In-Bonds Shipments: A Security Vulnerability Waiting to be Exploited

In-bond shipments to and within the United Statesare shipments that are not intended to enter the commerce of the United States and, therefore, do not bear the requirement of payment of the appropriate import duties and taxes required under the law.

To ensure the US collects its duties in case an in-bond shipment does enter the commerce of the United States, Customs and Border Protection (CBP) requires the posting of an import bond as security to guarantee payment. Bonded cargo is carried in sealed containers or trailers. Ordinarily, these conveyances with their cargo have a final destination outside the United States, but can transit through the United States to a border port of export or to a US seaport for export.

In-bonds also could have a temporary destination in the United States but not technically within CBP’s jurisdiction in the United States, such as destinations in a Foreign Trade Zone (FTZ) or bonded warehouses.

For merchandise eventually entered into the commerce of the United States, an importer may have a “single transaction bond (STB)” for a single customs transaction or a continuous bond for successive transactions used for bonded refining warehouses, like smelting warehouses.

In-bonds classified as transportation and exportation (T&E) bonds, are bonded goods that must transit from one port of entry to a port of export. In-transit (IT) bonds can be used for the movement of bonded cargo to internal ports of entry such as Dallas, St. Louis or Charlotte where they are cleared and any obligated duties and fees are paid. Even the container’s transport and handling must be done by a bonded carrier.

All these bonds are surety or indemnity bonds that ensures CBP the payment of the scheduled duty listed in the Harmonized Tariff Schedule should the goods be lost, misdirected or fail to arrive at the port of export, bonded warehouse or foreign trade zone – or illegally entered into US commerce.

Given the nature of "in-bond" shipments transiting the United State, there is no government monitoring of its movement, or accessibility to the cargo. In 2008, I wrote about the vulnerability of this practice and the lack of oversight by CBP and the resulting security and fraud risks of this system.

Yet, three years later, and nothing has been done to address the security risks nor the potential fraud issues that have now become much more blatant and potentially dangerous.

In its April 17, 2007 audit report, Persistent Weaknesses in In-Bond Cargo System Impede Customs and Border Protection’s Ability to Address Revenue, Trade and Security Concerns, the Government Accountability Office (GAO) determined that CBP frequently does not follow up on shipments processed through the in-bond system.

GAO stated “the limited information available on in-bond cargo also impedes CBP efforts to manage security risks and ensure proper targeting of inspections. In-bond goods transit the United States with a security score based on manifest information and do not use more accurate and detailed entry type information to re-score until and unless the cargo enters US commerce. As a result, somehigher risk cargo may not be identified for inspection, and scarce inspection resources may be used for some lower risk cargo.”

Not only has CBP failed to address this security problem, it also has failed to address the import tax issue that costs the United States hundreds of millions of dollars in revenue, and raises the likelihood that contraband could move on to other US destinations and illegally enter the commerce of the nation, thereby avoiding import taxation – or duties.

That this has occurred was evidenced by CBP’s March 3, 2008 announcement of seizing more than $67 million dollars worth of clothing illegally brought to the United States via the in-bond system. The shipment was supposed to transit through the US Southwest to a Mexican destination.

Clearly, introducing contraband intothe US commercial system is a recognized problem. In fact, the Department of Homeland Security (DHS) established the Intellectual Property Right (IPR) Center to meet the counterfeit problem. IPR stated it “is to address the theft of innovation that threatens US economic stability and national security, undermines the competitiveness of US industry in world markets, and places the public’s health and safety at risk.”

IPR has the following partners working together for this purpose:

  • CBP;
  • The Food and Drug Administration Office of Criminal Investigations;
  • FBI;
  • US Postal Inspection Service;
  • Department of Commerce International Trade Administration;
  • Patent and Trademark Office;
  • Defense Criminal Investigative Service;
  • Naval Criminal Investigative Service;
  • Army Criminal Investigative Command Major Procurement Fraud Unit;
  • Consumer Product Safety Commission;
  • Inspector General’s Office from the General Services Administration;
  • Defense Logistics Agency Office of Inspector General;
  • Department of State;
  • Air Force Office of Special Investigations; and
  • Royal Canadian Mounted Police.

Along with these partners, Immigration and Customs Enforcement (ICE) has its office of Homeland Security Investigations International Affairs (HSI-IA), which represents the largest investigative law enforcement presence abroad for DHS. However, one hardly finds the word "in-bond" within the lexicon of DHS. In fact, Assistant Deputy Director Erik Barnett recently told Congress the word "in-bond" was not in his nearly 5,000 word testimony.

