Federal Register / Vol. 65, No. 122 / Friday, June 23, 2000 / Rules and Regulations 39087

9 15 U.S.C. 77f, 77g, 77h, 77j and 77s(a).

10 15 U.S.C. 78c, 78l, 78m, 78n, 78o, 78w and 78ll.

11 15 U.S.C. 79t.

12 15 U.S.C. 77sss.

13 15 U.S.C. 80a–8, 80a–29, 80a–30 and 80a–37.

to coordinate the effectiveness of the

updated Filer Manual with the

scheduled system upgrade in order to

minimize confusion to EDGAR filers.

Statutory Basis

We are adopting the amendments to

Regulation S–T under Sections 6, 7, 8,

10, and 19(a) of the Securities Act,9

Sections 3, 12, 13, 14, 15, 23, and 35A

of the Securities Exchange Act of

1934,10 Section 20 of the Public Utility

Holding Company Act of 1935,11

Section 319 of the Trust Indenture Act

of 1939,12 and Sections 8, 30, 31, and 38

of the Investment Company Act.13

List of Subjects in 17 CFR Part 232

Incorporation by reference, Reporting

and recordkeeping requirements,

Securities.

Text of the Amendment

In accordance with the foregoing,

Title 17, Chapter II of the Code of

Federal Regulations is amended as

follows:

PART 232—REGULATION S–T—

GENERAL RULES AND REGULATIONS

FOR ELECTRONIC FILINGS

1. The authority citation for Part 232

continues to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j,

77s(a), 77sss(a), 78c(b), 78l, 78m, 78n, 78o(d),

78w(a), 78ll(d), 79t(a), 80a–8, 80a–29, 80a–30

and 80a–37.

2. Section 232.301 is revised to read

as follows:

§ 232.301 EDGAR Filer Manual.

Filers must prepare electronic filings

in the manner prescribed by the EDGAR

Filer Manual, promulgated by the

Commission, which sets out the

technical formatting requirements for

electronic submissions. For the period

during which Legacy EDGAR will be

available, prior to the complete

transition to the use of Modernized

EDGAR, the EDGAR Filer Manual will

consist of three parts. For filers using

Legacy EDGAR, the requirements are set

forth in EDGAR Filer Manual (Release

7.0), Volume I—Legacy EDGARLink. For

filers using modernized EDGARLink,

the requirements are set forth in EDGAR

Filer Manual (Release 7.0), Volume II—

Modernized EDGARLink. Additional

provisions applicable to Form N–SAR

filers are set forth in EDGAR Filer

Manual (Release 7.0), Volume III—N–

SAR Supplement. All of these

provisions have been incorporated by

reference into the Code of Federal

Regulations, which action was approved

by the Director of the Federal Register

in accordance with 5 U.S.C. 552(a) and

1 CFR Part 51. You must comply with

these requirements in order for

documents to be timely received and

accepted. You can obtain paper copies

of the EDGAR Filer Manual from the

following address: Public Reference

Room, U.S. Securities and Exchange

Commission, 450 5th Street, NW.,

Washington, DC 20549–0102 or by

calling Disclosure Incorporated at (800)

638–8241. Electronic format copies are

available on the SEC’s Web Site. The

SEC’s Web Site address for the Manual

is http://www.sec.gov/asec/ofis/

filerman.htm. Information on becoming

an EDGAR e-mail/electronic bulletin

board subscriber is available by

contacting TRW/UUNET at (703) 345–

8900 or at www.trw-edgar.com.

Dated: June 14, 2000.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–15489 Filed 6–22–00; 8:45 am]

BILLING CODE 8010–01–U

DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Part 171

[T.D. 00–41]

RIN 1515–AC08

Guidelines for the Imposition and

Mitigation of Penalties for Violations of

19 U.S.C. 1592

AGENCY: U.S. Customs Service,

Department of the Treasury.

ACTION: Final rule.

SUMMARY: This document revises

Appendix B to Part 171 of the Customs

Regulations, which sets forth the

guidelines for remitting and mitigating

penalties relating to violations of section

592 of the Tariff Act of 1930, as

amended. A violation of section 592

involves the entry or introduction or

attempted entry or introduction of

merchandise into the commerce of the

United States by fraud, gross negligence,

or negligence. Many of the changes to

Appendix B reflect the Customs

Modernization Act and its themes of

‘‘informed compliance’’ and ‘‘shared

responsibility.’’

