New Developments: Increase in CEE-Driven Enforcement Activities

Dear Friends,

Further to our initial post, we wanted to make sure you were aware of two developments from last week that will likely result in an increase in U.S. Customs and Border Protection (CBP) enforcement actions. 

The first was the publication of a report by the United States Government Accountability Office (GAO) critical of CBP’s handling of antidumping/countervailing duty (AD/CVD) orders.  The report, which is entitled, “Antidumping and Countervailing Duties:  CBP Action Needed to Reduce Duty Processing Errors and Mitigate Nonpayment Risk” concluded that CBP failed to collect approximately $2.3 billion in antidumping & countervailing duties between Oct. 1, 2001 and Sept. 30, 2014.  While this may not be entirely CBP’s fault (e.g., the retrospective nature of our trade remedies law), the GAO takes CBP to task for “miss[ing] opportunities to identify and mitigate nonpayment risk.”  Given the politics surrounding this issue (the report was delivered to the Senate Finance Committee), we can expect to see increased AD/CVD enforcement as CBP attempts to demonstrate its commitment to addressing this issue.

The second was the pre-publication by CBP of interim regulations entitled, “Investigation of Claims of Evasion of Antidumping and Countervailing Duties”.  These regulations were mandated by section 421 of the Trade Facilitation and Trade Enforcement Act of 2015, which was signed into law earlier this year.  The interim regulations, which will take effect on Monday, August 22, 2016, establish procedures for investigating claims of AD/CVD order evasion.  The procedures contain detailed timelines for initiating, conducting and completing investigations based on claims from private parties or other government agencies.  The process created by the interim regulations has numerous advantages over the e-allegation system (which will continue to exist) and we expect that it will be well-used by domestic producers, as well as companies who have reason to believe that competitors are not properly declaring merchandise subject to AD/CVD orders upon importation.

We hope this is helpful.  If you have any questions about the GAO report, or CBP’s interim regulations, please let us know.

Best regards,
Ted

 

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Increase in CEE-Driven Enforcement Activities

Dear Friends,

We wanted to share with you some developments we are seeing with regard to U.S. Customs and Border Protection (CBP) enforcement activities.  Specifically, we are seeing an increased focus on antidumping/countervailing duty issues, and an increase in the number of “commercial fraud” investigations being initiated.  In both cases, the Centers of Excellence and Expertise (CEEs) are playing prominent roles.

We are seeing Import Specialists tied to various CEEs issue an increasing number of Requests for Information (CF-28s) focused specifically on antidumping/countervailing duty order compliance (e.g., whether an imported article should have been entered as a Type 03 entry subject to an order).  These CF-28s have most often involved the AD/CVD orders with broad, ambiguous scopes (e.g., orders on aluminum extrusions, steel products, various orders on pipe, etc.).  The same Import Specialists are issuing CF-28s to multiple importers, which (we believe) demonstrates that the CEEs are working as intended – as an Import Specialist learns that one importer may have an issue, he/she wonders whether other importers in the same industry also have that issue and starts issuing CF-28s to other companies covered by the CEE, etc.  Given the potential exposure for failing to deposit estimated AD/CVD upon importation, we recommend that all importers re-confirm that they are properly declaring any such imports.

On a related note, we are seeing an increasing number of formal investigations being initiated by CBP; again, driven primarily by the CEEs.  The number of formal “commercial fraud” investigations declined dramatically following the split of the U.S. Customs Service into CBP and U.S. Immigration and Customs Enforcement (ICE) in 2003.  Since most of the enforcement personnel went with ICE and began focusing on different issues, the number of commercial fraud investigations declined.  While there have been blips of activity since then (e.g., the issue several years ago of Import Specialists including investigation language in routine CF-28s), formal investigations were not very frequent.  That may now be changing.  In recent months, we have seen several CEE-based Import Specialists launch formal investigations into different matters (e.g., antidumping/countervailing duty issues, NAFTA and other preference claims, etc.).  Some, but not all, of these investigations were preceded by a CF-28.  As a result, it is important to pay close attention to any CF-28s you receive, and to recognize the investigation risk (and prior disclosure opportunity) they represent.

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

Best regards,
Ted

 

EPA & Customs

Dear Friends:

I saw an interesting article about a report recently issued by the U.S. Environmental Protection Agency (EPA), Office of Inspector General (OIG) that I thought you should know about.

