Heightened Trade Activity Could Increase Cyber Threats Against Brokers, Panelist Says

China will "look at this as a no-holds-barred conflict,” Mike Brown, president and CEO of Avalon Risk Management, a surety, said during an April 8 panel discussion. “I can certainly envision state actors like the Chinese government launching cyberattacks on this sector. It’s always been a target sector, [along with] energy, healthcare and transportation. And so I think cyber insurance is a big deal.”

Companies subject to a ransomware attack may think that they can just pay the ransom to get their data back, but “that may not be what these guys want right now. They want to just be disruptors,” Brown said.

At the session, Brown and Ralph De La Rosa, NCBFAA customs committee vice chair and president of Imperial Freight Brokers, discussed other potential dangers brokers could encounter amid an increase in the breadth and depth of tariffs.

Brokers' clients could go out of business, and not pay any duties or fees owed to their broker. Brown asked, "Even if you're getting the duties up front, are you okay with absorbing a loss of a big client who owes you a bunch of entry fees?"

Brokers should consider purchasing credit insurance to hedge against importer clients who may potentially go out of business if these tariffs stay in place, Brown said.

“So, credit insurance can really save you. It also tends to give you a heads up when somebody’s going through" business difficulties "because the credit insurer will tell you, hey, we’re going to have to reduce credit for this company because they’re having problems [with] paying their rent overseas and [their] phone bill and things like that.”

Brokers may also potentially encounter bad actor importers, according to Brown.

These bad actor importers may act like “shell companies,” where importers incorporate as entities with the IRS, but then they disappear once CBP conducts intensive exams of the company, according to Brown.

This type of activity was prevalent during the first Trump administration and the 2018 tariffs, where a number of importers incorporated under conditions that made it easy to incorporate, Brown said.

“We saw a lot of that. So, it’s something that we’re in tune to now,” Brown said, describing companies that were set up as U.S. companies but had no nexus in the U.S. nor any U.S. employees. “This is something we saw with China, but the tariffs [were] on China. So, in the current environment, we have tariffs on literally every country in the world. This is something we’re very much on the lookout for right now.”

As the potential for this activity grows again with the additional tariffs, De La Rosa said customs brokers should think about vetting importers to prevent getting caught in an importer’s fraud scheme.

“Sometimes they will open a bond with you, and they tell you they’re going to start importing with you. But guess what? They were just shopping for your bond,” De La Rosa said. “And once you got the bond, and you’re like, well, I wonder what happened to that importer. He or she never gave me any business. Well, guess what, they’re writing a whole bunch of entries with another broker and perpetuating fraud unbeknownst to you.”

Another fraud situation that brokers might encounter is circumvention, wherein clients may seek to switch sourcing countries to avoid paying higher tariffs, De La Rosa said.

“I think, historically, industry looked at circumvention as being geographic in nature. ... But we do see other methodologies now; I don’t know if you call it circumvention, but they’re people that have historically been in a duty-free environment and never really thought much about valuation because nobody really cared about valuation when they were in the duty-free world,” Brown said. While some people are asking about how to reduce their duty burden, others may be making assumptions and excluding items from valuation, which gets them in trouble, he said.

“I think the key is really to know your importer at maybe a deeper level than was necessary previously,” Brown said.

Within the context of de minimis, circumvention means a potential surge in importers claiming that they don’t know the value of the package that the carriers are going to be responsible for payment of duty on, according to Brown.

“CBP alludes to the fact that the carrier bond, the C3 bond, will be the vehicle for guaranteeing payment as a surety. We don't believe that the C3 bond, that carrier bond, was really designed for that. It does say that it’ll cover payment of duties, taxes, fees and penalties, but realistically, that was if a shipment was improperly released and it entered the commerce of the U.S. without an entry. Now they're making it the prime way to pay duty,” Brown said.

He continued: “If you look at [CBP’s] recent data on de minimis shipments, the average value of a de minimis shipment was $54, so it is under that $250. I think that might be a way that we see some circumvention. We’re certainly going to tighten up on our underwriting of the carrier bonds.” $250 is upper limit for informal entries for goods covered by Chapter 99 subheadings, which now includes most goods.

To tackle the changes in tariff policy, some importers sought to increase their bonds based on what duties were assessed -- but those assessments were made prior to April 2, when Trump announced reciprocal tariffs (see 2504020072).

"I really believe this is the single most area of concern that all of us should have. … It’s not just improper bond forecasting. We all get stacking and we may help our clients with that. But what about improper advice, improper guidance? What about your operational folks making business decisions for your clients?” De La Rosa said, adding that trade attorneys need to be looped into the discussion. “But when I see improper forecasting? ... There’s all of those things that we are potentially opening ourselves up for liability.”

Brokers should do “everything we can do to mitigate our liabilities. Working with the sureties and their insurance products are really going to be more important than ever,” De La Rosa said.