Of course it makes great sense for an alert importer to maximize its savings through duty planning and to examine whether sourcing through one of those countries enjoying a free trade relationship with the United States will work for it. But that same importer must remember that a strategic program that takes advantage of a free trade agreement (FTA) to lower duties is only as good as the importer’s ability to prove eligibility for the FTA. Stated otherwise, there is a direct proportionality between the efficacy of a savings regime and the ability to withstand an auditor’s demands for authentication.

But such a statement begs the question: What will the auditors demand? While the actual level of what constitutes acceptable proof may vary from one audit team to the next, experience tells us that an importer is best prepared to expect an audit team that is skeptical or even cynical about the process.

Some auditors insist on an across-the-board checklist approach to proving eligibility. For these auditors, if they could theoretically make use of certain kinds of documents, they will want to see them in all cases. Such a “laundry list” approach usually means that the importer is in for a very rough ride.

Some audit teams will insist on a level of cost accounting that would be appropriate only for the most sophisticated company. Proof of local origin may lie in the payroll roster of employees, time sheets, pay stubs, shift records of production, purchase orders and invoices for materials, parts or components, proofs of payment for those materials, monthly utility bills, bills and records of payment for local transportation, list of capital equipment at the factory—all tied in to the imported articles on a model-specific, and even production line-specific, basis. What is especially galling is that the auditors seek nothing less than the level of detail that would be expected in a constructed value case—and there is a general recognition by customs valuation experts that constructed value is rarely sought because the information is so hard to come by.

No one could seriously argue that auditors do not have the authority to examine eligibility issues thoroughly. An insistence by the auditors on all of the foregoing types of documentation may be warranted IF there is some basis for the origin of the goods being open to some question. In such a case of questionable origin—for example, there is no previous record of a local industry to make those products—the “drill down” by the auditors would be justified. But the problem is that some auditors will want to see these records in every case and merely because they can. This procrustean insistence should be resisted early and often.

What should an importer do if it is dealing with an audit team that wants to make a “federal case” of the audit?

First off, as noted above, the savvy importer will have anticipated and tried to gather as much of this documentation as possible—at least on a sampled basis. The importer might build into its purchase arrangement with the vendor a provision that the vendor will commit itself to maintain some of these records and make them available to the importer. Many vendors will be reluctant to provide such information to the purchaser because it will reveal the vendor’s costs as well as its profits.

One way to allay a vendor’s fear of being later squeezed by its customer is for the customer to acknowledge that it recognizes the sensitivity of the information. The customer must assure the vendor that the information will either go to a third party advisor and not come to the importer at all or, if it does go to the customer, it will be strictly segregated.

In the latter case, the information would be used solely in communication with Customs and will not migrate out of the department that is in dialogue with Customs, usually the supply chain or the import/export department. In short, this sensitive information will be walled off and will not make its way to the purchasing department, merchandising, the buyers or any others who will be negotiating prices with the vendor.

If the audit team asks for the information and it is not readily available—as is most often the case—the importer has a stark, upfront choice. Either the importer can convince the audit team to back down or the importer will begin what is usually a long, drawn out game of “monkey in the middle,” with the importer in the lead role.

The game goes like this—the importer will ask the vendor for information and documents—putting its email, fax, and document scanners as well as the express couriers on an overtime footing—and then send follow-ups to the vendor when the importer realizes that the vendor did not understand the request and/or when the auditors either reject the information or ask for follow up. Sometimes the importer’s buying agent gets to play as well.

This game can last many, many months and is guaranteed to eat up lots of time and could account for some significant deforestation besides. The game will end with the importer either satisfying Customs…or not.

If the importer wants to sit out the game, then it must really end the game before it begins. The importer must convince the auditors to withdraw their own request or get someone else in Customs to have the request withdrawn, especially if, as a matter of law, the importer can make its case without delving into the minutiae that the auditors are seeking. An especially frustrating fact of life is that the importer might well be able to convince the import specialists as well as other Customs officials at the port—up to and including the Port Director—that the auditors’ request is overkill and not wasteful of time for both the importer and Customs itself.

The frustration lies in the fact that the auditors really cannot be headed off by anyone at the port. The importer in this position must seek an Internal Advice (IA) from Customs Headquarters. The IA tracks back to the “matter of law” basis for the importer’s position. Unless the importer can get a hearing on the legal standard being applied, the importer may well be left with the nasty underside of the FTAs—convincing the auditors that the entries were entitled to the benefits of the FTA.