EFFECTIVE DATE: July 24, 2000.

FOR FURTHER INFORMATION CONTACT:

Charles D. Ressin, Penalties Branch

(202) 927–2344.

SUPPLEMENTARY INFORMATION:

Background

On December 8, 1993, the President

signed the North American Free Trade

Agreement Implementation Act (Public

Law 103–182). The Customs

Modernization portion of this Act (Title

VI), popularly known as the Customs

Modernization Act or ‘‘the Mod Act’’,

became effective when it was signed.

The Mod Act emphasizes the themes of

‘‘shared responsibility’’ and ‘‘informed

compliance’’ for Customs and the

public.

Consistent with the Mod Act,

Customs has initiated a thorough

examination and review of its

procedures and processes relating to

importer compliance with Customs

laws, regulations, and policies. In this

review, the agency has considered a

number of innovative approaches to

improving the service it provides the

importing public as well as new

approaches to encourage compliance

and address incidents of noncompliance.

With regard to compliance, Customs

is dedicated to educating its personnel

to improve agency selection of

appropriate remedies to address

incidents of non-compliance. In keeping

with the Mod Act theme of informed

compliance, Customs is also attempting

to educate the importing public about

its requirements, particularly in areas

involving complex import transactions.

A more informed public promotes an

overall greater level of compliance than

the threat of an occasional and often

ineffective penalty.

In Appendix B to Part 171 of the

Customs Regulations (19 CFR part 171)

Customs has guidelines for remitting

and mitigating penalties relating to

violations of section 592 of the Tariff

Act of 1930, as amended (19 U.S.C.

1592) (hereinafter referred to as section

592). A violation of section 592 involves

the entry or introduction or attempted

entry or introduction of merchandise

into the United States by fraud, gross

negligence or negligence. In accordance

with the ‘‘shared responsibility’’ and

‘‘informed compliance’’ approach of the

Mod Act, Customs proposed a revision

of these guidelines in a notice of

proposed rulemaking published in the

Federal Register (63 FR 57628) on

October 28, 1998. This proposed

revision consisted of a reorganization of

the content of the current guidelines

into a new format intended to more

clearly identify important provisions

which are contained in the present text.

39088 Federal Register / Vol. 65, No. 122 / Friday, June 23, 2000 / Rules and Regulations

Below is a summary of the proposed

revised guidelines.

Summary of Proposed Revised

Guidelines

After the introductory text, the

proposed revised guidelines broke

current section (A) into 2 paragraphs.

Proposed section (A) discussed what

constitutes section 592 violations and

proposed section (B) discussed what is

meant by materiality.

Proposed section (A) clarified that

placing merchandise in-bond is

considered entering or introducing

merchandise into the United States for

purposes of section 592. The paragraph

also made it clear that if one

unintentionally transmits a clerical error

to Customs electronically, and that

clerical error is transmitted repetitively

by the electronic system, Customs will

not consider repetitions of the nonintentional electronic transmission of

the initial clerical error as constituting

a pattern, unless Customs has drawn the

error to the party’s attention.

In proposed section (B), defining

materiality under section 592, that

definition was clarified by providing

that a document, statement, act, or

omission is material if it significantly

impairs Customs ability to collect and

report accurate trade statistics, deceives

the public as to the source, origin or

quality of the merchandise, or

constitutes an unfair trade practice in

violation of federal law.

Proposed section (C) discussed the

degrees of culpability under section 592.

The degrees of culpability are currently

discussed in section (B).

A section (D) was proposed to be

added to include terms used throughout

the guidelines. Included in this section

were discussions of the terms: duty loss

violations; non-duty loss violations;

actual loss of duty; potential loss of

duty; reasonable care; clerical error; and

mistake of fact.

A section (E) was proposed to be

added which tracked the administrative

penalty process in chronological order.

