[Federal Register Volume 76, Number 206 (Tuesday, October 25, 2011)]
[Rules and Regulations]
[Pages 65953-65963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-27511]


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DEPARTMENT OF HOMELAND SECURITY

U.S. Customs and Border Protection

DEPARTMENT OF THE TREASURY

19 CFR Parts 162 and 163

[CBP Dec. 11-20; USCBP-2009-0029]
RIN 1515-AD65 (Formerly RIN 1505-AC00)


CBP Audit Procedures; Use of Sampling Methods and Offsetting of 
Overpayments and Over-Declarations

AGENCY: U.S. Customs and Border Protection, Department of Homeland 
Security; Department of the Treasury.

ACTION: Final rule.

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SUMMARY: This document amends the U.S. Customs and Border Protection 
(CBP) regulations by adding provisions for the use of sampling methods 
in CBP audits and prior disclosure cases and for the offsetting of 
overpayments and over-declarations when an audit involves a calculation 
of lost duties, taxes, or fees or monetary penalties under 19 U.S.C. 
1592. The sampling provision may be used by both CBP and private 
parties in certain circumstances. The offsetting provision is in 
accordance with CBP's authority under 19 U.S.C. 1509(b)(6).

DATES: This rule is effective December 27, 2011.

FOR FURTHER INFORMATION CONTACT: For Legal Aspects: Alan C. Cohen, 
Penalties Branch, Regulations and Rulings, Office of International 
Trade (202) 325-0062; For Audit and Operational Aspects: Keith Richard, 
Regulatory Audit, Office of International Trade, (704) 401-4701.

SUPPLEMENTARY INFORMATION: 

I. Background

    CBP is authorized to conduct audits under 19 U.S.C. 1509 (section 
1509) (sometimes referred to in this document as CBP audits or section 
1509 audits). The statute authorizes CBP to examine the records of, 
including conducting an audit of, parties subject to the agency's 
authority for the following purposes: ascertaining the correctness of 
any entry; determining the liability of any person for duty, fees, and 
taxes due, or which may be due, the United States; determining 
liability for fines and penalties; or insuring compliance with the laws 
of the United States administered by CBP. Under section 1509(b), 
specific procedures are set forth for conducting a formal audit 
authorized under the statute.
    On October 21, 2009, CBP published in the Federal Register (74 FR 
53964) a proposed rule to amend title 19 of the Code of Federal 
Regulations (19 CFR) pertaining to prior disclosure procedures and 
audit procedures by amending Sec. Sec.  162.74, 163.1, and 163.11 (19 
CFR 162.74, 163.1 and 163.11). The proposed amendments concerned the 
use of statistical sampling methods by CBP and private parties and the 
offsetting of overpayments of duties and fees or over-declarations of 
quantities or values on finally liquidated entries \1\ against 
underpayments or under-declarations on finally liquidated entries under 
certain prescribed circumstances. The proposed changes regarding 
sampling methods were designed to reflect in the regulations (19 CFR 
163.11) a practice recognized in both government and industry as the 
most practical and expeditious way to reliably assess voluminous 
numbers of transactions, such as are often encountered per audit in the 
modern commercial importation environment. A corresponding change was 
proposed to the CBP prior disclosure regulations (19 CFR 162.74) to 
reflect that sampling may be used by private parties submitting prior 
disclosures. The proposed changes regarding offsetting reflected the 
amendment made by the Trade Act of 2002 (``Trade Act'') (Pub. L. 107-
210, 116 Stat. 933 (2002)) to section 1509 pertaining to CBP audit 
procedures (19 CFR 163.11).
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    \1\ The term ``liquidation'' refers to the formal fixing of the 
terms of the entry by CBP. In liquidation, CBP fixes the 
appraisement, classification, and duties, taxes, and fees owed on 
imported merchandise (19 U.S.C. 1500). An entry is said to be 
``finally liquidated'' when the period for filing a protest under 19 
U.S.C. 1514 has expired. To protest the liquidation of an entry, the 
protest must be filed within 180 days of the date of liquidation (19 
U.S.C. 1514(c)(3)(A)).
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    Section 382 of the Trade Act amended section 1509(b) by adding the 
following paragraph (6):

    (6)(A) If, during the course of any audit conducted under this 
subsection, the Customs Service [now CBP] identifies overpayments of 
duties or fees or over-declarations of quantities or values that are 
within the time period and scope of the audit that the Customs 
Service [CBP] has defined, then in calculating the loss of revenue 
or monetary penalties under section 592 [of the Tariff Act of 1930, 
as amended; 19 U.S.C. 1592], the Customs Service [CBP] shall treat 
the overpayments or over-declarations on finally liquidated entries 
as an offset to any underpayments or under-declarations also 
identified on finally liquidated entries, if such overpayments or 
over-declarations were not made by the person being audited for the 
purpose of violating any provision of law.
    (B) Nothing in this paragraph shall be construed to authorize a 
refund not otherwise authorized under section 520 [of the Tariff Act 
of 1930, as amended, 19 U.S.C. 1520].

    The proposed amendments also included removal of the term 
``compliance assessments'' from 19 CFR Part 163 as the term has become 
superfluous as a result of CBP policy changes with respect to audits.

II. Discussion of Comments

    Comments were solicited on the proposed rule, and nine commenters 
responded. Collectively, the commenters raised numerous issues that CBP 
sets forth and responds to below.

A. Proposed Amendments Regarding Statistical Sampling

    Comment: One commenter asserted that there is no authority in the 
customs laws for CBP to employ statistical sampling in an audit and 
that customs laws and regulations require an entry-by-entry review.
    CBP response: CBP disagrees. Under section 1509, CBP is authorized 
to conduct audits of importers (and others subject to the customs laws 
and other laws enforced by CBP) to ensure compliance with the customs 
laws of the United States and other laws enforced by CBP. Section 1509 
does not specify or limit the methods CBP may use in conducting an 
audit, thereby leaving these decisions to CBP discretion. Statistical 
sampling is a legitimate and widely accepted method of examining vast 
amounts of data to produce reliable results. As pointed out in the 
proposed rule regarding the proposed offsetting amendments, Congress 
acknowledged that CBP has and retains the authority to define an 
audit's time period, scope, and methodology.\2\
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    \2\ In House Report 107-320 pertaining to the offsetting law, 
Congress provided that ``[a] government audit should be an even-
handed and neutral evaluation of a person's compliance with the law.
    * * * The Committee redrafted this provision on the basis of 
concerns from Customs [now CBP]. It is the Committee's intention 
that this provision shall not affect in any way Customs' [CBP's] 
current authority to define an audit's scope, time period, and 
methodology.'' While this report applies to the offsetting law, this 
statement of Congressional intent is relevant to CBP's audit 
authority.
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    Comment: Several commenters requested that CBP provide audit 
guidelines and/or an informed compliance publication on statistical 
sampling that includes information on statistical sampling factors and 
parameters used by CBP in audits. These aids would help importers 
understand statistical sampling and effectively apply sampling in 
internal audits and prior disclosures.