Perhaps more disturbing is the recent 3,000-word testimony of CBP Assistant Commissioner Alan Gina regarding the fight to reduce counterfeit products from entering the United States.

In the "Deterrence" section of his testimony, Gina stated that “in conjunction with our IPR enforcement efforts directed at goods entering and exiting the United States, CBP is working proactively to deter future violations. Such initiatives include strengthening the deterrent effect of fines and penalties by appropriately levying them and increasing collections; expanding and increasing the effectiveness of IPR audits to deprive counterfeiters and pirates of their illicit profits; and promoting criminal enforcement against counterfeiting and piracy by collaborating with ICE and supporting the IPR Center.”

But just like Barnett’s testimony, the word "in-bond" was conspicuously absent from Gina’s testimony. Unfortunately, there may be a real and honest basis for this omission. As I was told by a retired CBP law enforcement supervisor, the problem with in-bonds and CBP is that, today, CBP’s focus is on interdicting illegal aliens and that there are only a few CBP personnel left with the training, experience and knowledge of the in-bond process and its concomitant risks and vulnerabilities. But we know in-bond shipments are, without doubt, a major source of counterfeit products.

One merely has to look at one US port-of-entry on the US/Mexico border to see the vulnerability.

In support of this contention, allegations have been made that at the Laredo, Texas Port of Entry (PoE) CBP may be willfully avoiding its responsibility to ensure proper duty and tax collection. The Laredo PoE is the largest land port on the southern border, but instead of enforcing and supervising  the legal In-Bond process, CBP has been accused of looking the other way. As a result of CBP’s alleged avoidance of action, reputable businessmen in Laredo have contested CBP’s lack of enforcement.

In-bond merchandise is transported to Laredo through the United States for entry into Mexico.  A bonded carrier brings the bonded container to a container freight station (a CBP bonded cargo facility) under either a Transportation and Exportation (T&E) or "Immediate Transportation" (IT) in-bond condition for eventual export out of the USA and entry into Mexico.

This original bonded carrier does not continue into Mexico with this container, however.  Thus, the container freight station should not release the goods unless  another bonded carrier has posted a bond or obligated its own company bond for an "Immediate Exportation" (IE) from the United States.

Consequently, since the in-bond container is being consigned to a US-domiciled "forwarding agent" of the Mexican-domiciled customs broker, the forwarding agent (who is not regulated under US law as a surface freight forwarder, nor operates its own bonded warehouse) must then hire a US bonded carrier or a US customs broker pursuant to federal regulations to issue the new in-bond documents and to submit the appropriate forms to the Laredo CBP to allow the goods to be release from the container freight station.

The bonded carrier never takes possession. Instead, once the bonded carrier files the appropriate documents for the IE request, CBP allows the goods to be transported directly by any drayage or cartage agent hired by the forwarding agent who is working for the Mexican customs broker.

But neither the carrier nor the forwarding agents are bonded. In other words, all that the Laredo CBP seems to care about is a document filed by a legitimate bonded carrier or US customs broker. The obvious question is: does CBP really care about what happens to the cargo. Essentially, it loses control at the border and doesn’t know if the cargo left the United States as is supposed to do.

Clearly, if this is true, the first implication is that many regulations are simply ignored. One US firm established in a foreign trade zone in Laredo has had enough of the lack of action by CBP and has officially notified CBP of six specific federal regulations that are routinely and repeatedly violated.   These six regulations involve the use of proper bonded facilities, the use of bonded motor carriers, and manipulation of cargo and more.

Second, what impact would this practice have on in-bonds from Mexico?  Is it possible that a shipment of legitimate Mexican shipment destined for Canada "in-bond" could also contain narcotics – or even a weapons of mass destruction.

With CBP’s treatment of in-bonds at the border, it is obvious that a Canadian-bound in-bond trailer from Mexico containing genuine cargo such as electronics could also contain narcotics. And since it’s an in-bond shipment with proper in-bond documents filed with CBP, it enters the United States without inspection and could go to a Mexican forwarding agent on the US side of the border where the container or trailer is opened, the drugs (or any other cargo) removed for further distribution in the US, and the original legitimate cargo sent on to Canada in its original status as an authorized in-bond shipment.