Proposed section (E) was a revision of

current section (C). It began with the

case initiation and proceeded to

describe the considerations pertinent to

the decision to issue a pre-penalty

notice and how the different types of

violations can produce different

proposed claim amounts depending

upon the level of culpability and the

presence of mitigating and/or

aggravating factors. The proposed

guidelines contained express guidance

regarding statute of limitations

considerations and Customs policy

regarding waivers when the issuance of

pre-penalty and penalty notices are

involved.

Continuing in their chronological

progression, the proposed guidelines

next addressed steps to be taken when

Customs decides whether to close a case

or issue a penalty notice. Most of this

material is contained in paragraph (C)(2)

of the current guidelines. However, the

proposed guidelines provided that

penalty notices can indicate higher

degrees of culpability and proposed

penalty amounts than were contained in

the original pre-penalty notice if less

than 9 months remain before the

expiration of the statute of limitations,

and a waiver of the statute has not been

received. The current guidelines

provide that such increased penalty

notices would only be issued if less than

3 months remained.

Section (F) of the proposed guidelines

covered the procedures that are to be

followed and elements that Customs

will consider as part of the case record

for any mitigating and/or aggravating

factors. The current guidelines discuss

mitigating factors in section (F) and

aggravating factors in section (G).

Proposed section (F) was arranged so

the various types and degrees of

violations are explained and respective

mitigation considerations are explained.

The section also informed the reader

who within Customs has the authority

to cancel or remit penalty claims.

Proposed paragraph (F)(2)(f) provided

a discussion of prior disclosure and the

reduced penalties based upon the

different levels of culpability for a valid

prior disclosure. Prior disclosure is

discussed in section (E) of the current

guidelines.

Proposed section (G) of the guidelines

discussed the factors that are considered

by Customs in proposing a penalty or

mitigating an assessed penalty claim.

Among these factors are: an error by

Customs that contributed to the

violation; the extent of cooperation by

the violator with the investigation by

Customs into the alleged violation;

whether or not the violator takes

immediate steps to remedy the situation

that caused the violation; inexperience

in importing; and the prior record of the

violator in its dealings with Customs.

This proposed section combined the

factors located in sections (F) and (H) of

the current guidelines. It was felt that a

separate section was no longer

necessary for ‘‘extraordinary’’ factors

such as the ability of Customs to obtain

personal jurisdiction over the violator,

the violator’s financial status, and

whether Customs had actual knowledge

of repeated violations but failed to

inform the violator thus depriving him

of the opportunity to take corrective

action. All these factors were contained

in the one section. The proposed section

allowed that additional factors may be

considered in appropriate

circumstances.

Proposed section (H) contained the

factors that Customs believes are to be

treated as aggravating factors when

considering mitigation of proposed or

assessed penalties. Most of these factors

are found in section (G) of the current

guidelines. While the list of factors was

not intended to be all-inclusive, two

new factors were proposed to be added.

They were: the discovery of evidence of

a motive to evade a prohibition or

restriction on the admissibility of

merchandise, and failure to comply

with a lawful demand for records or a

Customs summons.

Section (I) of the proposed guidelines

addressed offers in compromise

(settlement offers). This was a new

element not contained in the current

guidelines. The proposed section

instructed parties who wish to submit a

civil offer in compromise pursuant to 19

U.S.C. 1617 to follow procedures

outlined in 161.5 of the Customs

Regulations (19 CFR 161.5). The section

summarized what steps will be taken by

both parties once such an offer has been

made.

Section (J) of the proposed guidelines

contained instructions to be followed in

instances where Customs makes a

demand for payment of actual loss of

duties pursuant to section 592(d). This

is a subject not addressed in the current

guidelines. The section provided that

Customs will follow the procedures set

forth in § 162.79b of the Customs

Regulations (19 CFR 162.79b) and stated

that no such demand will be issued

unless the record establishes the

presence of a violation of section 592(a).

The section stated that, absent statute of

limitations problems, Customs will

endeavor to issue section 592(d)

demands to concerned sureties and nonviolator importers only after default by

principals.

Section (K) of the proposed guidelines

addressed violations of section 592 by

brokers. The current guidelines discuss

brokers in section (I). The section

proposed to continue the present

practice of applying the overall

mitigation guidelines in instances of

fraud or where the broker shares in the

financial benefits of a violation.