[[Page 65954]]

    CBP response: CBP cannot provide specific guidance regarding 
sampling parameters because assessing sampling risk and establishing 
sampling parameters involve the auditor's professional judgment applied 
on a case-by-case basis to the unique facts of a specific audit 
situation. However, information and basic guidelines on statistical 
sampling and auditing are currently provided as part of the Focused 
Assessment Program (FAP) on the CBP Web site at http://cbp.gov/xp/cgov/trade/trade_programs/audits/focused_assessment/fap_documents/. The 
Web site information will eventually be removed, and CBP will publish 
an informed compliance document following the effective date of this 
rule. As set forth in the proposed rule, CBP expects private parties to 
employ a sampling plan and sampling procedures that are consistent with 
generally recognized sampling approaches. A number of commercial 
statistical sampling programs are available for guidance on sampling in 
addition to the above mentioned sources. CBP may reject a private 
party's sampling plan and/or methodology if it is not consistent with 
generally recognized sampling approaches.
    For purposes of clarity, CBP is adding to the regulation a 
description of ``projection,'' which refers to the application of the 
sampling results to the universe of transactions identified as within 
the time period and scope of the audit. Accordingly, a new paragraph 
(c)(2) under Sec.  163.11 is added in this final rule, and paragraph 
(c)(2) of proposed Sec.  163.11 is redesignated as paragraph (c)(3) in 
this final rule.
    Comment: One commenter asserted that statistical sampling of 
entries and projection will not produce accurate audits unless an audit 
takes into account the specifics for each transaction, such as 
circumstances of sale, relationship of the seller to the buyer, related 
parties versus non-related parties, trade preference program 
transaction, etc.
    CBP response: CBP conducts performance audits in accordance with 
generally accepted government audit standards (GAGAS) issued by the 
Government Accountability Office (GAO), which can be found on the GAO 
Web site at http://www.gao.gov/govaud/ybk01.htm. CBP auditors apply 
their professional judgment in establishing and executing sampling 
plans based on the particular factors, or relevant specifics, involved 
in a given audit situation. CBP auditors will apply appropriate 
sampling techniques, on a case-by-case basis, that address the 
commenter's concern. CBP is committed to employing sampling in 
accordance with widely accepted professional standards and best 
practices to ensure the efficiency and accuracy of audits that employ 
sampling.
    Comment: One commenter requested that CBP clarify whether CBP will 
use statistical sampling to calculate penalties under 19 U.S.C. 1592 
and the circumstances under which it may do so.
    CBP response: As set forth in the proposed regulations and this 
final rule, CBP may use statistical sampling in an audit in 
circumstances it determines are appropriate for its use under section 
1509, including the calculation of lost duties and/or monetary 
penalties under 19 U.S.C. 1592 (section 1592) or lost revenue and 
monetary penalties under 19 U.S.C. 1593a (section 1593a). In some 
circumstances, CBP may determine that an entry-by-entry review and 
calculation are more appropriate to the situation. CBP notes that use 
of sampling is not strictly limited to section 1509 audits (unlike 
offsetting which is so limited), but its use will be concentrated in 
the audit program.
    Comment: One commenter suggested that CBP's use of sampling and 
projection to calculate penalties under section 1592 in an audit 
context should be subject to agreement by the audited party prior to 
commencement of the audit.
    CBP response: Pursuant to section 1509, and as set forth in this 
final rule (19 CFR 163.11), CBP has sole discretion to determine the 
audit's methodology: either entry-by-entry, statistical sampling or, in 
some circumstances, both. Statistical sampling is a widely accepted and 
legitimate method of examining extensive quantities of data in an audit 
context and includes, by definition, projection of sample results to 
the universe of transactions set forth in the sampling plan. Neither 
the statute nor the regulations subject CBP's authority to determine an 
audit's methodology to the concurrence of the audited entity. In 
accordance with the proposed regulation and this final rule (Sec.  
163.11(c)(1)), CBP and the audited entity will discuss the specifics of 
the sampling plan before commencement of the audit; however, CBP's 
authority to conduct the audit or employ a statistical sampling method 
is not dependent on the audited entity's concurrence or its acceptance 
of the sampling plan.
    Comment: One commenter inquired whether the reduced penalties for 
prior disclosure would apply to projected violations (lost duty or 
revenue) where the audited entity makes a prior disclosure of a 
violation during a CBP audit.
    CBP response: In most cases, the penalty for prior disclosure is 
based on the lost duty or lost revenue amount (interest on that 
amount). Thus, assuming that the prior disclosure meets all 
requirements and that CBP has approved the sampling results, including 
the projection as applied, the reduced penalty for the prior disclosure 
would apply to the lost duty or revenue as calculated, either by CBP or 
by the claimant with CBP approval. (See 19 CFR Part 171, App. B.)
    Comment: One commenter claimed that statistical sampling will not 
reduce the cost to audited entities because the audit scope will be 
expanded to multiple years, thus requiring the audited entity to expend 
additional resources.
    CBP response: CBP disagrees. Audits already cover multiple years, 
whether the review method is entry-by-entry or statistical sampling. 
The review of entries over a particular time period will be less costly 
when sampling is employed because fewer entries are actually examined 
by CBP, thus requiring less audit time on the audited entity's 
premises, less time required of the audited entity to pull supporting 
records and documents, and less time required from audited entity 
personnel.
    Comment: One commenter asserted that statistical sampling should be 
utilized only to conduct annual audits of the audited entity and that 
expanded-scope audits by CBP as a result of statistical sampling should 
be limited to violations of 19 U.S.C. 1592 and/or 1593(a) that are 
discovered in the course of single-year audits.
    CBP response: CBP disagrees. First, the scope of audits will not be 
expanded due to CBP's use of statistical sampling methods. Some audits 
cover multiple years whether the method of review is entry-by-entry or 
sampling. Second, it is within CBP's discretion to determine its audit 
program goals in accordance with agency priorities. That discretion 
includes determining the purpose and the time period and scope of 
audits. CBP will not adopt this limiting formula for implementing its 
audit program.
    Comment: One commenter requested that CBP provide criteria for 
determining when an entry-by-entry or statistical sampling method is 
appropriate for an audit and asserted that CBP should not be able to 
change the audit's method midstream, before completing the audit.
    CBP response: The decision regarding use of entry-by-entry or 
statistical sampling methodology in an audit is dependent on the unique 
circumstances involved and is therefore a matter of professional 
judgment. CBP auditors

[[Page 65955]]

will exercise that judgment on a case-by-case basis based on 
information and data available to CBP. Proposed Sec.  163.11(c)(2), 
adopted without change as Sec.  163.11(c)(3) in this final rule, 
provides general guidance on when sampling methods are appropriate: 
Review of 100% of the entries/transactions is impossible or impractical 
in the circumstances; the sampling plan is prepared in accordance with 
generally recognized sampling procedures; and the sampling procedure is 
executed in accordance with the sampling plan. The decision to employ 
sampling or entry-by-entry review is solely within the auditor's 
discretion.
    Regarding changing methodology during the course of an audit, the 
auditor may encounter circumstances that were unknown when the sampling 
plan was created. The new circumstances may require changing the audit 
method from sampling to entry-by-entry, or vice-versa, in order to 
properly complete the audit. In some circumstances (see next comment 
response), CBP may expand the audit, either to address a disclosure 
presented by the audited entity during the course of the audit or to 
examine additional entries due to new circumstances. This may result in 
a change in the audit methodology or a different methodology applied to 
the expanded segment of the audit.
    Comment: A commenter inquired whether the proposed regulations 
permit CBP to go outside the sampling plan to examine entries and, if 
so, under what circumstances may CBP do so.
    CBP response: Generally, CBP will stay within the sampling plan. In 
some circumstances, the auditors may discover information or problems 
that warrant an expansion of the audit and a corresponding adjustment 
of the sampling plan if necessary. The amended regulations do not 
specify when CBP may expand the audit, as the various circumstances 
that may warrant an expansion or other adjustment cannot be captured 
categorically and evaluation of these circumstances must be left to the 
observation and professional judgment of the auditors involved. Two 
examples of when circumstances may warrant an expansion of the audit 
are where the audited entity requests approval to do self-testing of 
entries that do not fall within the sampling plan or where it presents 
a prior disclosure during the course of the audit. Again, expanding the 
audit will be at CBP discretion.
    Comment: One commenter asserted that the inapplicability of 
``finality of liquidation'' in proposed Sec.  163.11(c)(1) is not 
supported by the law or the intent of Congress because it concerns only 
audits conducted to identify lost duty under section 1592.
    CBP response: CBP disagrees. CBP may examine finally liquidated 
entries in an audit for the purpose of either determining compliance 
with applicable laws and regulations or identifying lost duties or 
revenue. Pursuant to sections 1592(d) and 1593a(d), CBP may demand 
payment of lost duties or revenues, respectively, and impose 
appropriate penalties relative to violations discovered in finally 
liquidated entries, notwithstanding the finality of liquidation rule.
    Comment: One commenter requested that CBP define its supervisory 
role in self-testing.
    CBP response: As used in the context of proposed Sec.  163.11(c)(3) 
(redesignated as Sec.  163.11(c)(4) in this final rule), CBP 
supervision means that CBP auditors will determine whether to approve 
the audited entity's request to do self-testing and whether the 
parameters of the sampling plan (including time period and scope), 
directing the execution of the sampling plan, and evaluating and 
verifying the sampling plan's execution and results. CBP may either 
provide the sampling plan to the audited entity for its execution or 
permit the audited entity to develop its own plan, with the auditors' 
direction, and present the plan to the auditors for acceptance prior to 
execution.

