U.S. Customs and Border Protection has issued an alert under the auspices of its Customs Trade Partnership Against Terrorism program regarding illegal transshipping.
Background
The issue is an important one because the Trump administration has indicated that, under some of the preliminary trade agreements it has reached with several countries, U.S. imports of goods transshipped through those countries may be subject to an additional 40 percent tariff. Such a provision – widely seen as an attempt to prevent Chinese goods from circumventing higher tariffs when destined for the U.S. – has sparked discussion within the trade community about what “transshipped” might mean in this context.
According to the alert, transshipping is the process of transferring goods from one mode of transportation to another (often from one vessel or port to another) during their journey from origin to destination. While transshipping itself is legal and common in global trade logistics, “it becomes illegal when used deceptively to avoid duties, sanctions, or trade restrictions.”
Transshipment Practices
CBP states that it has observed a notable increase in transshipment activity as foreign exporters and U.S. importers attempt to circumvent trade enforcement measures. Two examples are “particularly prevalent:” (1) exporters routing products through third countries to mask the original country of origin, particularly when that country is subject to high tariffs or quotas, and (2) exporters trying to relabel Chinese-origin products as originating from nations subject to lower tariffs.
CBP has also seen “bad actors” attempting to falsely claim preferential tariff treatment (e.g., under USMCA or CAFTA-DR) through fraudulent certificates of origin or minimal processing. Other common practices are to intentionally undervalue the goods, misclassify the goods, or report incorrect quantities to reduce tariff liability (false declaration).
CBP notes that the industries and products that are often the focus for illegal transshipment practices include steel and aluminum, textiles and apparel, automobiles and auto parts, electronics, solar panels, and agriculture.
Red Flags
The alert urges CTPAT members to pay particular attention to some of the red flag indicators of illegal transshipment, including the following.
- no substantial transformation in the transshipping country
- country of origin labeling does not match manufacturing capabilities
- discrepancies in trade volume exports/imports reported to CBP
- routing through low-cost or FTA-friendly countries with no logical supply chain reason
- uncommon or overly complex transaction structure without a clear and legitimate commercial purpose or some reasonable justification
- business partner significantly deviates from its historical pattern of trade activity with dubious pricing of goods and services
Best Practices
The alert also highlights several best practices identified by the Bureau of Industry and Security to guard against the risks of diversion through transshipment trade.
- Companies should pay heightened attention to the red flag indicators on the BIS website and communicate any red flags to all divisions, branches, etc., particularly when an exporter denies a buyer’s order or a freight forwarder declines to provide export services for dual-use items.
- Exporters should seek to utilize only those trade facilitators/freight forwarders that administer sound export management and compliance programs that include best practices for transshipment.
- Companies should know their foreign customers by obtaining detailed information on their bona fides (credentials) to measure the risk of diversion.
- Companies should avoid routed export transactions when exporting and facilitating the movement of dual-use items unless a longstanding and trustworthy relationship has been built among the exporter, the foreign principal party in interest, and the FPPI’s U.S. agent.
- Companies should use information technology to the maximum extent feasible to augment "know your customer" and other due diligence measures in combating the threats of diversion and increase confidence that shipments will reach authorized end users for authorized end uses.
Ramifications
The alert states that CBP is responding to increases in illegal transshipment by intensifying targeting operations, increasing supply chain audits, and leveraging its Enforce and Protect Act authority to investigate evasion schemes (ST&R has reported on this latter trend here). CBP warns that illegal transshipment violates CBP regulations and may subject businesses to steep fines, seizure of valuable inventory, business disruption, loss of import privileges, and criminal charges. “Furthermore, once illegal transshipment is exposed,” the alert adds, “the company's reputation may suffer significant damage, customer trust may decline, and market share may shrink,” and companies that are members of CTPAT could be suspended or removed from the program.
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