COAC Bond Subcommittee

September 9, 2008

TSN -- Sheraton Tyson's Corner

Opening remarks:

Based on a telephone conversation that a COAC subcommittee member had
with CBP regarding the operations of the COAC Customs Bond Subcommittee,
the member asked CBP to explain the operating guidelines of this
subcommittee. CBP explained that this subcommittee had one official
meeting to date in which the participants were introduced and the group
went over the action items listed in the statement of work, SOW. Since
there was both trade and CBP participants at this meeting, notes were
taken and this gathering was deemed to be an official Bond Subcommittee
meeting.

CBP explained that the subcommittee is free to meet at any time without
CBP present and further discuss items from a previous meeting. When CBP
participates with other members of the COAC Bond Subcommittee, then
notes will be taken and the meeting is considered an official meeting of
the group. The official meeting notes are to be posted and made
available to the public on CBP's website.

Further discussion between CBP and subcommittee members acknowledged the
overall guiding factor that the official subcommittee work that is
completed, must be presented to the full COAC for complete membership
deliberation. Furthermore, regardless of the recommendations brought
forward by any subcommittee, the COAC Chairs can proceed as they deem
necessary. The member commented that if the COAC decided not to pursue
what he believed to be a worthwhile recommendation, he may not abandon
the matter and pursue working out the differences between CBP and trade
with the goal of future implementation.

CBP asked the subcommittee if there were any other agenda items in
addition to the four sent to all members in an email at least one week
prior to this meeting. There were no others. The meeting proceeded with
discussion on the four items.

Agenda Items:

1)  Benefits for ISA/C-TPAT participants -- reduced bond formula applied
    to their annual duties, taxes and fees.

2)  Bond instructions

3)  CBP's procedures for termination and replacement of continuous bonds

4)  Bond insufficiency letters based on bad importer address

Agenda Item 1

CBP kicked off this agenda topic saying that he was aware that CBP's
Office of International Trade (OT) distributed questions to the members
requesting data that needed to be considered when coming to a conclusion
regarding the overriding question: is a reduced bond formula for
ISA/C-TPAT participants a worthwhile incentive to participate in these
programs. CBP explained he was looking for a response from the trade.

A member responded that he sent out "Issues for the COAC Bond
Subcommittee" that OT drafted and the response was meager. When
addressing the questions, the companies answered by coming up with other
suggestions for benefits to ISA/C-TPAT participation. This implies that
a reduced bond formula is not a meaningful benefit for participation in
those programs.

A member solicited responses from all COAC members and 20 of the
"largest importers". When asked a second time (the first response was
very weak), the respondents had two main comments to the lower bond
formula proposal:

a)  sureties wouldn't lower premiums regardless of the lower formula,
    and

b)  textile/mass merchandise importers who are high duty payers, would
    like any kind of help reducing bond premiums.

Several COAC Bond subcommittee members disagreed with the statement that
sureties wouldn't lower the cost of the bond if CBP reduced the
percentage of duties and fees to be covered by a continuous bond. The
surety members acknowledged the fact that CBP would increase their risk
to collecting the revenue whereas the sureties would lessen the amount
they would be on the hook to pay.

A member said that another suggested benefit in the response was:
Allowing a company to change the liability amount on their continuous
bond by simply submitting a rider without presenting a new bond
application. CBP stated that this would not be possible without changes
to the regulations. A surety member also mentioned this would not be
possible without significant programming changes. Sureties would need to
be notified when a rider was submitted to change bond amount. The
subcommittee determined that this perceived "benefit" was a reaction to
the problems within the past year, related to terminating one bond and
replacing it with another, term and replace. The trade members of the
subcommittee agreed this is not the significant issue it once was, and
on these grounds, this suggestion may not be worth pursuing. CBP
admitted this idea may be worth pursuing but when ACE E-bond is
implemented it would not be necessary.

A subcommittee trade member acknowledged that there were once noteworthy
problems with term and replace of continuous bonds. A surety member
inquired to how wide spread this issue currently is. CBP said that very
few have been elevated to his level over the past eight months so it
must not be wide spread. The trade member commented that the official
time of 45 days has helped matters. On rare occasions when there was a
rejection to a new bond, over the last 8 months, his company did not
have a lapse of bond coverage. He was not sure how other filers are
utilizing this procedure, but would think that this problem has
diminished.

CBP stated that the Bond Team at Indianapolis has dedicated resources to
look into lapse of coverage issues. They believe this problem is not a
crisis, as many perceived it use to be. People have become better in
submitting their bond applications timely, i.e. filers are no longer
waiting until the last minute.

