Recent NAFTA Penalty Decision

Dear Friends,

We are writing to let you know about an all-too-common misunderstanding of the law by U.S. Customs and Border Protection that, as the attached penalty decision demonstrates, can be an expensive trap for the unwary.

The issue involves claims made under NAFTA that are later corrected/revoked by the importer after being informed by the exporter that the goods no longer qualify – and more specifically what the importer is liable for in such a situation.

In the situation involved in the attached decision, a U.S. company imported goods from a related party in Mexico and claimed NAFTA preference based on a NAFTA Certificates of Origin provided by the exporter/producer.  The NAFTA eligibility of the goods hinged on the fact that a key component was itself NAFTA originating.  The exporter/producer had a NAFTA Certificate of Origin covering this component from an unrelated supplier.  Based on the applicable rule of origin, the finished goods would originate, provided that this component originated.  Since it had a NAFTA Certificate of Origin from the unrelated component supplier, the exporter/producer certified that the finished goods were originating and the importer made claims based on the exporter/producer’s NAFTA Certificate of Origin.

Years after the claims were made, the unrelated component supplier advised that its component was actually of Chinese origin and revoked its NAFTA Certificates of Origin.  This resulted in the finished goods no longer qualifying for NAFTA.  After confirming this analysis, the exporter/producer notified the U.S. importer that the goods it had previously certified as being NAFTA originating no longer qualified.  The U.S. importer then filed a corrected declaration with CBP at the appropriate Port of entry pursuant to 19 C.F.R. §181.21(b).  The corrected declaration identified all of the effected entries over multiple years.  In terms of duties, however, the importer only tendered the duties and Merchandise Processing Fees on the unliquidated entries.  The importer’s position was that it had acted with reasonable care when it relied on the NAFTA Certificate of Origin voluntarily provided by the exporter/producer (and the exporter/producer acted reasonably when it relied on a facially valid NAFTA Certificate of Origin for the component voluntarily provided by the third-party supplier).  The fact that the supplier revoked its certification years after the fact does not make those claims negligent acts.  If the importer was not negligent, there was no basis to reopen the liquidated entries.

The Port disagreed and chose to treat the corrected declaration as a prior disclosure (i.e., an admission of a culpable violation of the law).  Since the importer did not tender all of the duties covered by the “prior disclosure,” it was deemed to be invalid and the Port initiated a penalty action.  The Port sought duties and MPF of approximately $400,000 and a penalty based on a claim of negligence of approximately $800,000.  After much back and forth, the importer was ultimately able to get the case referred to CBP Headquarters for a decision.  As you will see from the attached, CBP Headquarters confirmed that an importer that relies on a facially-valid NAFTA Certificate of Origin is exercising reasonable care and that, if that certificate is later revoked, the importer is not liable for the duties or MPF on the liquidated entries.  The Port’s $1.2 million demand was remitted in full.

This an issue that any company that imports under NAFTA should be aware of, as the approach taken by the Port involved here is not an isolated instance.  We have 3 similar cases currently pending at other Ports and are aware of at least one other situation handled by another firm.  Importers should remember (particularly since CBP seems not to) that NAFTA (unlike our more recent FTAs) is an exporter-based agreement, which means that an importer who relies on a facially-valid NAFTA Certificate of Origin voluntarily provided by the exporter has a good argument that it exercised reasonable care.  If that certificate later turns out to be incorrect, then the importer will be liable for the duties and fees on the unliquidated entries (i.e., the past 10 months or so), but not on the liquidated ones.  As demonstrated by the attached, remembering this can help ensure that the company does not tender monies to the government unnecessarily.

We hope you find this helpful.  If you have any questions, please let us know.

Best regards,
Ted

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Another Customs-Related Qui Tam Action

Dear Friends:

I am writing to let you know about another customs-related qui tam action.

Last week, the U.S. Department of Justice announced that an Ohio-based company had agreed to pay $1.1 million to resolve allegations that it had intentionally filed false customs declarations to avoid the payment of antidumping and countervailing duties on Chinese-origin aluminum extrusions.  The announcement states that DOJ is also pursuing claims against 4 other companies and two individuals for similar violations.  A copy of DOJ’s press release can be found here.

The defendants are alleged to have transshipped Chinese-origin aluminum extrusions through Malaysia to hide the true country of origin (China) and avoid the payment of ADD/CVD upon importation into the United States (as many of you know, aluminum extrusions from China are subject to ADD/CVD rates of well over 100%).

The case was originally filed by a whistleblower under the qui tam provisions of the False Claims act.  The whistleblower (known as the “relator” under the False Claims Act) is entitled to a meaningful portion of any recovery from this action (including the $1.1 million collected thus far).

This case is part of a larger trend we have been seeing develop over the last couple of years – namely, that private parties are increasingly turning to the False Claims Act to address potential trade compliance violations by others (e.g., competitors, employers, etc.).  In addition to the obvious financial incentives (again, whistleblowers under the False Claims Act are entitled to a meaningful percentage of any recovery the government makes as a result of the case), government enforcement efforts in this area are viewed as increasingly resource-constrained, inefficient and/or ineffective.  In contrast, local U.S. Attorney Offices are showing strong interest in prosecuting these types of violations (particularly those involving government procurement, such as “buy America” violations, and antidumping/countervailing duty issues).  We expect to see this trend continue for some time.