B. Proposed Amendment Regarding the Audited Entity's Waiver of the 
Ability To Object to the Sampling Plan and/or Methodology

    Comments: Most commenters raised objections to the waiver provision 
of proposed Sec.  163.11(c)(1), under which an audited entity, prior to 
commencement of the audit work that involves sampling,\3\ would waive 
its ability to contest CBP's sampling plan and methodology once the 
parties have discussed and accepted it. Some of these comments also 
cited proposed Sec.  162.74(j), since it permits sampling in a prior 
disclosure. The primary objections and points are represented in the 
following comments and responded to further below:
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    \3\ The use of sampling (or its possible use) will be discussed 
at the audit's opening conference, but normally cannot be discussed 
in detail until the audit work has begun and the auditors have been 
able to observe facts and circumstances involved in the particular 
audited entity's situation.
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    (a) An audited entity should not be limited to challenging only 
computational and clerical errors and should be allowed to challenge 
CBP's sampling plan, methodology, and results to ensure that the 
proposed sampling plan was actually implemented as proposed and that 
the results were correctly analyzed and presented. An audited entity's 
waiver of its ability to appeal or challenge CBP's findings would 
likely result in the unwillingness of audited entities to accept CBP's 
statistical sampling plan.
    (b) Limiting an audited entity's right to challenge only 
computational and clerical errors is too narrow and would result in the 
audited entity waiving its right to challenge allegations of 
substantive and material errors, such as, for example, CBP allegations 
of misclassification, undervaluation, etc., and violations of sections 
1592 or 1593a.
    (c) The waiver is a violation of Congressional intent for even-
handed audits.
    (d) The regulation should reflect that once the parties accept the 
sampling plan, CBP waives its ability to subsequently contest the 
sampling plan's validity and methodology and, with the exception of 
fraud, waives its ability to review transactions outside the sampling 
plan for the purpose of determining the total loss of duties, taxes, 
and fees within the audit period and scope.
    (e) The waiver presents due process and fairness concerns, as CBP's 
projection of underpayments (i.e., violations) will result in a 
calculation of lost duty/revenue for entries that CBP has not examined, 
while the audited entity will have waived its ability to contest, 
administratively and judicially, what it believes may be CBP's failure 
to identify overpayments or its misidentification of lost duty or 
revenue.
    (f) The regulations should clearly identify what is being waived 
and what is not being waived.
    (g) The regulations should provide a procedure that would allow an 
audited entity the opportunity to be heard and to exhaust its available 
administrative and/or judicial challenges to violations alleged by CBP 
from the transactions actually examined.
    (h) Proposed Sec.  162.74(j) may be interpreted to bind the 
disclosing party to the sampling plan and methodology initially 
submitted with the prior disclosure without providing for an 
opportunity to modify and cure defects in the sampling before CBP makes 
its determination on the sampling results.
    (i) An audited entity performing self-testing using an agreed upon 
sampling plan should also be able to demonstrate facts to contest the 
validity and/or methodology of that plan, and to propose remedies, 
before CBP makes a determination on the results.

[[Page 65956]]

    (j) CBP should clarify in the regulation that the waiver must be in 
writing and must be signed by a person with authority to make the 
waiver, such as an officer of the entity or other person with authority 
to sign it. If a corporation, the signed waiver should be accompanied 
by a board resolution or similar authorization.
    (k) With respect to any dispute between CBP and the audited entity 
in the Court of International Trade, CBP's final calculation of the 
lost duty or revenue owed based on the projection of the sampling 
plan's results is not binding on the court.
    CBP response: CBP believes that most of the concerns raised by the 
commenters, including those regarding due process, fairness, even-
handedness, and waiving the right to challenge substantive findings or 
allegations, can be resolved with a fuller explanation of the waiver. 
The waiver takes effect when the audited entity accepts the sampling 
plan and methodology after having discussed it with CBP auditors. (This 
also applies when an audited entity has been authorized to do self-
testing in an audit.) The waiver, which must be in writing (see below), 
is designed primarily to avoid the contention and delay that could 
result from disputes over the sampling plan and methodology at the end 
of an audit, and to later avoid a protracted battle of sampling experts 
in any administrative or judicial proceeding concerning the details of 
a sampling approach that both parties had agreed to previously.
    It is noted, however, that the waiver is limited. The audited 
entity would be waiving only its ability to contest the sampling and 
methodology employed in the audit. The audited entity would not be 
waiving its ability to raise substantive objections it may have 
concerning the audit's underlying findings of violations of section 
1592 (false statements in an entry regarding classification, valuation, 
etc., or failure to have required documentation) or violations of 
section 1593a (false drawback claims). As has always been the case 
where an audited entity has substantive disagreements with CBP's audit 
findings identifying violations of sections 1592 or 1593a and/or with 
the audit's lost duty or revenue calculations (that cannot be resolved 
through further discussions with, and working with, the auditors), the 
audited entity is not bound to tender payment in accordance with those 
findings and calculations. The audited entity instead may opt to pursue 
its substantive objections as the process continues through any ensuing 
administrative penalty action initiated by CBP with issuance of either 
a notice of liability for lost duty or revenue under sections 1592(d) 
or 1593a(d) or a prepenalty notice under sections 1592(b) or 1593a(b).
    Through the formal penalty action, the audited entity, now the 
subject of this statutory process, will have access to various 
procedures under the current CBP regulations to challenge allegations, 
including audit findings upon which allegations are based. Under Sec.  
162.79b of the regulations, the subject may seek CBP Headquarters 
review when a notice of liability is issued under either section 
1592(d) or 1593a(d). Under Sec.  171.14, the subject may seek CBP 
Headquarters advice regarding the penalty allegations when CBP issues a 
prepenalty notice under section 1592(b)(1) or 1593a(b)(1). Also, as 
always, the subject would be able to raise its substantive objections 
in response to the prepenalty notice and in response to a later-issued 
penalty notice under section 1592(b)(2) or 1593a(b)(2), thereby having 
two opportunities to challenge CBP's determinations/allegations. The 
latter response would be in the form of a petition filed under 19 
U.S.C. 1618 (section 1618). Where CBP decides the section 1618 petition 
to the subject's dissatisfaction, the subject may submit a supplemental 
petition under Sec.  171.61 and Sec.  171.62, still another opportunity 
to argue its case. At any time after CBP issues a decision on an 
initial petition, the subject may pursue an offer in compromise under 
19 U.S.C. 1617, putting forth its substantive objections to support the 
settlement offer. Finally, the subject may defend withholding tender of 
the penalty and/or lost duty or revenue, and continue its substantive 
objections, in a judicial enforcement action where all substantive 
issues will be heard.
    The sampling waiver also applies to prior disclosures submitted 
outside the context of a CBP audit under Sec.  162.74(j) and Sec.  
163.11(c)(5) of this final rule, when the prior disclosure is reviewed 
by CBP's Office of International Trade, Regulatory Audit (RA). All such 
prior disclosures will be reviewed by RA in some form (although any 
claiming offsetting will get RA review; see comment response further 
below). Often, with these prior disclosures, the claimant and RA will 
have the opportunity to discuss any sampling proposed by the claimant 
after the initial disclosure is submitted.\4\ The claimant's acceptance 
of the sampling approach arrived at through these discussions with RA 
constitutes the waiver, as limited per the discussion above. In this 
context, a claimant may request that CBP calculate the lost duty/
revenue under Sec.  162.74(c) and may seek CBP Headquarters review of 
the field office's calculation (subject to limitations, such as a 
minimum monetary amount and the statute of limitations), at which time 
the claimant can raise its substantive objections to the underlying CBP 
allegations involved.
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    \4\ To establish the basic elements of the prior disclosure 
claim before CBP initiates an investigation, claimants will often 
submit the prior disclosure letter to disclose the circumstances of 
the violation and request an extension to finalize the calculation 
and submit lost duties/revenue. In discussions with CBP, the 
claimant may propose a sampling plan, work with CBP to develop one, 
or explain one that it has already worked through (without 
finalizing the calculation).
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    Thus, under the proposed regulation, and as adopted in this final 
rule, an audited entity, or prior disclosure claimant in the 
circumstances described above, waives its ability to object to the 
sampling and methodology to which it agreed, but does not thereby 
forfeit its ability to challenge underlying substantive findings or 
allegations through available procedures under the regulations. CBP is 
modifying proposed Sec. Sec.  162.74(j) and 163.11(c) in this final 
rule to clarify the waiver provision with respect to what is not being 
waived by, respectively, a prior disclosure claimant or an audited 
entity.
    Regarding comments concerning the ability of a prior disclosure 
claimant, within or outside of a CBP audit, to cure defects in sampling 
once the disclosure is submitted to CBP, CBP, upon review of the 
sampling, will allow a reasonable opportunity for the claimant to 
resolve defects. It is recognized that in some cases the sampling will 
be so flawed it cannot form the basis of an acceptable prior disclosure 
or be cured through reasonable efforts.
    The recommendations that the regulations include a waiver by CBP of 
its ability to challenge or change the sampling or methodology or to go 
outside the sampling plan to examine entries, after there is acceptance 
of the sampling plan by the parties, cannot be adopted in this final 
rule. CBP is authorized under law to conduct audits to ensure 
compliance with the customs laws and other laws in order to protect the 
revenue and enforce various restrictions. The audit program is CBP's 
primary means for ensuring this compliance. It is a critical oversight 
and enforcement function. To effectively perform this function, CBP 
must have flexibility to make necessary adjustments while conducting 
audits.
    Regarding the recommendation that the regulations provide for a 
written waiver, CBP agrees that a written waiver would be appropriate. 
Therefore, CBP is