However, where there has been no fraud

or sharing of the financial benefits, the

proposed section removed the dollar

limitations contained in the current

guidelines and advised that Customs

may charge the broker under 19 U.S.C.

1641.

Federal Register / Vol. 65, No. 122 / Friday, June 23, 2000 / Rules and Regulations 39089

Section (L) of the proposed guidelines

covered arriving travelers and consisted

of a reordering of the provisions of

section (J) of the current guidelines.

Section (M) of the proposed

guidelines referred Customs officers to

other Federal agencies for

recommendations in instances where

violations of laws administered by other

agencies are discovered. These

provisions are the same as those

contained in section (K) of the current

guidelines.

Analysis of Comments

The notice of proposed rulemaking

invited public comments. The comment

period closed on December 28, 1998.

Seventeen comments were received.

Many commenters applauded Customs

efforts to re-organize and simplify the

existing guidelines. Nine of the

commenters set forth similar concerns

and objections to Customs change in the

guidelines relating to penalty

assessment of customs brokers who

violate section 592. Also, eight of the

commenters voiced concerns and

recommendations regarding the

proposed guidelines on a section by

section basis. Three commenters also

made general comments which were not

directly related to a specific section of

the proposal.

The specific ‘‘section by section’’

recommendations and/or suggestions,

general recommendations and/or

suggestions, and the Customs responses

to the comments, are set forth below.

Proposed Introductory Paragraph of the

Guidelines

Comment: Three commenters object

to the language in the introductory

paragraph that indicates that ‘‘a

mitigated penalty is conditioned upon

payment of any actual loss of duty as

well as a release by the party that

indicates that the mitigation decision

constitutes full accord and satisfaction.’’

The commenters believe that if other

statutory remedies are available to

importers, the importers should have

the right to pursue those remedies

separately and distinctly from the

settlement of any civil penalty for

violation of section 592.

Also, one commenter takes issue with

Customs statement in the introduction

that the guidelines ‘‘may supplement,

and are not intended to preclude

application of, any other special

guidelines promulgated by Customs.’’

The commenter believes that the

language is unclear and would permit

Customs to issue, without prior notice,

draconian special guidelines to fit the

immediate needs of the agency.

Customs Response: Customs does not

agree that an alleged violator who seeks

mitigation of a civil penalty initiated by

Customs under section 592 is deprived

of other statutory remedies or judicial

recourse in the event that the party

chooses not to comply with the agency

decision. In other words, the party elects

to pay the mitigated amount. The

agency must, in turn, sue the party to

collect an assessed penalty in the event

that the violator decides not to comply

with the agency decision. Consequently,

given the elective nature of the

mitigation proceedings and the

availability of judicial recourse, we do

not agree with the commenters’

objections.

Also, we do not share the

commenter’s concern regarding issuance

of ‘‘special guidelines’’ inasmuch as

these guidelines merely reflect policies

issued pursuant to the discretionary

authority of the Customs Service

pursuant to 19 U.S.C. 1618 to remit and

mitigate penalties. As such, the Customs

Service may depart from the guidelines

as appropriate circumstances warrant,

including the application of special

guidelines.

Proposed Section (A) Violations of

Section 592

Comment: One commenter takes issue

with Customs characterization of ‘‘inbond’’ movements as encompassed

within the language ‘‘entry,

introduction, or attempted entry or

introduction.’’ The commenter believes

that the in-bond language is an

impermissible expansion of section 592.

In the commenter’s view, a mere

transportation movement should not be

considered an ‘‘entry’’ under section

592 because nothing has been presented

to Customs for entry or introduction

into the commerce of the United States.

Two commenters express concern

regarding Customs discussion of clerical

error and pattern of negligent conduct.

Specifically, one commenter believes

that the section is contradictory because

Customs initially states that ‘‘an

unintentional repetition by an electronic

system of an initial clerical error,

generally shall not constitute a pattern

of negligent conduct’’ unless Customs

has brought the error to the party’s

attention. In the next sentence the

commenter feels that Customs

contradicts itself where it is stated that

‘‘* * * the unintentional repetition of a

clerical mistake over a significant period

of time or involving many entries could

indicate a pattern of negligent conduct

and a failure to exercise reasonable

care.’’ Both commenters believe that this

language should be clarified.

