Unused-Merchandise Drawback and a Client's Instruction to Omit Use
An importer paid $120,000 in duties on 5,000 imported LED fixtures. It exports 4,200 units and files an unused-merchandise drawback claim for 99% of the duties, $118,800. The broker later learns that 600 of the exported units were first used for three weeks in a trade-show display and then packed and exported. Another 300 units cannot be matched to import entries because the importer commingled identical fixtures from two shipments with different duty rates. The importer has records showing the remaining units were not used in the United States. The client tells the broker to omit the trade-show use because 'the units still left the country' and asks the broker to sign the claim as prepared. The broker has a power of attorney and five years of import records.
1. Calculate the maximum supportable drawback claim and explain the recordkeeping requirements.
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Unused-merchandise drawback requires that the exported goods were not used in the United States before export. The 600 units used in the trade show are not eligible, even though they were later exported. Duty per unit = $120,000 / 5,000 = $24. The 4,200 exported less the 600 used = 3,600 potentially eligible units. The 300 unmatched units may still be claimed only if the commingling records satisfy the same-kind-and-quality and matching rules; if they do not, eligible units fall to 3,300. Maximum claim if the 300 are supported: 3,600 × $24 × 99% = $85,536. If the 300 cannot be matched: 3,300 × $24 × 99% = $78,408. The importer must retain import, export, use, and commingling records for the required period.
2. What are the broker's ethical and legal obligations when the client instructs omission?
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The broker cannot omit the trade-show use or sign a claim known to be false. The broker's duty of reasonable care and ethical obligations require accurate, supported claims; a false drawback claim can expose both importer and broker to penalties, and the broker to license discipline. The broker should explain the eligibility problem, recompute the claim, and correct or withdraw the excess portion. If the client insists on the omission, the broker should decline to sign and consider withdrawing. Confidentiality does not require participation in a false statement. Document the advice and the client's response.
3. What penalty and compliance risks arise, and what corrective steps should be taken?
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Risks include denial of the claim, repayment of the excess drawback with interest, civil penalties for negligence or fraud, and referral for criminal exposure in egregious cases. The broker should take corrective action promptly: amend the claim to the supported amount, return the excess, preserve records, and consider prior disclosure if the false claim was already filed. The broker should also review other drawback claims for the same commingling or use issue. Signing the claim as prepared would convert a recordkeeping problem into a false-claims problem.