In the report (accessible here), the OIG recommends that EPA obtain import data from U.S. Customs and Border Protection (CBP), and export data from the U.S. Census Bureau, to identify U.S. companies and facilities that are not in compliance with the Clean Air Act risk management plan (RMP) requirements.

Under EPA regulations, facilities that have more than a threshold quantity of any of 140 regulated substances on site in any one process are required to implement and submit to the EPA an RMP that includes a hazard assessment, prevention program and emergency response program.

The recommendations in the report came after the OIG analyzed vessel manifest data related to imports of hazardous substances.  The OIG cross-referenced that import data with the EPA’s RMP National Database to identify facilities/companies that may not be in compliance with RMP requirements.  The OIG identified four situations that could indicate that facilities need to prepare or revise their RMPs:

  1. Imports of chemicals above the reporting threshold to facilities with no RMP.
  2. Return shipments of large empty containers to facilities with no RMP.
  3. Imports of chemicals in amounts greater than the amount reported in the facility’s RMP.
  4. Large shipments of regulated chemicals for which consignee information was not available.

The OIG recommended further analysis and potential on-site inspections to determine whether facilities falling into one or more of the above categories are in compliance with Clean Air Act requirements.  Specific states of concern are also cited in the report.

We see this as part of a growing trend of enhanced cooperation between CBP and other federal agencies to identify and pursue enforcement actions.  As you know, we generally recommend that all companies request their Importer Trade Activity (ITRAC) data from CBP Headquarters at least once a year and incorporate its review into their import compliance programs.  This is the same data that CBP uses when conducting audits.  Now, the ITRAC data could also serve as an invaluable tool to monitor and identify other compliance gaps such as those identified by the OIG at EPA.

We hope this helps.  If you have any questions related to the OIG report or would like to discuss requesting your ITRAC data from CBP Headquarters, please let us know.

Best regards,

Ted

CBP’s Centers of Excellence and Expertise (CEE)

Dear Friends:

U.S. Customs and Border Protection (CBP) recently issued a “trade process document” on its Centers of Excellence and Expertise (CEE) program that contained a number of interesting points (“Centers of Excellence and Expertise Trade Process Document:  Responsibilities and Procedure for Participating Accounts and Their Brokers, Agents or Filers” (March 2014) copy available here).  Given that the CEE program is CBP’s preferred (eventually, mandatory?) model for the future, we thought all importers should be aware of these points, so have summarized them for you below.

* Importers must apply and be approved to participate in the CEE test program.

* The CEE’s are meant to meant to be centralized, industry-specific groups that bring additional experience/expertise to entry transaction review (i.e., by grouping resources by industry, the goal is to do better with less) and increased uniformity for importers (i.e., reduce the chances of getting different treatment at different ports).

* There are currently 10 CEE’s [(1) Agriculture & Prepared Products – Miami; (2) Apparel, Footwear  & Textiles – San Francisco; (3) Automotive & Aerospace – Detroit; (4) Base Metals – Chicago; (5) Consumer Products & Mass Merchandising – Atlanta; (6) Electronics – LA; (7) Industrial & Manufacturing Materials – Buffalo; (8) Machinery – Laredo; (9) Petroleum, Natural Gas & Minerals – Houston; and (10) Pharmaceuticals, Health & Chemicals – New York].  Importers can apply for the CEE that best fits their business.

* Once accepted, all consumption and ADD/CVD entries will be processed by the CEE.  Participants are “strongly encouraged” to file the entries with the CEE electronically.  The physical importations, however, can still move through the same ports of entries (i.e.., the supply chain does not need to be modified).

* All post-entry validations (including protests) for entries filed with a CEE will be handled by the CEE (revenue collection will continue to be handled by the port for the time being).

* Any Requests for Information/Notices of Action will be issued by the CEE and need to be responded to electronically.

* For entries subject to ADD/CVD (type 03 entries) that are filed with the CEE, the blanket certificates of non-reimbursement will need to be submitted to the CEE electronically.

* Protests will be processed by the CEE and can be filed electronically through ABI, or via paper with the Port.  If filed electronically, the CEE must be designated.  If filed via paper with the Port, then an electronic copy of the complete protest must be sent to the CEE.

* Reconciliation and drawback entries must continue to be filed with the authorized port of entry/drawback center.

* Enforcement actions will continue to be processed by the ports “until such time that automation allows for the Center to process FP&F actions.”  The CEE will likely play a leading role in most enforcement actions, however.