[[Page 65957]]

adding to the regulation in this final rule (19 CFR 163.11(c)(1)) that 
a management official with authority to bind the audited entity must 
sign the waiver on the audited entity's behalf. This official should 
have responsibility over the company's importation or trade matters 
and/or other matters involving the customs laws and regulations, or 
other trade related laws and regulations. The appropriate RA field 
director will have authority to sign for CBP. It is noted, however, 
that in some instances, the sampling plan and/or methodology must be 
adjusted or modified after it has been discussed and accepted or after 
it has been commenced. In these instances, further discussions of these 
adjustments/modifications would require another written waiver to 
evidence the audited entity's acceptance of the changes.

C. Proposed Amendments Regarding Offsetting

    Comment: Several commenters requested clarification as to whether 
an audited entity authorized (pre-approved) by CBP to conduct self-
testing in a CBP audit, under CBP supervision, may apply offsetting in 
a prior disclosure resulting from the self-testing.
    CBP response: An audited entity in the described circumstances 
(self-testing in a CBP audit) may apply offsetting in a prior 
disclosure. The offsetting will be approved where, upon review, RA 
determines that all the requirements for offsetting set forth in this 
final rule have been met and RA approves the audited entity's 
implementation and results of the self-testing, whether an entry-by-
entry or sampling methodology was used.
    Comment: Several commenters asserted that offsetting should be 
permitted for overpayments in prior disclosures that are not submitted 
in the context of a CBP audit. Several commenters also requested that 
CBP clarify, for purposes of offsetting, the circumstances under which 
CBP's verification or review of a prior disclosure submitted outside 
the context of a CBP audit would constitute a section 1509 audit as 
defined by the proposed regulation (Sec.  163.1(c)).
    CBP response: CBP's offsetting authority under section 
1509(b)(6)(A) was limited by Congress to audits conducted by CBP under 
section 1509 and to calculations of lost duty and monetary penalties 
under section 1592. The law does not include exceptions to this 
restriction. CBP cannot apply offsetting in an audit calculating lost 
revenue under section 1593a; nor can CBP apply offsetting in a prior 
disclosure submitted to CBP outside the context of a section 1509 audit 
unless CBP performs such an audit or review of the prior disclosure 
submission. The proposed regulation did not include a provision for 
offsetting in a prior disclosure submitted outside the context of a CBP 
audit, but that scenario was discussed in the proposed rule's preamble. 
Based on the many comments received on this issue and further 
consideration of the matter, CBP, in this final rule, is providing a 
regulatory process for ensuring that all of these prior disclosures are 
referred to RA for review and evaluation of the offsetting.
    Initially, it is noted that, consistent with the proposed rule, 
this final rule recognizes that some CBP audits will be full-scale 
reviews that follow all the procedural steps for a formal on-site 
review of an audited entity's records, such as would be appropriate to 
conduct a focused assessment audit, and others will be less formal and 
extensive for conducting audits with a more narrow purpose. The 
definition of ``audit'' set forth in proposed Sec.  163.1(c), and 
adopted with a minor change in this final rule, provides that a CBP 
audit ``may be as extensive or simple as CBP determines is warranted to 
achieve the audit's purpose under applicable laws and regulations.'' 
This concept is consistent with CBP's practice under current 
regulations. CBP has always had the flexibility to vary the approach of 
audits depending on the audit's purpose and the circumstances involved. 
Proposed Sec.  163.11(f) is modified in this final rule to reflect this 
flexibility, as the formal process of Sec.  163.11(a) is not conducive 
to a CBP RA review of a prior disclosure.
    The referenced change to the proposed definition of ``audit'' 
reflects a refining of terms, as the words ``examination or review'' 
have been replaced in this final rule with the word ``evaluation.'' 
Another modification to the definition is designed to clarify that the 
self-testing approved by CBP within the time period and scope of the 
audit includes the time period and scope as originally set and as 
sometimes later modified by CBP at its discretion where warranted.
    Under this final rule, all prior disclosures with offsetting 
submitted outside the context of a CBP audit will be referred to CBP's 
RA for a review and evaluation that will be deemed a section 1509 audit 
for offsetting purposes. Due to limits stemming from the availability 
of resources and the press of other priorities and responsibilities, RA 
will vary its approach to reviewing these prior disclosures depending 
on their circumstances. The extent of the review will be based on an 
internal evaluation of the prior disclosure's complexity and risk 
factors. The monetary value of the disclosure also may be a factor at 
times. In some instances, RA will review sufficient documentation 
submitted by the claimant plus CBP's own records and databases. In 
other instances, RA may contact the claimant for discussion or 
additional documentation. In still other instances, an on-site visit 
may be warranted, with a partial or full-scale review of entries/
documents depending on RA's assessment of the circumstances. Where RA 
determines that its review of the prior disclosure, whether limited or 
extensive, shows, to its satisfaction, that the claim and its 
calculations of lost duty meet all statutory and regulatory 
requirements regarding offsetting, and sampling where sampling is 
employed, offsetting may be applied, provided it meets the basic 
requirements of the prior disclosure regulations, as determined by the 
appropriate Fines, Penalties, and Forfeitures (FP&F) office.
    CBP notes that offsetting may not be allowed in every case, but CBP 
is committed to providing offsetting in accordance with the statute and 
this final rule whenever, under its procedures, it performs a section 
1509 audit/review involving lost duty calculations under section 1592.
    Comment: One commenter claimed that CBP's disallowance of 
offsetting under proposed Sec.  163.11(d)(5), in cases where identified 
underpayment entries involve fraud, violates Congressional intent for 
even-handed audits under the Trade Act. Under this paragraph, all 
properly identified overpayments would be disallowed for offsetting, 
while CBP would seek collection for all properly identified 
underpayments (violations). This commenter also asserted that the 
restriction on refunds under proposed Sec.  163.11(d)(8) violates this 
Congressional intent. Under that paragraph, refund payments are limited 
to properly identified overpayment entries that qualify for a refund 
under the requirements of 19 U.S.C. 1514 (section 1514) or 19 U.S.C. 
1520 (section 1520). These statutes provide for a refund where the 
audited party can identify an error correctable under one of their 
provisions.
    CBP response: CBP disagrees. Section 1509(b)(6)(A) precludes 
offsetting when overpayments/over-declarations were made for the 
purpose of violating any provision of law. Proposed Sec.  
163.11(d)(5)'s disallowance of offsetting when entries identified in an 
audit were made knowingly and intentionally (fraudulently) is self-
evident and consistent with CBP's