A subcommittee member stated that mass merchandise importers would find
it very beneficial if the bond formula was reduced from 10% to 5% of the
yearly duties taxes and fees since they do pay a great amount of duties
and fees. These mass merchandisers often import textiles which have high
rates of duty. A surety member commented that textile importers are
directed by CBP to secure bonds for 2% of the entered value of their
imported goods, which is significantly higher than the 10% of duties and
fees requirement. CBP stated that the Bond Division is working with
other entities within CBP to determine what a "Textile Importer" is.
This should be spelled out in the new Bond Directive that is currently
being written. CBP acknowledged that currently, they are accessing bond
sufficiency for all importers using the 10% requirement. CBP stated if
the importer secures a bond higher than what is required they do not
question that. A CBP participant at the meeting asked the sureties if
they question clients to determine if they are a "textile importer"? The
sureties do make these types of inquiries. A surety member mentioned
that he needs to tell CBP what the commodities are on the bond
application.

CBP commented that if we changed bond formulas for mass merchandisers
who are also "textile importers" it would make it more challenging to
identify which shipments would receive a reduced bond formula (from the
2% value rule) because they are CTPAT/ISA participants. CBP stated that
WalMart and Kmart import a lot of non textiles.

A surety member pointed out that the inconsistency he sees with offering
an ISA/C-TPAT participant a reduced bond amount, is that there is no
correlation between being in these program and their financial stability
to pay financial obligations. A trade member said that for C-TPAT CBP
does not look at a company's financial situation but they do for ISA.
And CBP wants to make sure the company has the processes in place, and
accounting measures that are in line with accepted accounting
principals, to make sure goods are classified and valued correctly and
duties are paid. The intention is to verify all this which would ensure
import compliance.

A COAC member continued that ISA participants have their internal
controls reviewed and approved and record metrics, and have processes to
ensure proper valuation and classification.

A surety member commented that the problem is that they may be compliant
in these matters, but the day someone goes bankrupt, the bond is blown
out of the water.

CBP acknowledged the government is already at risk. Government is
already accepted risk in regards to 45 days of receiving the duties owed
under the Periodic Monthly Statement program.

A COAC member added that due to Periodic Monthly Statement offered to
importers under the ACE program, if an importer goes bankrupt, there is
a large duty bill to be covered. Also another liability factor for CBP
is the 21 months a company has to do a reconciliation on imported
merchandise. They could accumulate thousands of dollars on these
reconciliation entries. Liquidated damages may come in to play for late
payments on PM Statement entries and recon entries. If a compliant
import becomes bankrupt and is hit with these situations, it can have a
huge financial obligation to cover.

The member subscribes to what he believes are stronger more meaningful
benefits for ISA members. He suggests focusing on big dollar issues for
example lessening penalty and liquidated damages amounts for ISA/C-TPAT
participants. These companies would fall under different mitigation
guidelines. He proposes a type of "Get out of Jail Free" card for prior
disclosures and a different formula applied for 592 cases. He mentioned
benefits under a carrier initiative program which gave credits for
future penalties. He contends this should apply on the importer side as
well.

A COAC member stated that the idea he would carry forward to the full
COAC is that, based on the feedback given to the subcommittee, importers
would want a reduction in bond amounts or reduction of 5%.

A surety member again emphasized that he believes it is not prudent for
CBP to lower the bond amount. He said that at this point in time, the
data is not there to back it up and say it's a good financial idea. He
emphasized that recently two PM Statement Importers went bankrupt.

A surety member shared a different surety perspective: he does not
oppose reducing the bond amount because that lessens the amount the
surety is liable for. He emphasized that all parties should focus on the
real issue - the risk.

An importer member expanded on the Importer Self Assessment perspective
by saying CBP Regulatory Audit worked with his company for three weeks
before allowing them in to ISA. This was a significant investment of
company resources. To keep in the program also requires significant
resources. A benefit for being ISA that Aaron would like to see is for
CBP to not require a check for bond sufficiency every couple months but
instead only once or twice a year. This would allow resources to engage
in other matters instead of analyzing bond sufficiency.

A COAC member stated that a mass merchandiser made a recommendation that
equates to the following: when a bond is reviewed for sufficiency, the
determined liability amount should not be rounded up if the liability
amount is over \$100,000. As an example, if CBP determined the company
had duties and fees during a 12 month period that required a \$110,000
bond, CBP would round that number down and allow the importer to secure
a \$100,000 bond. Currently, CBP rounds up, and in this instance since
bonds must be secured in \$100,000 increments once over \$100,000, the
company would need to get a \$200,000 bond which is in excess of what is
needed. CBP carried the example a bit further and surmised that a
\$149,000 bond would be rounded down to \$100,000 whereas a need for a
\$151,000 would be rounded to \$200,000.

CBP inquired as to whether importers were informed of the benefits, or
lack thereof, for ISA participants. He questioned why does CBP need to
come up with additional benefits.

A CBP meeting participant said that the ISA benefits are clearly
defined. One very noteworthy benefit is that a participating company is
removed from the CBP Regulatory Audit pool of importers to be audited. A
COAC member confirmed that in his company's experience, CBP has followed
through with that commitment.