Customs Response: With respect to

the objection regarding inclusion of ‘‘in

bond’’ applications within the meaning

of entry, introduction, or attempted

entry or introduction, Customs does not

believe that such inclusion contradicts

either statute or regulation. For

example, if merchandise entered under

bond is subsequently diverted (i.e.,

‘‘introduced’’ into the commerce of the

United States contrary to the terms of

the bond, the penalty provisions of

section 592 may apply.

We also disagree with the two

comments relating to Customs language

concerning ‘‘clerical error’’ and ‘‘pattern

of negligent conduct.’’ Clearly, in those

cases where Customs calls the error to

the attention of the party and the error

is not corrected, the party may be

subject to potential section 592 penalty.

Similarly, in those cases where the

repetition of a clerical mistake occurs

over a significant period of time or

involves many entries, a violation may

occur if the facts and circumstances

surrounding the transactions indicate a

failure to exercise reasonable care. In

the latter instance, the proposed

language does not mandate assessment

of a penalty, but rather, contemplates

the possibility of a penalty depending

on the facts and circumstances of the

transactions at issue.

Proposed Section (B) Definition of

Materiality Under Section 592

Comment: Three commenters object

to Customs definition of materiality as

either ‘‘too subjective’’ or not within the

scope of section 592. One of the

commenters is of the opinion that the

Court of Appeals’ decision in Pentax

Corp. v. Robinson, 125 F.3d 1457 (Fed.

Cir. 1997), amended, 135 F.3d 760

(1998), does not permit Customs to

include an importer’s liability for

marking duties in the agency definition

of materiality. Two commenters also

expressed concern that the language

‘‘whether an unfair trade practice has

been committed under the anti-dumping

or countervailing duty laws or a similar

statute’’ is too broad and may result in

Customs adding its penalty on top of

other agencies’ statutory remedies.

Similarly, one of these commenters also

believes that the definition of

materiality should not include a

determination of whether an unfair act

has been committed involving patent,

trademark or copyright infringement, in

view of other remedies available to

Customs for such intellectual property

rights infractions. Lastly, one of the

commenters believes that the

definition’s inclusion of ‘‘collection and

reporting of accurate trade statistics’’

exceeds the statutory limits of section

39090 Federal Register / Vol. 65, No. 122 / Friday, June 23, 2000 / Rules and Regulations

592. This commenter is involved with

oil and gas importations and is of the

opinion that statistical discrepancies for

the majority of these products bear no

relevance to the entry of such products,

and that therefore, Customs definition of

materiality should not include statistical

errors.

Customs Response: Customs is of the

opinion that the definition of materiality

set forth in the proposed guidelines

comports with law and judicial

precedent. With respect to the inclusion

of a marking duties assessment as an

example of a ‘‘Customs action’’ that

could be influenced by a false

statement, omission, or act, in Customs

view, the Pentax decision does not

preclude liability for marking duties in

connection with section 592 violations

in all cases.

We note that in cases involving either

antidumping, other agency or

intellectual property rights infractions,

the law does not preclude the use of

section 592 in appropriate cases, despite

the availability of other government

remedies. Further, with respect to that

part of the definition of materiality

involving collection and reporting of

accurate trade statistics, we note that

there is judicial precedent that supports

this aspect of Customs definition.

Proposed Section (D) Discussion of

Additional Terms

Comment: Two commenters suggest

that Customs include fees and taxes in

the definition of loss of duty in the

paragraph entitled ‘‘(1) Duty Loss

Violations’’ so that there is consistency

with the definition of loss of duty as set

forth in the paragraphs entitled ‘‘(3)

Actual Loss of Duties,’’ and ‘‘(4)

Potential Loss of Duties.’’ Two other

commenters object to including marking

duties in the definition of ‘‘duty loss’’

based on the same objections expressed

above regarding materiality and the

Pentax decision.

