An importer that discovers it has been misclassifying a product, undervaluing entries, or claiming a free trade agreement it did not qualify for has two choices. It can fix the problem quietly going forward and hope. Or it can tell Customs and Border Protection first. The second choice has a name, prior disclosure, and a specific legal consequence: the penalty for the past entries is replaced, in most cases, by interest.
What the statute gives
Under 19 U.S.C. § 1592(c)(4), if a person discloses the circumstances of a violation before, or without knowledge of, the commencement of a formal investigation of that violation, the penalty is capped. For negligence and gross negligence, the penalty becomes the interest on the lost duties. For fraud, it becomes one times the loss of revenue, instead of up to the full domestic value of the goods. The duties themselves must still be paid, with interest, but the multiple that makes § 1592 frightening is gone.
The regulation that implements this is 19 C.F.R. § 162.74.
What a valid disclosure contains
The regulation is specific, and CBP reads it strictly. A disclosure must:
- Identify the class or kind of merchandise involved.
- Identify the importation, by entry number or by the ports and approximate dates of entry, for every entry affected.
- State the material false statements, omissions or acts, and explain how and when they occurred.
- Set out the true and accurate information that should have been provided, to the extent known.
The disclosure must be in writing, and it must be made to the CBP port or Center with jurisdiction over the entries. A verbal conversation with an import specialist is not a prior disclosure.
The thirty-day perfection period
Importers rarely know every affected entry on the day they discover the problem. The regulation allows for this. A disclosure can be filed with the information available and a statement that the rest will follow, and the discloser then has 30 days to perfect it. CBP can extend that period on request, and in practice does, for an importer that is visibly working through its records.
Within the same 30 days, or the extended period, the discloser must tender the actual loss of duties, taxes and fees, or make a deposit against it. A disclosure without a tender is not complete, and CBP can treat it as not having been made.
When the window closes
The protection depends on timing. A disclosure is prior only if it is made before a formal investigation has commenced, or if the discloser did not know that one had. The regulation treats an investigation as commenced on the date recorded in CBP’s own files, which the importer cannot see. What the importer can see is whether it has received a pre-penalty notice, a summons, a visit from Homeland Security Investigations, or a CF-28 that reads like an investigator wrote it.
A pre-penalty notice closes the window for the violations it describes. A routine CF-28 does not, but it is a signal that the question is being asked, and a disclosure filed after a CF-28 will be scrutinized for whether the importer already knew an investigation was under way. The safe reading is that the window is open until it is clearly closed, and that every day of delay is a day of risk.
The mistakes that void it
Four errors come up repeatedly.
Disclosing the symptom instead of the violation. An importer discloses that one product was misclassified when the real problem is a valuation method applied to everything it buys from a related supplier. The disclosure protects the classification error and nothing else.
Missing the tender. The duties are calculated, the letter goes out, and the check does not. The 30 days pass. The disclosure fails for lack of a tender.
Leaving out entries. The disclosure lists eighteen months of entries because that is what the broker could find. The violation went on for four years. The undisclosed entries are fully exposed, and the partial disclosure itself tells CBP where to look.
Saying too much about state of mind. A disclosure is required to state the circumstances. It is not required to characterize the violation as negligent, grossly negligent or fraudulent, and it should not volunteer facts that argue for the higher level.
The decision
Prior disclosure is not always right. If the error is small, isolated, already corrected and well outside any pattern, the cost of the disclosure can exceed the exposure. If the facts suggest fraud by a former employee, the disclosure can bring a criminal referral. Those judgments require a review of the entry data, the internal communications, and the five-year statute of limitations under 19 U.S.C. § 1621 before anything is filed.
What is nearly always wrong is doing nothing after discovering a systemic error. CBP’s data analytics find patterns that importers assume are invisible, and a penalty case that begins with the agency’s letter costs several times more than one that begins with the importer’s.