Importers of merchandise into the United States must use “reasonable care” in the importation process, which includes providing accurate and complete information necessary for U.S. Customs and Border Protection (“CBP”) to process and release the merchandise into the United States. Importers who fail to take this obligation seriously do so at their peril, because catching importer mistakes that result in duty underpayments is an enforcement priority for CBP. If CBP determines that an importer has failed to exercise reasonable care, CBP may impose substantial civil penalties, even if an error was unintentional. However, where importers discover their own import compliance errors before CBP does, they may significantly reduce their exposure to penalties by proactively and voluntarily disclosing such errors to CBP with a “prior disclosure.” This article summarizes the fundamentals of a prior disclosure, and reports on recent efforts by CBP to standardize prior disclosure practices across U.S. ports of entry.
Prior Disclosure Fundamentals
CBP encourages importers to file prior disclosures, and it often makes sense for an importer to do so. The statutes, regulations and procedures that govern the importation of merchandise into the United States are complex and constantly changing, such that even the most experienced and vigilant importers make mistakes. A prior disclosure allows an importer to disclose its violations of Customs laws and regulations to CBP and pay any unpaid duties or fees owed. In exchange, the importer limits exposure to otherwise applicable penalties, by limiting the penalty to the interest owed. CBP benefits as well, receiving prompt payment of duties owed (plus interest) without using internal resources to conduct an investigation of the reported violations and enforce a penalty order.
An importer may discover a violation through an internal audit or review, in the course of a CBP audit, or when responding to a question from CBP about a particular transaction. No matter how the issue arises, a prior disclosure must be filed before, or without knowledge of, the commencement of a formal investigation of the particular violation by CBP. The statute of limitations for violations of Customs laws and regulations not involving fraud is five years from the date of the violation. For any non-fraudulent violations which occurred more than five years ago, a prior disclosure is not necessary and CBP will not be able to penalize the importer. For more recent violations, only disclosed errors receive protection. The prior disclosure itself may trigger CBP’s scrutiny of an importer’s other entries dating back five years for additional violations, making it prudent for an importer to evaluate the potential existence of additional errors during this period prior to submitting a new disclosure.
A prior disclosure usually takes the form of a letter describing the circumstances of the violations and quantifying the resulting loss of revenue to CBP. A simple disclosure may be completed in one step, while a more complex set of violations may be addressed with an initial disclosure describing preliminary findings and a subsequent perfection with complete findings. In either case, the final disclosure is usually accompanied by a physical check tendering the total amount of duties and interest owed to CBP, if applicable. It is recommended that importers use the opportunity of filing a prior disclosure to implement corrective actions to avoid repetition of the disclosed violations, including through a review of existing compliance practices and internal controls, and that they detail those corrective actions within the disclosure.
CBP’s Directive Concerning the Processing of Prior Disclosures
Because CBP’s management of prior disclosures has historically been decentralized, importers and import compliance professionals often have to navigate unwritten rules and expect inconsistent outcomes across ports. For example, ports have differed on how much time an importer will be afforded to complete a complex, two-step disclosure, how often the importer must make a showing of progress to receive additional time, and what that showing should include. Offices within CBP have also differed on whether and to what extent importers may offset duty underpayments with duty overpayments to reduce the total loss of revenue owed to the government in connection with a prior disclosure. Offices within CBP have also differed on how quickly they review perfected disclosures, lacked a consistent practice of notifying the importer when review begins, and been inconsistent about providing written notification to the importer that a disclosure has been accepted and closed out.
Late last year, CBP headquarters issued an internal guidance (“Directive”) which may help address importers’ frustration with CBP’s unwritten and inconsistent prior disclosure practices. A redacted version of the Directive was recently released to the trade community in response to a FOIA request. Despite some ambiguities, the Directive signals CBP’s efforts to start standardizing prior disclosure rules across U.S. ports.
Whether the Directive ultimately helps importers better navigate the prior disclosure process will depend in significant part on the agency’s implementation. The Directive is an internal document that CBP created to assist its personnel in evaluating and processing prior disclosures, which details the responsibilities of relevant CBP offices and outlines the procedure governing CBP’s internal handling of prior disclosures. While the information in the Directive provides a new degree of transparency to the public, it does not replace CBP’s existing regulations governing prior disclosures. At least initially, importers may be left looking for clues about how and whether the Directive is being followed by CBP, and whether processes are changing for the better overall. If implemented as drafted, importers may benefit from greater predictability regarding the stages of CBP’s processing of their prior disclosures and from a clearer pathway for elevating issues within CBP if needed. However, because some of the provisions in the guidelines contain ambiguities which will be subject to interpretation by CBP officials in the various offices and ports, it remains possible that outcomes in certain areas may remain port-dependent.
Of particular interest, the Directive includes several provisions that appear to increase importer transparency in the prior disclosure process, including instructions that:
- CBP’s Fines, Penalties and Forfeitures Officer (FPFO) must review requests for extension of time to perfect a disclosure and issue a response to the requesting party;
- the CBP Center Director must provide the disclosing party with a letter acknowledging receipt of the prior disclosure and identifying which Center (industry-focused office) is handling the disclosure, along with certain information explaining the offsetting procedures;
- the Cashier must deposit payment within one business day from the date of receipt and must send a receipt to the disclosing party;
- CBP must notify parties in writing of whether CBP accepts or denies the claim for prior disclosure treatment; and
- CBP must process and evaluate a prior disclosure during newly specified time periods.
While there is reason for optimism that the preceding changes will benefit importers, language in the Directive contains potentially significant ambiguities, the resolution of which will turn on how CBP implements and interprets the guidance over time. For example, CBP’s implementation of the Directive may negatively impact importers by restricting their ability to receive extensions of time for the completion of complex prior disclosures. Further, the Directive’s guidance surrounding CBP’s treatment of offsets and tariff exemptions may result in importers owing higher duties and fees in connection with a disclosure.
Prior disclosures can provide companies with an effective means to ensure proactive compliance with U.S. import requirements, but filing a prior disclosure is often a complicated and detail-oriented process. CBP’s Directive should give importers more transparency in the prior disclosure process, but may come at the cost of new restrictions on importers’ abilities to seek extensions, duty offsets, and tariff exemptions. It is essential that importers take note of this changing landscape and work with import compliance professionals to monitor CBP’s implementation of this Directive in the coming months to ensure their companies are best positioned for compliance.
Covington’s dedicated Customs and Import Compliance team in Washington, D.C. advises clients on regulations and processes governing prior disclosures and other import-related issues. Our team is well versed in the customs laws and have extensive experience helping clients with prior disclosure submissions and interfacing with CBP.
 U.S. Customs and Border Protection (“CBP”), Prior Disclosure: An Informed Compliance Publication (“Prior Disclosure: Informed Compliance”) 3 (2017).
 19 U.S.C. § 1592.
 Prior Disclosure: Informed Compliance at 7.
 19 U.S.C. § 1592(c)(4).
 Id. at § 1621.
 19 C.F.R § 162.74.
 See id.
 See id.
 CBP, Processing Prior Disclosure Submissions §§ 5.6.1, 5.1.7, 5.1.8, 5.3.1, 5.8.1, 5.10.1, CBP Directive No. 5350-020A (Nov. 17, 2021).
 Id. at § 5.6.1.
 Id. at § 8.