This also could occur with a US in-bond shipment to Guatemala that is opened at the southern border, guns added, and then shipped as a legitimate Mexican "in-transit" carriage destined for Guatemala.  Mexico already admits it has difficulty monitoring in-transit shipments.

Concerned about this problem, 18 businesses and organizations operating at the Laredo Port of Entry joined to complain to CBP that in-bond shipments are, in fact, entered and manipulated on the US side of the border in direct violation of regulations. This situation allows for possible or potential fraud and the sale of bonded merchandise within the commerce of the United States without the payment of duty and US import taxes, if applicable.

Because CBP refused to respond to complaints about its apparent disregard for controlling in-bond shipments through Laredo, a Laredo-based firm on Sept. 1, 2009 sent a letter to Rep. Henry Cuellar (D-Texas), the congressional representative of the district that includes Laredo who at the time chaired the House Committee on Homeland Security’s Subcommittee on Border and Maritime Security, to ask for his assistance to make CBP comply with the law.

The firm bluntly requested help “in getting Customs to follow the regulations.” Continuing, the firm wrote “Customs and Border Protection in Laredo is allowing Mexican customs brokers and unlicensed freight forwarders to manipulate in-bond merchandise outside of a bonded area, and to receive in-bond merchandise. This is not only contrary to law, but it puts bonded warehouses and [the] Foreign Trade Zone at a great economic disadvantage.”

On February 2, 2010, a draft of this op-ed was sent to the subcommittee, but as of this writing there has been no known action taken by Congress to compel DHS or CBP to comply with federal regulations to monitor and control in-bond shipments, particularly along our southern border.

However, on February 25, 2010, the Laredo CBP did issue a "Trade Notice" that outlined the need to comply with in-bond regulations. One hopes that the House Homeland Security Committee had something to do with CBP’s action.

Nevertheless, on October 7, 2010, I received the following note from a licensed US broker on the border:

Since Mexican Customs Brokers associations have deep pockets they "persuaded" … (name omitted) to find a loophole to the Trade Notice issued by local CBP that bonded cargo only goes to the bonded carriers facility.  Now Mexican customs brokers, or as you call them, Forwarding Agents, can "lease" a space out to a bonded carrier and appoint a person (on the Mexican broker’s payroll) as an agent of the bonded carrier so that the Mexican broker can receive in-bond freight. This is the same thing they were doing before. CBP regulations clearly state who can receive bonded freight. I guess that is why we have issues. This leaves people like me ( I am a bonded warehouse proprietor, FTZ operator, bonded carrier and a US customs broker) at a huge disadvantage.

The US in-bond system is clearly broken. And still other trade-focused customs practices and duties have broke in the wake of the creation of DHS.

As they are regulated today, in-bond shipments are both a security vulnerability and a duty and tax evasion risk. What was recognized by the GAO audit in 2007 has continued to be recognized as a problem by businesses operating in Laredo that are involved in international trade.

Either DHS and CBP are unaware of these problems, or they do know but refuse to take appropriate action, which, if that’s the case, raises serious questions with respect to nonfeasance, misfeasance, or, at worst, mal-feasance.

The conclusion is obvious. The United States has, and perpetuates, a broken and risk-filled in-bond system. Where is the leadership in Congress, DHS and CBP to make the necessary repairs?

A customs broker friend who operates along the southern border in Texas recently wrote me to say:

Laredo CBP just recently issued a trade bulletin and is taking action on this very issue. See attached. Other ports like McAllen and Brownsville have issued similar trade bulletins, but in reality are taking a sit and wait attitude to see how far Laredo can take this issue to remedy the in Bond bru ha ha

While it appears that the Laredo Port of Entry may finally have gotten the message regarding the long-standing problems with in-bonds, Laredo is only one US border port.

The question is: what is happening at our other southern border ports?

Dr. Jim Giermanski is a former Air Force Col. who, as a Special Agent in the Air Force Office of Special Investigations, concentrated on counterintelligence and clandestine base penetrations. He also is a former FBI agent and worked with Customs and Border Protection on drug intelligence development. He presently is chairman of Powers Global Holdings, Inc.    

The Government Technology & Services Coalition's Homeland Security Today (HSToday) is the premier news and information resource for the homeland security community, dedicated to elevating the discussions and insights that can support a safe and secure nation. A non-profit magazine and media platform, HSToday provides readers with the whole story, placing facts and comments in context to inform debate and drive realistic solutions to some of the nation’s most vexing security challenges.

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