CBP commented that it is a company's decision to participate and they
can evaluate the benefits they receive and make a decision to stop if
there are no benefits. CBP asked why this subcommittee is looking into
benefits for ISA/C-TPAT participants. A member suggested CBP needs more
benefits for these programs to sell it to others. Drawback Claims:
Reduce drawback bond

A COAC member mentioned other possible benefits such as a reduction of
the obligation to pay double the duties if a TIB is not properly closed
out. CBP stated that this is per the regulations.

The COAC member, after all the discussion, stressed that the
subcommittee still needs to consider benefits on bond reductions for ISA
/CTPAT participants.

A surety member proposed that CBP, to lessen their exposure of loss of
duties, increase bond amounts for PM Statement when a company is not a
CTPAT or ISA participant.

A surety member stated that he does not know of any surety that asks an
importer if they are CTPAT or ISA, because this does not relate to a
company's financial soundness and the risk to the surety to write a bond
for that importer. He stated that the issue is that these programs have
not been in place long enough to show if participation affects financial
risk.

After listening to all these ideas and recommendations, a COAC member
and two CBP attendees, agreed that they will come up with some type of
verbiage for the recommendations and determine how to go forward. They
will have an additional call after this meeting to discuss and then
eventually prepare something for the COAC in November.

Agenda item 2

Three surety members created a rough draft of the "General Instructions
for Filing Bonds". This seven page document was distributed to all
subcommittee members in attendance. All were asked to read this document
and submit any comments to a surety member in two weeks. The group will
have a call in on this particular topic soon after September 24^th^.

Agenda item 3

CBP discussed their new term and replace procedures which are spelled
out in a Draft document that was handed out to all attendees. CBP said
they met with Customs Surety Executive Committee, CSEC, the day before
and also gave them this Draft. CBP asked that everyone review the Draft
and submit comments to the Revenue Division of CBP by September 26. Don
Huber also asked to be copied.

CBP acknowledged that the trade had concerns over previous drafts of
this policy. One being CBP took a hard stance if the principal and
surety were not the same on the new bond as the terminated one, but now
CBP has said that is OK. CBP stated that any importer that receives a
"bond insufficiency" letter must comply 100%. And the Bond Team will
stay with their 45 day time frame. A surety member commented that the 45
days to replace the bond is helping tremendously in getting new bonds
activated instead of using single transaction bonds. CBP said that if an
importer submits a request for a new bond 30 days out, they should not
experience delays.

A COAC member stated that he will report at the TSN on Wednesday during
the plenary session that the bond term and replace issue is far less
prevalent than it once was and there are fewer negative effects
occurring. A subcommittee member confirmed that the majority of problems
have gone away. Time extension has helped. This gives trade more time to
get paper work to CBP. The COAC member said that his company has had no
occurrence of a lapse of bond coverage with the new time frame. Other
subcommittee members commended CBP for making concessions to this policy
and the timing.

Agenda item 4

CBP Bond Division will test a new "bad address" policy due to the fact
that they receive a great deal of returned mail because of incorrect
addresses for importers. Currently, the Bond Team renders any bond
insufficient that has a bad address (verified by undeliverable mail).
The new policy test will begin October 1 and works in this manner: When
mail is returned to the Bond Team because of a bad address, the surety
will be notified via a spreadsheet and given basically one week to
contact the importer, obtain the correct address, and then file the
appropriate bond rider and 5106 as needed. If the importer claims the
address they originally gave is correct, they must sign a statement
attesting to this. Any bad address that the surety does not correct in
the manner above will result in the bond will be rendered insufficient.
The Bond Team is looking for at least a 75% corrective response to this
new test policy and if that is not achieved this approach will be
scrapped and the Bond Team will return to the current "bad address"
process.

CBP and a surety member had a brief discussion regarding how ACE may be
able to assist sureties in assuring them addresses are correct. The
surety member mentioned the possibility of presenting a GIF (Great Idea
Form) for this functionality.

CBP mentioned that he presented this test policy at a recent Customs
Surety Executive Committee (CSEC) meeting. A COAC member asked if the
minutes of that meeting could be incorporated in these minutes. CBP was
not sure but discussion eventually lead to the conclusion they would not
be.

Miscellaneous items:

A COAC member inquired as to whether there were any other items that
needed to be discussed. CBP informed the group that there is a surety
that is getting out of the Customs bond business and as a result the
Bond Team is getting a large influx of termination and replacement
requests. They estimate receiving up to 25,000 over the next several
months. CBP wanted to make everyone aware that this will effect day to
day processing of bonds in that there will be delays. The member said
that he would give this information to the TSN on Wednesday.

Action items:

A COAC member and a CBP individual will put together a schedule for
upcoming conference calls to discuss some of the items addressed at this
meeting. The first call should take place during the week of September
29.

A COAC member and a couple people from CBP will work on the
recommendations of benefits to ISA/C-PAT participants so that they can
be ready for presentation at the COAC on November 20. This will require
at least one conference call.