[[Page 65958]]

treatment of fraud violations under section 1592 as distinct from 
violations based on negligence or gross negligence. An importer should 
not be permitted to gain through offsetting in instances where it 
committed knowing and intentional violations. This provision is 
retained in this final rule as Sec.  163.11(d)(6).
    Regarding the disallowance of refunds under proposed Sec.  
163.11(d)(8) (Sec.  163.11(d)(9) in this final rule), it is in fact the 
intent of Congress to limit refund payments to specific, limited 
circumstances. Under section 1509(b)(6)(B), the offsetting provision is 
not to be construed as authorizing a refund that is not otherwise 
authorized under section 1520. This clearly means that a refund is 
payable only if the particular circumstances of the overpayment entries 
involved would independently meet the very specific circumstances set 
forth under any provision of section 1520 that involves liquidated 
entries, including any requirement to timely file a petition or claim 
for relief under the provision.
    It is noted that the proposed regulation and the regulation as 
amended in this final rule includes section 1514 in its refund 
restriction, along with the statutorily enumerated section 1520, on the 
grounds that Congress intended that CBP have the authority to pay a 
refund when an overpayment entry's circumstances constitute clerical 
error, mistake of fact, or other inadvertence now correctable under 
section 1514(a). At the time the offsetting law was enacted, relief for 
a clerical error, mistake of fact, or other inadvertence was provided 
for under section 1520.
    Comment: One commenter asserted that CBP should make clear that the 
inapplicability of the ``finality of liquidation'' rule is limited to 
an audit conducted to assess lost duties, including offsetting of 
overpayments, only in cases of 19 U.S.C. 1592. The commenter also 
requested that CBP clarify whether offsetting is permitted for 
overpayments on unliquidated entries identified within the time period 
and scope of the audit.
    CBP response: The proposed rule made clear that offsetting would 
apply only to finally liquidated entries identified in a CBP audit for 
calculating lost duties and monetary penalties under section 1592, 
provided that all requirements for offsetting are met, including that 
the identified overpayments are within the audit's time period and 
scope (and within the time period and scope of any sampling plan 
applied in accordance with proposed Sec.  163.11(c)) (proposed Sec.  
163.11(d)(3) is Sec.  163.11(d)(4) in this final rule). It also made 
clear that section 1592 permits the lost duty calculation on liquidated 
entries despite the fact that their liquidations have become final. 
This calculation of lost duties under section 1592 now includes 
offsetting of overpayments by virtue of section 1509(b)(6)(A).
    Regarding offsetting for unliquidated entries, it is possible that 
both unliquidated and liquidated entries may be properly identified in 
a CBP audit; however, section 1509(b)(6)(A) limits offsetting to 
overpayments/over-declarations identified on finally liquidated 
entries, provided that the overpayments/over-declarations were not made 
by the audited entity for the purpose of violating any provision of law 
and meet the other requirements of the statute.
    Comment: One commenter recommended that members of the Importer 
Self-Assessment Program (ISA) be allowed to benefit from offsetting.
    CBP response: The ISA program is a voluntary partnership program 
between CBP and companies operating under the customs laws, generally 
importers. An ISA program member receives certain benefits under the 
program, the most notable being removal from the pool of companies 
subject to focused assessment audits (the general audit program 
administered by RA for ensuring compliance with the customs laws and 
regulations). CBP has a high degree of confidence in member companies 
based on RA's initial evaluation of the companies' internal processes 
and systems during the application process. ISA members are companies 
with high compliance ratings, and CBP believes that the trust it has in 
members is warranted and the benefits enjoyed by members are earned and 
deserved. In addition to their initial evaluation by CBP in the 
application process, member companies must perform an annual self 
review of its customs operations that it submits to RA. The ISA annual 
self-review may occasionally result in the discovery of errors that 
lead to the filing of a prior disclosure.
    The benefit of offsetting in prior disclosures is available to ISA 
members just as it is available to any importer. As trusted members of 
the ISA program whose records, systems performance, and regular 
monitoring engender CBP confidence, ISA member prior disclosures may 
not require extensive CBP RA review, though that is a judgment for RA 
to make on a case-by-case basis.
    Comment: One commenter stated that because offsetting is an 
importer's right under the statute, the discretionary ``may'' should be 
changed to ``shall'' and ``will'' under, respectively, proposed Sec.  
163.11(d)(1) pertaining to CBP's authority to allow offsetting and 
proposed Sec.  163.11(d)(2) pertaining to an audited entity's 
offsetting when self-testing under CBP supervision.
    CBP response: CBP agrees that ``may'' should be changed. Therefore, 
``may'' has been changed to ``will'' in both provisions. CBP has also 
added language in both provisions to clarify that the approval of 
offsetting by CBP is dependent on all the requirements for offsetting 
in Sec.  163.11(d) being met.
    Comment: One commenter stated that proposed Sec.  163.11(d)(4) has 
an incorrect reference to paragraph (d)(4) that should instead 
reference paragraph (d)(3).
    CBP response: CBP agrees and has made the correction. However, in 
this final rule, proposed Sec.  163.11(d)(3) has been redesignated as 
Sec.  163.11(d)(4) and proposed Sec.  163.11(d)(4) has been 
redesignated as Sec.  163.11(d)(5). Thus, the reference is now to Sec.  
163.11(d)(4) and is found in Sec.  163.11(d)(5).

D. Proposed Amendments to Prior Disclosure Regulations

    Comment: One commenter requested that CBP modify proposed Sec.  
162.74(j) to require that CBP approve the statistical sampling plan 
proposed by a private party prior to submission of a prior disclosure. 
The commenter stated that failure by CBP to accept the sampling plan 
prior to submission could subject the private party to expensive and 
time consuming entry-by-entry analysis even though the statistical 
sampling analysis and lost duties/revenues have been tendered to CBP. 
One commenter inquired whether a prior disclosure claimant would have 
an opportunity to correct a prior disclosure sampling plan that CBP, 
upon post-submission review, is unable to accept due to a defect in the 
plan or its execution.
    CBP response: CBP's review of a prior disclosure with sampling may 
include, at CBP's discretion, reasonable efforts, as determined in the 
circumstances by CBP, to work with the private party to cure defects in 
the sampling plan or its execution. It is recognized that in some cases 
the sampling will be so flawed it cannot form the basis of an 
acceptable prior disclosure or be cured through reasonable efforts.
    In this regard, to effectively review a prior disclosure claimant's 
sampling and calculations or sampling/methodology proposal, CBP must be 
able to understand them. Therefore, the claimant must submit with its 
disclosure a brief but clear explanation of its sampling plan and 
methodology.

[[Page 65959]]

Proposed Sec.  162.74(j) has been modified accordingly in this final 
rule.
    Comment: One commenter inquired whether an audited entity 
authorized by CBP to conduct self-testing in a CBP audit can file a 
prior disclosure without triggering a formal investigation.
    CBP response: Where an audited entity performs self-testing during 
a CBP audit, the discussion that precedes the self-testing concerns the 
particulars involved, and it is not likely that an investigation would 
be triggered by such discussions. However, an audited entity is advised 
to be aware of the restrictions to prior disclosure set forth in the 
prior disclosure regulations. Under these regulations, a prior 
disclosure may be approved where the claimant discloses the 
circumstances of a violation before, or without knowledge of, the 
commencement of a formal investigation (see Sec. Sec.  162.74(a) and 
162.74(g)). Thus, where CBP auditors have already uncovered evidence of 
violations, created a writing recording those suspected violations 
(commencing a formal investigation), and raised those suspected 
violations with the audited entity (Sec.  162.74(i)(1)(i)), the 
restriction to prior disclosure eligibility may apply.