* Participants that file a prior disclosure can choose to file the disclosure with the CEE, rather than with the Port of Entry concerned (notwithstanding what the regulations currently say).

* Participation in the CEE program is voluntary and participants may withdraw at any time.

In general, the CEE idea is a good one.  There can be benefits to dealing with CBP Import Specialists who understand the industry, its products and issues.  Of course, there can also be downsides to such an arrangement (e.g., once an Import Specialist associated with a CEE sees an issue with one importer, it is easier for him/her to see if everyone in that CEE has the same issue, etc.).  As a result, you would want to have industry leading/well above average levels of compliance before choosing to participate in a CEE.

Also, given that participation is voluntary, we would recommend that you perform a high level cost-benefit analysis before applying.  If you are not experiencing significant delays, not receiving numerous CF-28’s/CF-29’s from different ports of entry, etc., then there may not be much benefit to you participating in the CEE program (there would, in our view, be heightened enforcement risk, however).  Conversely, if you are experiencing issues that can be addressed through having a single point of contact, then the benefits provided by the CEE program may outweigh the costs.

We hope this update is helpful.  If you have any questions about the CEE program, its pro’s/con’s or whether you should participate, please let us know.

Best regards,

Ted

Update on Another Customs Valuation-Related Qui Tam Action

Dear Friends:

We are writing to let you know about the settlement of a False Claims Act (FCA) case involving customs valuation issue that we first brought to your attention back in October of 2013.

The U.S. Attorney’s Office for the District of Colorado and U.S. Customs and Border Protection (CBP) announced yesterday that OtterBox, a U.S.-based importer of protective cases for smartphones, tablets, and computers, agreed to pay $4.3 million to settle allegations that it knowingly undervalued imported merchandise and underpaid customs duties.  The underlying complaint alleged that from January 1, 2006 to December 31, 2011 OtterBox knowingly omitted the value of “assists” from the dutiable value declared upon entry and knowingly made other false statements in documents submitted to CBP.  A copy of the press release announcing the settlement is available here.

This case is interesting for several reasons.

First, the case was brought be a former employee who was responsible for the Company’s international trade compliance.  The complaint alleged that this employee brought the assist issue to management’s attention, but was ignored.  The complaint followed.

Second, the case presented an interesting legal issue that had not been previously addressed – namely, whether the filing of a valid prior disclosure bars a subsequent qui tam claim filed under the FCA.  Although the court did not have the opportunity to decide the issue, a sizeable settlement was reached, and approved, despite the fact that OtterBox had voluntarily disclosed the same violation to CBP almost a year before the complaint was filed.  This suggests that a voluntarily self-disclosure filed after the initiation of an FCA action does not bar that action from proceeding.

Third, this settlement highlights the growing trend in prosecuting trade compliance violations under the FCA.  In announcing this settlement, the U.S. Attorney stated that “Customs duties are a significant source of revenue for the United States” and this settlement demonstrated that “the Department of Justice will zealously enforce their lawful collection.”  The combination of the financial incentives provided by the FCA (e.g. the private party bringing the complaint, known as the relator, is entitled to a portion of the recovery; here the relator received $830,000), reduced resources for CBP / U.S. Immigration and Customs Enforcement in this area, and strong interest in prosecuting these types of cases by many local U.S. Attorney’s Offices means that this trend is going to continue.  CBP appears to have been more involved in this action than in others, so it will be interesting to see if CBP devotes more resources to enforcement based on these FCA actions.

Finally, this 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.

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

Update on Another Customs Valuation-Related Qui Tam Action

Dear Friends:

We are writing to let you know about the settlement of a False Claims Act (FCA) case, involving customs valuations issues, that we brought to your attention back in January.

On Wednesday, the U.S. Attorney’s Office (USAO) for the Southern District of New York announced that women’s apparel importers Siouni and Zarr Corp., Danny & Nicole, Dana Kay and their individual owners, agreed to pay $10 million to settle allegations that they violated the FCA by intentionally understating the value of apparel imported since 2001.  The underlying complaint alleged that the defendants made separate payments, apart from the commercial invoice prices for the merchandise, to the apparel manufacturers, and knowingly did not include the value of these payments in the customs value of the merchandise.  A copy of the USAO’s press release is available here.

There are a couple of key takeaway’s from this case.