One commenter is of the opinion that

the last sentence in section (D)

paragraph (4) ‘‘Potential Loss of Duties’’,

should be deleted. The commenter

points out that if an entry summary is

filed without inclusion of information

regarding antidumping or

countervailing duty investigations the

regulations provide that the entry

should be rejected. The commenter

believes that such a case should not give

rise to a potential loss of duties

inasmuch as Customs is not discovering

a violation but rather merely enforcing

a regulation.

The same commenter suggests that

Customs revise section (D) paragraph (6)

‘‘Reasonable Care’’, to include language

that failure to follow a binding Customs

ruling pertaining to its merchandise

evidences a failure to exercise

reasonable care.

Customs Response: Customs agrees

that the definition of duty loss set forth

in section (D) paragraph (1) ‘‘Duty Loss

Violations’’, should be amended to

conform to the definition of duty loss

set forth in section (D) paragraph (3)

‘‘Actual Loss of Duties’’, and has made

the necessary change.

As indicated in our response to

comments regarding materiality, section

592 liability may arise in certain cases

where the government has been

deprived of marking duties.

Consequently, Customs believes that the

inclusion of marking duties in the

definition of duty loss is appropriate.

With regard to the suggestion that

Customs delete the last sentence of

section (D) paragraph (4) ‘‘Potential Loss

of Duties’’, we note that the failure to

provide required information on the

entry documents may give rise to

section 592 liability and that Customs

may ‘‘discover’’ such an omission after

the filing of the documents. Therefore,

it is accurate to state that a potential loss

of duties equals the amount of the

duties, taxes, and fees that would have

occurred had Customs not discovered

the violation prior to liquidation and

taken steps to correct the entry.

With regard to the commenter’s

suggestion involving ‘‘Reasonable Care’’,

we believe that the suggested revision is

unnecessary. Customs notes that the

regulations already establish the

requirement that an importer who

receives a ruling from Customs

regarding the tariff classification of

merchandise shall set forth in

connection with a subsequent entry of

that merchandise the tariff classification

set forth in the ruling.

Proposed Section (E) Penalty

Assessment

Comment: A commenter recommends

that section (E) be revised to require the

Customs field officer to include copies

of the evidence relied upon for issuance

of the prepenalty notice with

appropriate deletions based on Freedom

of Information Act exemptions. This

commenter also believes that if Customs

agrees to a waiver of the statute of

limitations, the guidelines should reflect

a requirement that the Customs officer

signing the waiver has the contractual

authority to sign the waiver. Also, the

commenter is of the opinion that the

guidelines should be amended to

require that penalty notices provide

explanations why a petitioner’s

prepenalty response arguments are

defective or without merit. Lastly, the

commenter believes that the guidelines

should require that the Customs field

officer promptly notify the alleged

violator in cases where the officer has

determined that the statute of

limitations has expired.

Another commenter questions

Customs approach to the ‘‘parking

ticket’’ penalties of up to $10,000, set

forth in paragraph (E)(1)(c). The

commenter believes that $10,000 is an

excessive penalty for per entry

infractions especially when the case

involves a number of entries. The same

commenter expresses concern regarding

Customs approach to statute of

limitations waivers. The commenter is

of the opinion that the paragraphs in

section (E) relating to statute of

limitations waivers override the clear

legislative intent underlying the statute

of limitations applicable to section 592

violations—i.e., that the agency identify

and resolve the violations within a

specified period of time. For example,

the commenter objects to Customs

Headquarters recently requiring agents

to obtain waivers of the statute of

limitations immediately upon initiating

a case.

Another commenter objects to

Customs lengthening the time during

which Customs can lawfully indicate a

degree of culpability and penalty

amount higher than were set forth in the

original prepenalty notice, without

having to issue a new prepenalty notice

(i.e., from the current 3 months to the

proposed 9 months before expiration of

the statute of limitations). The

commenter believes that the proposed

revision needlessly extends the period

of time within which Customs may

claim higher levels of culpability

without providing the alleged violator

full due process. The commenter

believes that this proposal provides a

strong incentive for Customs to delay its

section 592 investigation.

Customs Response: Customs does not

agree with the commenter’s

recommendation to include copies of

evidence with the prepenalty notice.