E. Proposed Amendment Regarding Restriction on Defense of Reasonable 
Care

    Comment: One commenter recommended that CBP clarify proposed Sec.  
163.11(e)'s restriction on the defense of ``reasonable care'' \5\ as 
applied to entries involved in a previous audit's sampling plan.
---------------------------------------------------------------------------

    \5\ Under 19 U.S.C. 1484(a)(1), an importer of record, or its 
agent, is obligated to exercise reasonable care in performing 
certain actions related to the entry of merchandise into the United 
States. Under 19 CFR Part 171, App. B, Para. (C)(1), a penalty is 
warranted where a person fails to exercise ``the degree of 
reasonable care and competence expected'' in the circumstances, and 
the failure results in a false statement or material omission under 
the statute. Generally, a showing that the importer acted with 
reasonable care is a defense to allegations of a negligence 
violation under 19 U.S.C. 1592 or 1593a.
---------------------------------------------------------------------------

    CBP response: Under proposed Sec.  163.11(e), the mere fact that an 
entry was within the time period and scope of a previous CBP audit that 
employed a sampling plan cannot be claimed as a defense in a later 
penalty action. The proposed provision is retained in this final rule 
without change.

III. Conclusion Regarding Comment Analysis and Additional Changes

    Based on the comments received and CBP's reconsideration of the 
various issues raised and discussed in this document, CBP is adopting 
as final the proposed rule's changes, with certain modifications and 
additions that are explained throughout the comment discussion section 
of this document. The major additions are as follows:
    (1) A requirement that a private party's prior disclosure that 
employs sampling must include an explanation of the sampling plan and 
methodology employed. The explanation must be adequate, to CBP's 
satisfaction, to permit CBP to understand the sampling and methodology 
employed. This reflects in the regulation a procedure that is already 
practiced by prior disclosure claimants. An explanation of the sampling 
and methodology is fundamental and inherent in a proper prior 
disclosure using sampling as a means of disclosing the circumstances of 
the violations involved. (See 19 CFR 162.74(j) and 163.11(c)(5) of this 
final rule.)
    (2) A requirement that a written waiver evidence a private party's 
acceptance of the sampling plan and methodology to be employed in an 
audit or, where appropriate, in circumstances of self-testing or prior 
disclosure as described in 19 CFR 163.11(c)(4) and (c)(5), 
respectively. The waiver limits the private party's objections to the 
sampling procedure to but does not limit any other substantive claims. 
The appropriate RA field director will sign for CBP. Acceptance of 
subsequent adjustments or modifications to the sampling plan or 
methodology also must be in writing. (See 19 CFR 163.11(c)(1) of this 
final rule.)
    (3) A provision under which CBP will refer to RA for review and 
evaluation all prior disclosures submitted outside the context of a CBP 
audit that apply or seek to apply offsetting under 19 CFR 163.11(d). 
(See 19 CFR 163.11(d)(3) of this final rule.) RA will approve the 
offsetting where it determines that the requirements of the statute and 
this final rule are satisfied.

IV. Statutory and Regulatory Reviews

A. Executive Order 12866

    Executive Order 12866 (Regulatory Planning and Review; September 
30, 1993) requires Federal agencies to conduct economic analyses of 
significant regulatory actions as a means to improve regulatory 
decision-making. Significant regulatory actions include those that may 
``(1) [h]ave an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local or tribal governments or communities; 
(2) [c]reate a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency; (3) [m]aterially alter the 
budgetary impact of entitlements, grants, user fees, or loan programs 
or the rights and obligations of recipients thereof; or (4) [r]aise 
novel legal or policy issues arising out of legal mandates, the 
President's priorities, or the principles set forth in this Executive 
Order.'' This rule does not meet any of the above criteria and is thus 
not a significant regulatory action. This rule has not been reviewed by 
the Office of Management and Budget (OMB) under this order.
    As described above, this final rule does not impose additional 
requirements or procedural burdens on entities affected and would not 
have an economic impact on them except in certain penalty cases in 
which the entities affected would realize a reduction in the amount of 
a penalty, or in the amount of lost revenue owed, due to the allowance 
of offsetting. CBP did not receive any comments that would contradict 
our conclusion that this rule is not a significant regulatory action or 
our assertion that to the extent this rule does have economic impacts, 
they will be marginally beneficial to the trade community and CBP.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) as amended by 
the Small Business Regulatory Enforcement and Fairness Act of 1996 
(SBREFA), requires federal agencies to examine the impact a rule would 
have on small entities. A small entity may be a small business; a small 
not-for-profit organization; or a small governmental jurisdiction 
(locality with fewer than 50,000 people).
    The entities affected by this final rule are importers and various 
other parties who are subject to a CBP audit under the CBP regulations. 
``Importers'' are not defined as a ``major industry'' by the Small 
Business Administration (SBA) and do not have a unique North American 
Industry Classification System (NAICS) code; rather, virtually all 
industries classified by SBA include entities that import goods and 
services into the United States. Thus, entities affected by this final 
rule would likely consist of the broad range of large, medium, and 
small businesses operating under the customs laws and other laws that 
CBP administers and enforces. These entities include, but are not 
limited to, importers, brokers, and freight forwarders, as well as 
other businesses that operate under drawback, bonded warehouse, and 
foreign trade zone procedures and those conducting various activities 
under bond.

[[Page 65960]]

    The finalized rule concerning audit procedures brings the CBP 
regulations up to date with CBP practices by explicitly providing for 
the use of sampling methods in audits conducted by CBP under 19 U.S.C. 
1509. The use of sampling methods is expected to facilitate and enhance 
the effectiveness of the CBP audit process for both CBP and private 
entities, thus making the process less burdensome for all involved. The 
finalized rule brings the regulations up to date with existing law 
regarding the offsetting of overpayments and over-declarations for the 
purpose of calculating loss of revenue or monetary penalties under 19 
U.S.C. 1592.
    Because these amendments to the regulations affect such a wide-
ranging group of entities involved in the importation of goods to the 
United States, the number of entities subject to this final rule would 
be considered ``substantial.'' Additionally, these changes to the 
regulations would confer a small, positive economic benefit to affected 
entities as a result of a more efficient audit process and, in some 
cases, a reduction of duties found owing to the government. Neither of 
these benefits, however, would rise to the level of being considered a 
``significant'' economic impact. We solicited comments on this 
conclusion and did not receive any comments contradicting our findings. 
Therefore, CBP certifies that this rule will not have a significant 
economic impact on a substantial number of small entities.

C. Paperwork Reduction Act

    The collections of information in part 163 of the current CBP 
regulations have already been approved by the Office of Management and 
Budget (OMB) in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507) and have been assigned OMB control number 1651-0076 
(General recordkeeping and record production requirements). This final 
rule does not involve a change to either the number of respondents or 
the burden estimates contained in the existing approved information 
collection. Affected persons are already required to provide relevant 
information or records requested by CBP during an audit procedure 
conducted under the authority of 19 U.S.C. 1509 (the CBP audit statute) 
and the CBP regulations. Records or information having to do with 
overpayments or over-declarations for offset purposes under paragraph 
(b)(6) of the statute fall within this existing requirement. An agency 
may not conduct or sponsor, and a person is not required to respond to, 
a collection of information unless the collection of information 
displays a valid control number assigned by OMB.

D. Signing Authority

    This regulation is being issued in accordance with 19 CFR 0.1(a)(1) 
pertaining to the Secretary of the Treasury's authority (or that of his 
or her delegate) to approve regulations pertaining to certain revenue 
functions.

List of Subjects

19 CFR Part 162

    Administrative practice and procedure, Customs duties and 
inspection, Penalties, Reporting and recordkeeping requirements.

19 CFR Part 163

    Administrative practice and procedure, Customs audits, Customs 
duties and inspection, Imports, Penalties, Reporting and recordkeeping 
requirements.