The rise of private party-initiated trade compliance actions should incentivize all companies to review their internal controls over this area and ensure that they are working effectively.   Otherwise, companies may find themselves embroiled in expensive enforcement actions, like those described above and below.  Similarly, if you are aware of non-compliance by others that is unfairly tilting the playing field (e.g., a competitor not paying antidumping/countervailing duties rightfully owed, or misstating the origin of their products, to get a competitive advantage), there are steps you can take to address it, even if the responsible government agency has not done so.

We hope that this is helpful.  We have significant experience advising clients on how to test (and improve, when necessary) trade-related internal controls.  We also are advising several clients on how best to address potential non-compliance by competitors/others.  If you have any questions, or if you would like to discuss these issues further, please let us know.

Best regards,

Ted

Recent “Made in USA” Enforcement Case

Dear Friends:

We are writing to let you know about a recent (and interesting) “Made in USA” enforcement case.

As many of you know, the use of U.S.-origin claims in product labeling or advertising is governed by rules promulgated by the Federal Trade Commission.  These rules set an incredibly high standard for unqualified U.S. origin claims, such as “Made in the USA”.  Under this standard, a product must be “all or virtually all” made in the United States.  “All or virtually all” means that all significant parts and processing that go into the product must be of U.S. origin; that is, the product may only contain a negligible amount of foreign content.  This has generally be viewed to mean that the product was last substantially transformed in the United States and contains at least 95% U.S. content.  If a product is last substantially transformed in the United States, but does not contain “all or virtually all” U.S. content, then a qualified U.S. origin claim is more appropriate (e.g., “Made in the U.S. of U.S. and imported parts” or “Assembled in USA”).

Earlier this week, the FTC announced that E.K. Ekcessories, Inc., a U.S.-based outdoor accessories retailer, agreed to settle charges that it falsely advertised, labeled and distributed certain products to consumers throughout the United States as “Made in the USA.”  According to the FTC’s complaint (available here),  the Company made a number of unqualified U.S.-origin on the packaging, on its website and in its product catalogs.  The claims that were made included:

“Truly Made in USA [with an image of an American flag]”

“For 28 years, E.K. Ekcessories has been producing superior quality made accessories in our 60,000 sq. ft. facility in Logan, Utah”

“[O]ur source of pride and satisfaction abounds from a true ‘Made in USA’ product.”

“Made in USA”

The FTC alleged that in fact many of the products, or certain components of these products, were made outside of the United States and, thus, were not eligible to use these unqualified claims.  The FTC also alleged that by distributing promotional materials to third-party retailers, the company provided the means and instrumentalities to those retailers for the commission of deceptive acts.

Under the proposed settlement agreement, which contains a 20-year Consent Order (available here), the company is prohibited from claiming that a product is made in the United States, or providing third-party retailers with promotional materials with which to make that claim, unless the product is “all or virtually all” made in the United States.  More significantly, the company is required to contact all distributors who purchased or otherwise received any products from the company over a certain time period, and provide them with a notice and a copy of the Order.  As you will see from the attached notice, the company is now in the uncomfortable position of having to ask its distributors to immediately stop using some of its marketing materials, and to affix stickers over the packaging of certain products to cover claims that the items are made in the United States.

The proposed agreement will be subject to public comment for 30 days, after which the FTC will decide whether it will make the Order final.

The use of U.S.-origin claims has become increasingly important for many companies in recent years.  This case underscores the need to exercise caution when making such claims, whether on product packaging or on your website.  The standard for making these claims differs from the traditional customs test and the standard for making unqualified U.S. claims is extremely high (and, arguably, counterintuitive).  Companies need to review their packaging and marketing materials to ensure that any such claims are accurate and capable of being substantiated.

We have a great deal of experience advising clients on country of origin marking issues, including the use of “Made in USA” claims.  If you have any questions about the case discussed above, or making U.S.-origin claims more generally, please let us know.

Best regards,

Ted

Canada and Mexico Question U.S. Country of Origin Labeling Requirements

Dear Friends:

You may have seen in the news over the last few weeks stories about a dispute between the United States and Canada (and to a lesser extent Mexico) over U.S. country of origin labeling requirements for meat.

The U.S. Department of Agriculture recently issued final regulations requiring the country of origin labeling for certain cuts of beef. Canada and Mexico have alleged that this final rule is not consistent with an earlier WTO decision finding that a previous version of the USDA regulations were inconsistent with the United States’ WTO obligations. Now that the USDA has issued its final regulations, Canada, in particular, is publicly raising the possibility that it will impose sanctions on imports from the United States. Sanctions in this area generally take the form of additional customs duties on unrelated imported goods; often times the duties are upwards of 100%.

While the imposition of sanctions will need to be approved by the WTO (and, as a result, is a little ways off), the negotiation process has begun. On Friday, Canada’s Ministers of International Trade and Agriculture issued a statement that included a draft list of tariff classifications Canada is considering hitting with sanctions. The list primarily covers U.S. agricultural products and foodstuffs (e.g., certain types of meat, fruits, vegetables, ketchup, etc.), it also includes certain manufactured items (e.g., furniture, jewelry, etc.). The complete list is worth a quick read and can be found here. Canada is publishing this list now, so the U.S. exporters that are impacted have time to pressure their Congressional representatives to resolve the USDA meat labeling issue.

All U.S. companies that export products to Canada should review the list. If your products are currently included, there are steps you should take now to minimize the chances that they are included on the final list of products ultimately subject to the sanctions. We, together with our colleagues in Canada, have a great deal of experience with these issues and would be happy to advise further, if helpful. If it would be, just let me know.

Best regards,

Ted