Neither the statute nor corresponding

regulations authorize release of

evidence at the time of issuance of the

prepenalty notice, and to require its

production would be tantamount to

engaging in unauthorized pre-trial

discovery. Also, Customs does not agree

with this commenter’s suggestions to

establish a requirement that the

Customs officer signing a waiver of the

statute of limitations has the contractual

authority to sign such a waiver. Such

signing authority already has been

established through the appropriate

Customs delegation procedures.

Moreover, waivers involve the unilateral

action of the involved party and such

Federal Register / Vol. 65, No. 122 / Friday, June 23, 2000 / Rules and Regulations 39091

action has nothing to do with any

contractual authority with Customs.

Further, inasmuch as section 592 does

not require the agency to furnish

explanations why a prepenalty response

is deficient or defective, Customs does

not believe that such a requirement is

necessary. In Customs view, the statute

provides adequate safeguards for the

alleged violator by requiring the agency

ultimately to furnish the party with its

findings of fact and conclusions of law

in the agency decision. Lastly, because

the statute of limitations is an

affirmative defense available to an

alleged violator, we do not agree with

the commenter’s recommendation that

Customs should be required to notify

the alleged violator in cases where the

statute has expired.

With respect to the commenter’s

concern regarding Customs approach to

technical violations and ‘‘parking

ticket’’ penalties of up to $10,000,

Customs notes that this paragraph does

not mandate a $10,000 fixed sum

penalty per entry violation, but rather

provides for ranges of fixed sum

penalties—generally $1,000 to $2,000

per infraction where there are no prior

violations. The higher fixed sum

amounts may be appropriate in cases of

multiple or repeat violations, and

Customs does not believe that these

fixed sum amounts are excessive. In

response to this commenter’s concern

regarding statute of limitations waivers,

Customs notes that an alleged violator is

not required to provide a waiver to

Customs, and the guidelines merely

serve to advise the alleged violator of

the consequences of providing a waiver,

as well as the consequences of choosing

not to provide a waiver of the statute of

limitations. Customs notes that the

guidelines, for the most part, reiterate

already established regulatory

provisions.

Customs also does not agree with the

comment raising a due process objection

to Customs lengthening the time in

which Customs can lawfully indicate a

higher degree of culpability and penalty

amount than were set forth in the

original prepenalty notice without

having to issue a new prepenalty notice.

Customs notes that the guidelines do

not affect the alleged violator’s due

process rights, inasmuch as the party

may file a petition to contest the

allegations set forth in the penalty

notice. Customs would also like to point

out that this provision affects only those

few cases where evidence is uncovered

at a point in time where the statute of

limitations poses a significant concern

to the government’s ability to timely

process the penalty action.

Proposed Section (F) Administrative

Penalty Disposition

Comment: One commenter believes

that the penalty dispositions for nonduty loss violations (based on a

percentage of the dutiable value) are

unfair to importers of duty-free articles.

The commenter is of the opinion that

the penalty disposition in non-duty loss

cases should be under 10 percent of the

dutiable value (plus interest), including

cases of fraud.

Customs Response: Customs

disagrees. Some of the most egregious

violations involve non-dutiable articles

(e.g., quota evasion).

Proposed Section (G) Mitigating Factors

Comment: Two commenters object to

the proposed requirement that

‘‘Contributory Customs Error’’ may only

be claimed where the misleading or

erroneous advice given by a Customs

officer is given in writing. The

commenters believe that the writing

requirement will have the effect of

eliminating the ability to claim this

factor, and one of the commenters

expresses the view that because the

alleged violator has the burden of proof,

a writing requirement is unnecessary.

One commenter objects to Customs

elimination of ‘‘Inexperience in

Importing’’ as a mitigating factor, and

believes that the Customs

Modernization Act’s concept of

‘‘reasonable care’’ suggests that the

factor should be included in the

guidelines. This commenter also

believes that Customs should not

require the cooperation with an

investigation be ‘‘extraordinary’’ to be

entitled to mitigation; that the ‘‘inability

to obtain jurisdiction’’ factor should not

be eliminated as a mitigating factor and

that there should not be an increase in

penalties in non-duty loss cases where

Customs knew of the infraction but

failed to take action.

