puts unnecessary pressure on the I/T. Department and the Verification team).

Communicate

Communicate internally to inform staff that a Customs audit is under way. Advise the names of the team leader and authorized contacts in each department. The involvement of your Customs Broker during an audit is not mandatory. However, it is your option and we recommend that you authorize CBSA to communicate with your Broker during all phases of the Verification, including attendance at any meeting or discussion of any aspect of our business relationship.

Review record keeping practices

Are all records available? Many companies retain their records as required under the law (6 years plus current year) but they are inaccessible. How do you archive records? Can they be retrieved? Are they cross-referenced?

Complete a mock-audit

If CBSA have not notified you that you have been selected for a Verification, consider a mock-audit. Take a sampling of 20 – 25 transactions and trace them through the entire process. Verify what you ordered against what you received and what you actually paid against what you declared to Customs. Your Broker can assist in this process.

Overages and Shortages

Many companies have become lax in reporting discrepancies to Customs. While this is not always necessary on a transaction by transaction basis, it remains a requirement. Importers are particularly vulnerable if Customs detect an overage during the clearance process and penalties under the Administrative Monetary Penalty System (AMPS) are not uncommon.

Understand Your Responsibilities

The Importer of Record is ultimately responsible to CBSA to ensure the accurate and appropriate reporting of goods imported into Canada (as is the Exporter of goods exported from Canada). As your Customs Broker we take every reasonable care to ensure accuracy. However, we are only as good as the information provided to us. If there are overages; shortages; price errors; inaccurate or ambiguous descriptions etc. mistakes can and will happen. It is recommended that you define this responsibility and make it a specific job description to compare the Customs documents prepared by your Customs Broker against your own purchasing, receiving and payment records to ensure accuracy.

The Initial Meeting

The initial meeting between the Verification team and your staff is significant. This meeting will set the tone for the Verification and it is imperative that you are well prepared. Request a copy of the agenda from Customs. Take time to review it and request any additions or clarifications you deem necessary. You will be advised of the scope of the Verification.

Retain Control

It is important to understand the scope and time frame of the Verification. During the Verification you should be prepared to challenge the Verification team if they appear to be changing or expanding the scope. Ideally the team leader should be available to the Verification team whenever they are in your facility. It is recommended that all questions be channeled through your team leader. Control all information given to the Verification team and ensure that only qualified and authorized personnel provide information and answers whether electronic, paper or verbal. For example, don’t let a worker on the production line answer a question that should be answered by an engineer.

AUDIT OBJECTIVES

The CBSA Compliance Verification Program uses two basic parameters: 1). Single Program; and 2). Multi-Program. The Verification may take place in full or part at the importers premises or entirely at the CBSA office. Verification has two main components: 1). Systems Review (to examine accounting systems and procedures related to Customs activities); and 2). Program Compliance Review (to test the level of compliance with various customs and OGD requirements).

In the former environment, Customs review of commodities on a transactional basis did not consider other aspects of a business organization. Today, all aspects of importing and exporting processes are evaluated. The systems and controls in place within the company will be assessed and verified. Customs compile profiles of importers and their industry sectors. The creation of these profiles is a main objective of the audit and they provide a picture of importers in terms of their size, importing activity, and reporting patterns. Compliance with Customs programs will be assessed and levels of assistance necessary to promote compliance will be combined to illustrate the standing individual importers and also compared with other importers in each industry sector. Favorable comparison with others in the same sector may result in qualification for certain programs not otherwise available (eg: Customs Self Assessment). Those found wanting are provided with recommendations and, if warranted, requirements aimed at improving their compliance profile.

This process will improve the ability of Customs to assess and manage risk. Risk management tools developed through the Verification program are used to establish standards for individual businesses in addition to each industry sector. Customs conduct their business based on analysis of industries by sector and specific importing history. High-risk industry sectors and importers are identified. Businesses and individuals bent on beating the system are targeted and the full force of the law can be applied against such organizations. Compliant members of the importing community will see fewer impediments (eg: Fewer examinations; fewer Verifications etc.).

The Verification environment presents the opportunity to review potential liabilities in areas where procedures and systems indicate weakness. Levels of compliance with the laws and regulations governing imports in general and any additional requirements for specific operations and/or industries will be assessed. This will include procedures for voluntary reporting of goods received in excess of those covered by import entries; the existence and validity of NAFTA Certificates of Origin; and the voluntary disclosure of errors in value, tariff classification, and tariff treatment, among other things.

In a Compliance Verification, all aspects of an import transaction are verified to confirm the presence of linkages between various processes. Linkages from purchasing, customs release, receiving, payables (including payment of Duty/Taxes and payment for the goods), accounting and reporting are examined. When such linkages exist, the audit trail can also work backwards and track financial transactions to foreign suppliers. Verification includes a process to review goods actually imported and received, rather than those simply reported to customs.

It is not the objective of a Compliance Audit to undertake a complete financial audit and analysis. Only those areas impacted by international trade activity are examined. It is necessary to verify the links between internal accounts receivable and accounts payable and Customs systems in order to determine if the proper amounts of duties and taxes have been paid. It is equally important to demonstrate that the correct volumes, values and types of goods have been reported for Customs and Statistics Canada purposes.

