Striking the Balance: Managing Tariffs and Bond Stacking Liability

By Matt Zehner, VP, Surety Information & Analysis, Roanoke Insurance Group Inc.

Recently, my colleague Colleen introduced Tariffs and Bond Stacking Liability and the need for importers to monitor bond sufficiency on a regular basis, with the goal to avoid a short-notice demand from CBP to terminate and file a larger bond.  One significant reason to planning the timing of when to make use of a larger continuous bond is that by reducing the number of times the bond amount changes over time, the bond principal is able to minimize the accumulation of bond liability.  There are ancillary benefits to importers when the timing of terminating and replacing a continuous bond is planned in advance, such as coordinating the replacement in line with reconciliation periods (month-/quarter-end dates) and eliminating any gap where a bond is not in effect. A gap in continuous bond coverage may disrupt supply chains because of the inability to file ISFs, entries, and make entry dates changes on pre-filed cargo releases.

The greatest benefit of the Customs bond process in America is that cargo moves fluidly across the border separately from the deadlines when parties finalize their documentation and duty payments.  In situations when the importer fails to perform its CBP obligations, the surety is called upon to perform under the obligations and promises it agreed to when executing the bond. One slight difference is that, while an importer has a statutory obligation to pay all duties owed, the surety is only accountable to pay up to the limit of the bond.  Because of this, CBP constantly monitors hundreds of thousands of continuous bonds to identify those that are no longer compliant with How CBP Sets Bond Amounts.

When CBP determines a bond is insufficient, it gives joint notice to the bond principal and its surety, sets forth the new required minimum bond amount, and (very important) sets a 30-day deadline for compliance which involves terminating the insufficient bond and filing a new bond.  Since a bond termination requires advance notice of 15 days, this means the parties must initiate compliance (give notice of termination to CBP) within 15 days of when CBP dispatches the insufficiency notice.  An insufficient bond not timely replaced is rendered insufficient by CBP and is not available to secure new transactions, such as ISF filings and cargo releases.

In the same manner that filing multiple new bonds each year accelerates bond stacking which also causes a rapid accumulation of risk that the surety is supporting, maintaining bonds that are larger than necessary also causes that risk to accumulate too quickly.  The amount of a continuous bond represents the amount of risk the surety is undertaking on behalf of the bond principal, and, as it’s stated on the face of the CBP Bond Form (Form 301), this risk amount increases for each year, or part of a year, a bond is in effect.

Excerpt from the CBP Form 301, with red underline added to emphasize the text creating bond liability stacking.

Avoiding CBP bond insufficiency letters is good and there’s no better way than to have a bond amount larger than the required calculation.  A bond amount slightly larger works well, but an excessively large bond amount has its own ramifications.  A bond amount much larger than it needs to be can cause risk accumulation totals to be unnecessarily high.  Additionally, since bond premiums are based on the amount of the bond, the expense of bond premiums becomes larger than it might need to be.  This is similar to having a line of credit far in excess of what a firm may need, which incurs unnecessarily large commitment fees payable to the bank.  CBP only acts on insufficient bonds; CBP is not going to send notification to bond principals to inform them CBP feels their bond is significantly larger than it needs to be.  It’s the importer’s obligation to make this determination.

There is a zone, a sweet spot, for a bond amount that accomplishes the two goals of minimizing risk accumulation and maintaining bond sufficiency.  Keeping the bond amount within this zone requires continual attention and an understanding that the zone is quite often a moving target.  That sweet spot can be moved by many variables, some of which can be:

• seasonality and growth/decline of imports,
• sourcing changes,
• obtaining or losing duty preferences or exemptions, and
• any impact of antidumping or countervailing duty orders.

This doesn’t just apply to Activity Code 1 (import bonds), which are by far the most common continuous bond there is.  International carriers must keep sufficient Activity Code 3 bonds that must exceed multiples of unpaid monthly or quarterly user fee balances.  Fluctuations with a drawback program could mean using bond amounts that should change over time.

A surety continually monitors it’s accumulation of risk (bond amounts) importer by importer.  Only upon finality of liquidation coupled with the passage of more time will bond periods begin to drop out of the surety’s risk accumulation calculation.  Each surety has its own method of how it determines to measure risk accumulation and when it has reached its limit of risk.  The filing of an entry is merely the beginning of risk accumulation, and even entry liquidation doesn’t signify the end of risk because CBP can claw back an underpayment of duties on liquidated entries where that liquidation date is within the past 5 years.  This clawback (under 19 USC 1592) is not a frequent occurrence, but it can and does occur.

When a surety has reached its limit of risk accumulation for a bond principal, the surety either declines to provide more bonds or renewals or it will continue only with the support of holding collateral. Changing bond amounts multiple times a year causes the risk amount to accumulate to a level higher than it needs to be.  Similarly, bonds that are too large can cause the same consequences.  The goal is to find the bond amount that keeps you in the zone.

 At Roanoke, we specialize in helping businesses manage their bond programs effectively and provide tailored solutions to maintain compliance and mitigate financial exposure. If you’re ready to optimize your bond management strategy, reach out to our team of experts today to discover how we can support your success and keep you moving forward with confidence.

This post was previously published in the American Association of Exporters and Importers newsletter.

Disclaimer: This information is provided as a public service and for discussion of the subject in general. It is not to be construed as legal advice. Readers are urged to seek professional guidance from appropriate parties on all matters mentioned herein.