First, given the increasing number of FCA-related trade cases brought by current/former employees (here the employee who brought the case will be entitled to receive up to 30% of the $10 million), companies should develop (1) procedures for employees to elevate potential issues to management (e.g., ensuring that procedures related to “hotlines” include trade issues, etc.), and (2) a process for management to review, investigate and address credible issues.  With good internal controls, most companies will be able to protect themselves from these costly enforcement actions.

Second, while these cases generally result in significant settlements, the Department of Justice appears to be willing to settle these cases quickly and for less money than the government would otherwise be entitled to collect.  While $10 million is a sizeable settlement, the FCA requires liable defendants to pay a civil penalty plus 3 times the amount of damages which the government sustains.  Here, the complaint alleged that the defendants’ additional payments resulted in an estimated underpayment of duties of at least $3 million per year and the settlement alleged that the defendants owed the government “millions of dollars in duties”.  In the alternative, the U.S. civil customs penalty statute (19 U.S.C. §1592) would require the repayment of the duty, plus impose a penalty of up to the domestic value of the merchandise (since this was fraud).  Either way, the government could have collected significantly more than the $10 million settlement.  Thus, while the Department of Justice appears willing to make these cases “hurt”, they also appear willing to sacrifice some of the potential recovery for a quick victory.  It will be interesting to see if U.S. Immigration and Customs Enforcement and/or U.S. Customs and Border Protection starts devoting more resources to enforcement based on these FCA actions.

Finally, as part of the terms of the settlement, the defendants agreed to cooperate fully with the government in any investigation of, or enforcement action against, any other entities and/or individuals involved in this case.  If your company conducts business with Siouni and Zarr Corp., Danny & Nicole, Dana Kay or their individual owners, we strongly recommend that you review your interactions with the defendants in order to identify (and address) any credible issues that could be the subject of further investigations/enforcement actions stemming from this case.

We hope this is helpful.  If you have any questions, or if you would like to discuss these issues further, please let us know.

Best regards,

Ted

Buying Agency Commissions

Dear Friends:

We are writing to let you know about an interesting U.S. Customs ruling that was just recently published on buying agents and the dutiability of commissions. Every company that utilizes buying agents should be familiar with the ruling.

Under U.S. customs law, commissions paid to a bona fide buying agent are not dutiable; whereas commissions paid to a selling agent are. The determination of whether a bona fide agency relationships exists is made on a case-by-case basis, and turns on a variety of factors, the most important of which is whether the principal has the right to control the agent’s conduct with regard to the matters entrusted to it.

In Headquarters Ruling 1561151, a U.S. importer entered into an agreement with an unrelated third-party (“agent”) to supervise the supply of apparel the principal purchased from an unrelated supplier in India (“supplier”). Under the terms of the agreement, the agent was responsible for placing orders, as well as overseeing the production, inspection, and shipment to the importer (among other functions). To that end, the agent spent a significant amount of time at the supplier’s facility, and visited subcontractors to monitor every step of the production process. In return, the importer paid the agent a commission equal to 25% of the FOB price of the merchandise.

U.S. Customs considered the issue and ultimately concluded that the agent was too involved in the production process to be a bona fide buying agent for customs purposes. U.S. Customs noted that the bulk of the services performed by the agent were akin to a quality control check – a function it associated with the production of the merchandise and not with the purchase of the merchandise. (The fact that the agent signed commercial documents on behalf of the seller, used the seller’s e-mail address, and had access to an office on the seller’s premises, did not help the importer’s case.) As a result, U.S. Customs concluded that the relationship between the importer and the seller was not a bona fide buying agency and, thus, the commissions the importer paid the agent were dutiable. In short, the agent was disqualified from being a bona fide buying agent for doing too much for the importer.

All companies that utilize buying agents need to be mindful of this ruling and should revisit their buying agency agreements (you do have written buying agency agreements, right?) to make sure that it is clearly spelled out in the agreement what the agent should/should not do on your behalf. A well-drafted agency agreement can go a long way to establishing non-dutiability of commissions. It also avoids leaving a gap that U.S. Customs will otherwise fill with how they view the relationship (U.S. Customs is generally less inclined to view an agent as a buying agent, etc.).

We have a good deal of experience assisting companies structure acceptable bona fide buying agency agreements. If you have any questions concerning the ruling, or this issue more generally, please let us know.

We hope this is helpful.

Best regards,

Ted