Amendments to the Regulations

    For the reasons set forth in the preamble, parts 162 and 163 of the 
CBP regulations (19 CFR Parts 162 and 163) are amended as set forth 
below:

PART 162--INSPECTION, SEARCH AND SEIZURE

0
1. The general authority citation for part 162 continues to read as 
follows:

    Authority:  5 U.S.C. 301; 19 U.S.C. 66, 1592, 1593a, 1624; 6 
U.S.C. 101; 8 U.S.C. 1324(b).
* * * * *
0
2. Section 162.74 is amended by adding new paragraph (j) to read as 
follows:


Sec.  162.74  Prior disclosure.

* * * * *
    (j) Prior disclosure using sampling. (1) A private party may use 
statistical sampling to ``disclose the circumstances of a violation'' 
and for calculation of lost duties, taxes, and fees or lost revenue for 
purposes of prior disclosure, provided that the statistical sampling 
satisfies the criteria in 19 CFR 163.11(c)(3). The prior disclosure 
must include an explanation of the sampling plan and methodology that 
meets with CBP's approval. The time period, scope, and any sampling 
plan employed by the private party, as well as the execution and 
results of the self-review, are subject to CBP review and approval. In 
accordance with 19 CFR 163.11(c)(1), in circumstances where the private 
party and CBP have discussed and accepted the sampling plan and its 
methodology, or adjustments to it, the private party submitting a prior 
disclosure employing sampling under this paragraph may not contest the 
validity of the sampling plan or its methodology, and challenges of the 
sampling itself will be limited to computational and clerical errors 
after CBP conducts its review and makes a determination. This is not a 
waiver of the private party's right to later contest substantive issues 
it may properly raise under applicable regulations, as provided in 19 
CFR 163.11(c)(1).
    (2) If a private party submits a prior disclosure claim employing 
sampling, CBP may review other transactions from the same time period 
and scope that are the subject of the prior disclosure.

PART 163--RECORDKEEPING

0
3. The general authority citation for part 163 continues to read as 
follows:

    Authority:  5 U.S.C. 301, 19 U.S.C. 66, 1484, 1508, 1509, 1510, 
1624.
* * * * *


Sec.  163.0  [Amended]

0
4. Section 163.0 is amended by removing from the second sentence the 
words, ``or compliance assessment''.
0
5. Section 163.1 is amended by:
0
a. Revising paragraph (c); and
0
b. Removing paragraph (e) and redesignating existing paragraphs (f) 
through (l) as paragraphs (e) through (k).
    The revision of Sec.  163.1(c) reads as follows:


Sec.  163.1  Definitions.

* * * * *
    (c) Audit. ``Audit'' means an evaluation by CBP under 19 U.S.C. 
1509 of records required to be maintained and/or produced by persons 
listed in Sec.  163.2, or pursuant to other applicable laws or 
regulations administered by CBP, for the purpose of furthering any 
investigation or review conducted to: ascertain the correctness of any 
entry; determine the liability of any person for duties, taxes, and 
fees due, or revenue due, or which may be due the United States; 
determine liability for fines, penalties, and forfeitures; ensure 
compliance with the laws of the United States administered by CBP; or 
determine that information submitted or required is accurate, complete, 
and in accordance with any laws and regulations administered or 
enforced by CBP. An audit does not include a quantity verification for 
a customs bonded warehouse or general purpose foreign trade zone. An 
audit may be as extensive or simple as CBP determines is warranted to 
achieve the audit's purpose under applicable laws and regulations.
* * * * *

[[Page 65961]]

Sec.  163.6  [Amended]

0
6. Section 163.6 is amended by removing the words ``or compliance 
assessment'' in paragraph (c)(1), first sentence, and in paragraph 
(c)(2), first sentence.


Sec.  163.7  [Amended]

0
7. Section 163.7 is amended by removing the words ``or compliance 
assessment'' in paragraph (a), first sentence.

0
8. Section 163.11 is revised to read as follows:


Sec.  163.11  Audit procedures.

    (a) General requirements. In conducting an audit under 19 U.S.C. 
1509(b), the CBP auditors, except as otherwise provided in paragraph 
(f) of this section, will:
    (1) Provide notice, telephonically and in writing, to the person to 
be audited of CBP's intention to conduct an audit and a reasonable 
estimate of the time to be required for the audit;
    (2) Inform the person who is to be the subject of the audit, in 
writing and before commencement of the audit, of that person's right to 
an entrance conference, at which time the objectives and records 
requirements of the audit, and any sampling plan to be employed or 
offsetting that may apply, will be explained and the estimated 
termination date of the audit will be set. Where a decision on a 
sampling plan and methodology is not made at the time of the entrance 
conference, CBP will discuss these matters with the person being 
audited as soon as possible after the discovery of facts and 
circumstances that warrant the possible need to employ sampling;
    (3) Provide a further estimate of any additional time for the audit 
if, during the course of the audit, it becomes apparent that additional 
time will be required;
    (4) Schedule a closing conference upon completion of the audit on-
site work to explain the preliminary results of the audit;
    (5) Complete a formal written audit report within 90 calendar days 
following the closing conference referred to in paragraph (a)(4) of 
this section, unless the Executive Director, Regulatory Audit, Office 
of International Trade, CBP Headquarters, provides written notice to 
the person audited of the reason for any delay and the anticipated 
completion date; and
    (6) After application of any disclosure exemptions contained in 5 
U.S.C. 552, send a copy of the formal written audit report to the 
person audited within 30 calendar days following completion of the 
report.
    (b) Petition procedures for failure to conduct closing conference. 
Except as otherwise provided in paragraph (f) of this section, if the 
estimated or actual termination date of the audit passes without a CBP 
auditor providing a closing conference to explain the results of the 
audit, the person audited may petition in writing for a closing 
conference to the Executive Director, Regulatory Audit, Office of 
International Trade, Customs and Border Protection, Washington, DC 
20229. Upon receipt of the request, the director will provide for the 
closing conference to be held within 15 calendar days after the date of 
receipt.
    (c) Use of statistical sampling in calculation of loss of duties or 
revenue. (1) General. In conducting an audit under this section, 
regardless of the finality of liquidation under 19 U.S.C. 1514, CBP 
auditors have the sole discretion to determine the time period and 
scope of the audit and will examine a sufficient number of 
transactions, as determined solely by CBP. In addition to examining all 
transactions to identify loss of duties, taxes, and fees under 19 
U.S.C. 1592 or loss of revenue under 19 U.S.C. 1593a, or to determine 
compliance with any other applicable customs laws or other laws 
enforced by CBP, CBP auditors, at their sole discretion, may use 
statistical sampling methods. During the audit, CBP auditors will 
explain the sampling plan and how the results of the sampling will be 
projected over the universe of transactions for purposes of calculating 
lost duties, taxes, and fees or lost revenue and, where appropriate, 
overpayments and over-declarations eligible for offsetting under 
paragraph (d) of this section. The person being audited and CBP will 
discuss the specifics of the sampling plan before audit work under the 
plan is commenced. Once the sampling plan is accepted, the audited 
person waives the ability to contest the validity of the sampling plan 
or its methodology at a later date and challenges of the sampling will 
be limited to challenging computational and clerical errors. CBP's 
authority to conduct the audit or employ statistical sampling is not 
dependent on the audited person's acceptance of the specifics of the 
sampling plan. An audited person's acceptance of the sampling plan and 
methodology must be in writing and signed by a management official with 
authority to bind the company in matters of trade, imports, and/or 
other affairs under the customs laws, CBP regulations, or other 
applicable laws. The audited person may submit the signed waiver to the 
CBP auditor. The appropriate field director, Regulatory Audit, will 
sign the waiver for CBP. Where the sampling plan or methodology is 
subsequently adjusted or modified, at CBP's discretion, acceptance of 
the adjustments or modifications also must be in writing and signed. 
This is not a waiver of the audited person's right to later contest 
substantive issues, such as misclassification, undervaluation, etc., 
that may properly be raised under applicable regulations, including in 
a request for CBP Headquarters advice under 19 CFR 171.14, a request 
for CBP Headquarters review under 19 CFR 162.74(c), a response to a 
prepenalty notice issued by CBP under 19 U.S.C. 1592(b)(1) or 19 U.S.C. 
1593a(b)(1), a petition submitted in response to a penalty notice 
issued by CBP under 19 U.S.C. 1592(b)(2) or 19 U.S.C. 1593a(b)(2) (19 
CFR part 171) and 19 U.S.C. 1618, a supplemental petition submitted 
under 19 CFR 171.61 and 171.62, or any action commenced in a court of 
proper jurisdiction.
    (2) Projection. For purposes of this section, ``projection'' of 
sampling results over the universe of transactions is the process by 
which the results obtained from the sample entries actually examined 
are applied to the universe of entries set within the time period and 
scope of the sampling plan to yield a reliable assessment of that which 
is sought to be ascertained or measured in the audit, including, but 
not limited to, lost duties or revenue, or overpayments or over-
declarations, as described in paragraph (d)(1) of this section.
    (3) When CBP uses statistical sampling. CBP auditors have the sole 
discretion to use statistical sampling techniques when:
    (i) Review of 100 percent of the transactions is impossible or 
impractical;
    (ii) The sampling plan is prepared in accordance with generally 
recognized sampling procedures; and
    (iii) The sampling procedure is executed in accordance with that 
plan.
    (4) Statistical sampling by audited persons under CBP supervision. 
CBP may authorize a person being audited to conduct, under CBP 
supervision, self-testing of its own transactions within the time 
period and scope of the audit as originally set or later modified by 
CBP at its discretion. Audited persons permitted in advance by CBP to 
conduct self-testing of certain transactions under CBP supervision 
within the time period and scope of a CBP audit may use statistical 
sampling methods, provided that the criteria contained in paragraph 
(c)(3) of this section are satisfied. CBP