WHAT HAPPENS AFTER THE VERIFICATION?

An Interim Report is produced by the Verification Team and importers are generally allowed thirty days to respond. It is essential that this document be carefully reviewed during the allotted time. There should be no surprises but the report is highly detailed and errors and omissions can and do occur. Responses will be included in the Final Report that is assessed at Customs Headquarters and compared to industry sector standards.

The Final Report is distributed to:

• Importer team leader or designate
• Customs Headquarters NBR Group
• Statistics Canada

The Audit is confidential and the results will not be released to any other party. It is excluded from the sharing of information agreement between U.S. and Canada Customs.

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CHECK LIST OF INFORMATION

• Corporate Organization Chart showing Structure, Ownership, Affiliates, Divisions, and Key Personnel
• Most Recent Trial Balance and General Ledger
• Location of Head Office and Books & Records
• Most Recently Available Annual Report; Audited Financial Statements; and Corresponding Trial Balances
• Copies of License, Royalty, Distribution Agreements
• Copies of Discount Agreements/Contracts
• Copies of Patents, Trademarks, Copyrights and Quota & Profit Sharing Agreements
• List of Foreign Vendors
• List of Duties Relief or any other Customs Related Programs your company is utilizing
• Information on any Issue Outstanding with CBSA

DOCUMENTS FOR AUDIT SAMPLES

• Purchase Order
• Commercial Invoices
• B3 Entries and Recap Sheets
• Cancelled Cheques
• Certificates of Origin
• Bill of Lading/Waybill
• Receiving Reports
• Payment Entry in the Books
• Freight Invoice
• Quantity Ordered / Received
• List of all Product Numbers; catalogs; brochures
• Freight Contracts
• Internal Controls used to ensure goods are not exported to restricted countries

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FREQUENTLY ASKED QUESTIONS ABOUT CUSTOMS COMPLIANCE VERIFICATION

What questions should you be asking yourselves in preparation? What questions might the Verification Team ask? The following examples are typical. Any issues specific to your company or your type of business should also be considered.

Finance

• Do any royalty situations exist?
• If so, are you aware that they may be subject to duty?
• Are you aware that your General Ledger will be audited by the Customs Audit Team?
• Minutes of Executive Meetings may be required during the audit, do you have these available?

Customs Department

• Do you maintain a list of suppliers and shipping terms?
• Do you review Customs Entries and verify information against Receiving and Accounts Payable records?
• Do you have any different process for duty free entries?
• Do you review brokerage invoices for accuracy?
• Are discounts deducted at time of entry?
• If they are, do you verify that they were earned and taken?
• Do you have any drawback or duty deferral issues?
• Do you have current and valid NAFTA Certificates of Origin on file for all goods on which NAFTA preferential treatment is claimed?
• Are NAFTA Certificates specific to product(s) imported?
• Does tariff classification on the NAFTA match the import entry?
• Do you ensure tariff classification for accuracy and consistency?
• What process is in place to ensure appropriate tariff classification by Russell A. Farrow Limited?
• Do we request product literature or other supporting information on new products being imported?
• Have you received any Customs Rulings? Are they current and are they being followed?
• Are you aware that your Customs Broker maintains a database of your imports, including vendor, product, NAFTA and classification elements?
• Are you aware that this database includes vendor part numbers where available?
• Are you aware that your Customs Broker may review NAFTA Certificates for completeness and accuracy?
• Do you have all Customs records available for review?
• How long do you keep records?
• Do you have any outstanding issues with Customs?

Accounts Payable

• Do you earn and take all discounts?
• Who is advised when such discounts are NOT taken?
• Do you compare and verify receiving reports / invoices / Customs entries?
• What do you do when discrepancies are identified?
• Do you pay your suppliers on the basis of purchase orders, packing slips, invoices or other document?

Information Systems / Information Technology

• Do you have the capability to generate reports linking Purchasing, Receiving and Accounts Payable information?
• If not can such reports be created?
• What is the level of integration of your computer systems between each department?

Inventory Control

• Do you maintain inventory discrepancy reports and are they available?
• Do you have a system in place to ensure inventory gains are investigated?
• Are you aware that such gains may be due to over-shipment and, subject to duty and/or GST?
• Are you aware that all overages and shortages on import shipments should be reported to Customs?

Purchasing

• What are the transportation terms of your purchasing contracts or purchase orders?
• Do you verify any freight amounts deducted from the value for duty?
• Do you retain copies of purchase orders?
• How are purchase order numbers assigned?
• Do you distinguish domestic purchases from imports?

Receiving

• Are packing lists filed and available?
• How do you track overages and shortages?
• Do you match receiving reports to Customs entries?
• Do you have drop-shipments?

Sales

• Do you offer any discounts for end use certificates?
• If end use is an issue, do you have a system to communicate diversions (eg: From Automotive OEM to Service)?
• If you provide K32A Drawback Forms to your customers do you note your import files?

Traffic

• Do you have any freight contracts in place?
• How do you document exports?
• Is drawback or duty deferral an issue?

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Revised January 2009