There is so much more to Customs bonds than just financial underwriting. The complex system of laws, regulations and taxes that principals who are involved in international trade are expected to know and be familiar with can be daunting. In fact it is often the Customs specific risks that can greatly impact the underwriting terms and conditions of U.S. Customs bonds. One of the most impactful risks for an Importer bond would be anti-dumping and/or countervailing duties (ADD/CVD). Understanding the unique risks these duties pose and how they impact the liability for the surety can be vital for all parties involved.
Based on the additional liability ADD/CVD entries cause, it is not uncommon for a surety to require additional security, such as collateral and/or apply a higher rate in order to write these types of bonds. To appreciate why ADD/CVD can be so impactful on the underwriting terms for an account, one must first understand how “standard” transactions affect the surety’s liability. To that end, consider this example:
A builder decides to import building materials from an overseas supplier. The builder secures a continuous $50,000 importer bond, receives the goods and 10 days later pays the duty, taxes and fees to Customs. Customs must then begin the liquidation process whereby Customs determines the final computation and assessment of duties for an entry. This process takes a minimum of 314 days from the date of the transaction. Keep in mind the surety has liability equal to the full penalty amount of the bond for any transaction secured by the bond in a particular bond period. Because the surety will not receive a release from Customs it is standard practice for a surety to consider liquidation the “reasonable” determination as to their final liability for an entry transaction.
What if Customs determines the builder, as importer, paid the wrong amount at the time of entry? Upon liquidation of the transaction, Customs will send the builder a bill for the additional duty that is due. In the event the builder does not pay this duty the surety must pay Customs the duty and seek reimbursement from the builder. Typically, since liquidation of most “consumption” entries occurs within about a year from the date of the transaction, the surety will be in a good position to secure a recovery from the builder, since the builder will likely still be in business.
Now let’s consider how the type of merchandise and the country of origin can have a major impact on the surety’s liability. To demonstrate this, assume that the goods entered by the builder are subject to ADD/CVD. Because other government agencies, such as the Department of Commerce, are involved in determining these duties, the entry liquidation period is extended or suspended from the standard 314 day period to an indefinite period. This suspension of the liquidation process could take 10 years or more depending on the nature of the ADD/CVD case. Since the surety’s liability for an entry would be considered open until the entry has been liquidated, the suspension of the liquidation date effectively extends the surety’s exposure beyond the standard time frame which applies to most “consumption” entries. This can cause the surety a considerable amount of concern as now the surety must wait for an indefinite period to expire instead of being able to expect conclusion of the transaction in about a year. While the entry could liquidate with no additional duty due, it could also liquidate with a significant amount of additional duty due. Our office has experience in cases where the duty rate increased from 0% to over 300%. Under this scenario, the likelihood of recovery by the surety is impacted by the lapse of time from the original date of entry.
Using the same example, what if that the builder is a very active importer? Instead of importing only a limited amount of building materials from overseas, the builder decides to secure the majority of their materials from overseas. In this scenario the difficulties in establishing liability on a limited number of entries could be multiplied to hundreds of entry transactions in a given year.
Even after the bond is terminated the surety could potentially have multiple years of stacking liability for the bond that was in effect at the time the entries were made which would also have a long tail on that exposure for many years to come. Therefore, if additional security was posted in support of the bond, such as collateral, many sureties will retain the collateral until all entries secured under the bond have been liquidated.
As stated above; understanding the unique risks these duties pose and how they impact the liability for the surety can be vital for all parties involved and why underwriting terms are apt to be more stringent. Therefore, if you have any concerns or questions regarding ADD/CVD or any U.S. Customs specific risks, we encourage you to contact our office.