[[Page 65962]]

will determine the time period and scope of the CBP-approved and 
supervised self-testing and will explain any sampling plan to be 
employed in accordance with paragraph (c)(1) of this section. The 
execution and results of the self-testing and the sampling plan are 
subject to CBP approval, and the audited person is subject to the 
waiver of paragraph (c)(1) of this section.
    (5) Statistical sampling by a private party submitting a prior 
disclosure. A private party conducting an independent review of certain 
transactions and a calculation of lost duties, taxes, and fees or lost 
revenue for purposes of prior disclosure, in accordance with 19 CFR 
162.74(j), may use statistical sampling, provided that the private 
party submits an explanation of the sampling plan and methodology 
employed and that the criteria in paragraph (c)(3) of this section are 
satisfied. Where the private party submits a prior disclosure employing 
statistical sampling, the time period, scope, and any sampling plan 
employed by the private party, as well as the execution and results of 
the self-review, are subject to CBP review and approval. Where CBP and 
the private party discuss and accept the sampling plan and methodology, 
or an adjustment to it, the waiver of paragraph (c)(1) of this section 
applies.
    (d) Offset of overpayments and over-declarations in 19 U.S.C. 1592 
penalty cases. (1) General. In conducting any audit authorized under 19 
U.S.C. 1509 and this section for the purpose of calculating the loss of 
duties, taxes, and fees or monetary penalty under any provision of 19 
U.S.C. 1592, CBP auditors identifying overpayments of duties or fees or 
over-declarations of quantities or values that are within the time 
period and scope of the audit, as established solely by CBP, will treat 
the overpayments or over-declarations on finally liquidated entries as 
an offset to any underpayments or under-declarations also identified on 
finally liquidated entries, provided that:
    (i) The identified overpayments or over-declarations were not made 
by the person being audited for the purpose of violating any provision 
of law, including laws other than customs laws,
    (ii) The identified underpayments or under-declarations were not 
made knowingly and intentionally, and
    (iii) All other requirements of this paragraph (d) are met.
    (2) When audited person conducts self-testing under CBP 
supervision. Offsetting will apply to self-testing conducted by an 
audited person under CBP supervision (i.e., during a CBP audit), 
provided that all requirements of this paragraph (d) are met, CBP 
approves the self-testing in advance and, upon review of the self-
testing, CBP approves its execution and results.
    (3) When a private party submits a prior disclosure. Offsetting 
will apply when a private party submits a prior disclosure, provided 
that the prior disclosure is in accordance with 19 CFR 162.74 and CBP 
approves the private party's self-review, including its execution and 
results. CBP's Office of International Trade, Regulatory Audit will 
review and evaluate all such prior disclosures and approve offsetting 
where it is satisfied that the requirements of 19 U.S.C. 1509(b)(6) and 
this paragraph (d) are met.
    (4) Time period and scope determined by CBP; projection when 
sampling employed. In conducting an audit under paragraph (d)(1) of 
this section or authorizing an audited person's self-testing as 
described in paragraph (d)(2) of this section, CBP will have the sole 
authority to determine the time period and scope of the audit. In 
conducting a review of a private party's prior disclosure as described 
in paragraph (d)(3) of this section, the time period and scope employed 
will be subject to CBP approval. In each of these circumstances, where 
statistical sampling is involved, CBP auditors will examine only the 
selected sample transactions. The results of the sample examination, 
with respect to properly identified overpayments and over-declarations 
and properly identified underpayments and under-declarations, will be 
projected over the universe of transactions to determine the total 
overpayments and over-declarations that are eligible for offsetting and 
to determine the total loss of duties, taxes, and fees.
    (5) Same acts, statements, omissions, or entries not required. 
Offsetting may be permitted where the overpayments or over-declarations 
were not made by the same acts, statements, or omissions that caused 
the underpayments or under-declarations, and is not limited to the same 
entries that evidence the underpayments or under-declarations, provided 
that they are within the time period and scope of the audit as 
established by CBP and as described in paragraph (d)(4) of this 
section.
    (6) Limitations. Offsetting will not be allowed with respect to 
specific overpayments or over-declarations made for the purpose of 
violating any provision of law, including laws other than customs laws. 
Offsetting will not be allowed with respect to overpayments or over-
declarations resulting from a failure to timely claim or establish a 
duty allowance or preference. Offsetting will be disallowed entirely 
where CBP determines that any underpayments or under-declarations 
identified for offsetting purposes were made knowingly and 
intentionally.
    (7) Audit report. Where overpayments or over-declarations have been 
identified in accordance with paragraph (d)(1) of this section, the 
audit report will state whether they have been made within the time 
period and scope of the audit.
    (8) Disallowance determinations referred to Fines, Penalties, and 
Forfeitures office. Any determination that offsets will be disallowed 
where overpayments/over-declarations were made for the purpose of 
violating any law, or where underpayments or under-declarations were 
made knowingly and intentionally, will be made by the appropriate 
Fines, Penalties, and Forfeitures (FP&F) office to which the issue was 
referred. CBP will notify the audited person of a determination whether 
to allow offsetting in whole or in part. The FP&F office will issue a 
notice of penalty under 19 U.S.C. 1592(b) and/or notice of liability 
for lost duties, taxes, and fees under 19 U.S.C. 1592(d) where it 
determines that such action is warranted. If the FP&F office issues a 
notice of penalty, the audited person may file a petition under 19 
U.S.C. 1592(b)(2), 19 U.S.C. 1618, and 19 CFR part 171 to challenge the 
action.
    (9) Refunds limited. An overpayment of duties and fees will only be 
credited toward a refund if the circumstances of the overpayment meet 
the requirements of 19 U.S.C. 1520 or the requirements of 19 U.S.C. 
1514(a) pertaining to clerical error, mistake of fact, or other 
inadvertence in any entry, liquidation, or reliquidation.
    (e) Sampling not evidence of reasonable care. The fact that entries 
were previously within the time period and scope of an audit conducted 
by CBP in which sampling was employed, in any circumstances described 
in this section, is not evidence of reasonable care by a violator in 
any subsequent action involving such entries.
    (f) Exception to procedures. The provisions of paragraph (a) of 
this section may not apply when a private party submits a prior 
disclosure under paragraph (d)(3) of this section. Paragraphs (a)(5), 
(a)(6), (b), (d)(8), and (d)(9) of this section do not apply once CBP 
and/or ICE commences an

[[Page 65963]]

investigation with respect to the issue(s) involved.

Alan D. Bersin,
Commissioner, Customs and Border Protection.
    Approved: October 19, 2011.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 2011-27511 Filed 10-24-11; 8:45 am]
BILLING CODE 9111-14-P