One of the many inconveniences of the additional tariffs implemented this year is their effect on the Customs bonds held by importers. Virtually all import entries must be covered by a bond, and all regular importers have or should have a continuous bond in place. Continuous bonds, also known as annual bonds, are used to cover Customs’ bond requirements for an importer’s entries over a 12-month period, beginning on the effective date. A continuous bond eliminates the need and expense of filing a single-entry bond with each importation. Under Customs regulations, a continuous bond must have a coverage amount equal to 10% of an importer’s annual Customs outlay. This amount covers all base duties, fees, and additional tariffs collected by Customs (simplified to ‘duties’ for this article).
To enforce the coverage requirement, Customs will regularly review all collections for an importer over the previous 12-month period. If this review shows that the payments are close to exceeding the bond coverage requirement, then Customs will notify the importer that their bond is insufficient for their level of imports and that a new bond with a higher coverage amount is required. This notice will indicate only the amount required to meet the coverage requirement, but this should not be taken as the coverage you may actually need. At this point, an importer should reassess their level of imports and the duty requirements they may have for the coming twelve months. There is little benefit—and added cost—in obtaining a new bond only to have it deemed insufficient in a few months. Within 30 days of the notification, Customs will terminate the current bond, and the importer will need to have their new bond in place to avoid a lapse in coverage. A lapse would mean that the importer would need to file single-entry bonds until their new continuous bond is in place. In addition to the added expense, this becomes problematic since surety companies will only allow an importer to file five single-entry bonds annually, and they may refuse to accept even one single-entry bond for a high-value shipment.
The minimum bond amount is $50,000 for a continuous bond, which covers up to $500,000 in annual Customs duties. Many, if not most, importers hold minimum bonds, and for years, this has not created problems for them. With the additional tariffs of at least 10% imposed since March, many bonds are being deemed insufficient. We are expecting that most of our regular importing clients, large and small, will face a bond insufficiency this year.
The added expense stems from the requirement to apply for a new, higher coverage bond before the expected expiration date is reached. An insufficiency occurs when the coverage level has been reached, and the surety considers the bond to have reached its saturation point; therefore, it is not eligible for any refunds based on the earlier-than-expected termination. As a result, you have now bought two bonds, and the second bond has a higher coverage level than the first. Secondly, the surety may require that an importer post collateral for high-value bonds. Normally, this is in the form of an irrevocable letter of credit, though some sureties will still hold cash. Either way, this is an expense to the importer.
Obviously, this process creates more work and time spent just to maintain the bond. There may be some back and forth with the surety or their underwriter, possibly necessitating the importer to submit their most recent audited financial statement and, in some cases, a requirement to provide collateral. We expect the number of importers asked to provide collateral will increase at a rate we have never experienced before.
We strongly recommend that importers review their expected Customs spend and compare it to their current bond coverage. Being proactive when an insufficiency looks imminent provides valuable time to prepare for obtaining the correct bond coverage, and avoiding a lapse is imperative for regular importers. When we are notified that an insufficiency is likely, we will pass that information on; however, under the current tariff environment, insufficiencies arrive quickly. Since May, we have already seen more notices for an actual or imminent insufficiency than we have experienced over the course of any previous year.
Best Regards,
Sam McClure, LCB
Director of Compliance & Customs Services