Finally, with respect to the mitigating

factor of ‘‘Customs Knowledge’’ another

commenter recommends deletion of the

qualifying language ‘‘without

justification,’’ that precedes the

requirement that Customs ‘‘failed to

inform the violator so that it could have

taken earlier corrective action.’’ The

commenter is of the opinion that the

qualifying language makes the benefit of

this factor unobtainable.

Customs Response: Customs disagrees

with the two commenters’ objections to

the ‘‘Contributory Customs Error’’

writing requirement. In view of the

responsibility of the importer to act with

reasonable care (as set forth in the

Customs Modernization Act), Customs

believes it is reasonable to require that

the importer demonstrate ‘‘Contributory

Customs Error’’ by tangible written

evidence.

With regard to the commenter’s

concern involving the proposal to

eliminate ‘‘Inexperience in Importing,’’

as a mitigating factor, Customs has

reconsidered the proposal and decided

to retain the factor. With respect to the

commenter’s concern regarding

cooperation, Customs believes that it is

appropriate that the cooperation be

extraordinary, as it is expected that the

party does more than merely cure the

defect or problem that resulted in the

violative conduct. Customs also believes

that ‘‘inability to obtain jurisdiction’’

(i.e., personal jurisdiction) is a matter

that is better addressed at the litigation

stage of the proceedings in the event of

non-compliance with the agency

decision. As for the commenter’s

question regarding the rationale for

increasing the ‘‘Customs Knowledge’’

non-duty loss penalties, we note that the

change is being made so that the nonduty loss penalty amounts are

consistent with the corresponding duty

loss penalty amounts.

Finally, Customs disagrees with the

commenter’s opinion regarding the

suggested deletion of the ‘‘without

justification’’ language set forth in the

‘‘Customs Knowledge’’ mitigating factor.

Customs notes that there may be

circumstances (such as an open

investigation) that warrant delay in

notifying the alleged violator of the

purported infraction.

Proposed Section (H) Aggravating

Factors

Comment: One commenter believes

that because the new proposed

aggravating factors of ‘‘evading a quota

restriction’’ and ‘‘failure to comply with

a lawful demand for records’’ are

themselves subject to penalty, these

factors should not be considered to

increase the penalty or proposed

penalty of an alleged violator.

Another commenter expresses

reservations about the aggravating factor

that involves ‘‘textile imports that have

been the subject of illegal

transshipment, whether or not the

merchandise bears false country of

origin markings.’’ The commenter asks

how goods can be transshipped if they

are properly marked—and implies that

this factor should be deleted.

Customs Response: With regard to the

first commenter, it should be noted that

the guidelines indicate that the

‘‘presence of one or more aggravating

factors may not be used to raise the level

of culpability attributable to the alleged

violations, but may be utilized to offset

the presence of mitigating factors.’’

39092 Federal Register / Vol. 65, No. 122 / Friday, June 23, 2000 / Rules and Regulations

Consequently, although we agree that

the offenses may be subject to separate

penalties, the inclusion of these two

aggravating factors do not serve to

potentially increase the section 592

penalties, but rather, may serve to offset

the presence of mitigating factors in the

action.

With respect to the second

commenter’s question concerning the

aggravating factor involving

transshipped textile products, Customs

notes that the factor’s qualifying

language indicates ‘‘whether or not the

merchandise bears false country of

origin markings.’’ Therefore, although

the textile article may not bear a false

country of origin marking, it does not

necessarily follow that the article is

properly marked. For example, an

imported textile product may bear no

country of origin marking at all, and

therefore be improperly marked as well

as possibly illegally transshipped.

Proposed Section (J) Section 592(d)

Demands

Comment: One commenter believes

that Customs should make it very clear

that where an entry has been finally

liquidated, that absent proof of a

violation of section 592, no further

duties may be collected.

Customs Response: Customs believes

that no additional language to the

proposed section is warranted inasmuch

as the second sentence of the section

makes clear that with respect to finally

liquidated entries ‘‘information must be

present establishing a violation of

section 592(a),’’ before a section 592(d)

demand may be issued.

Proposed Section (K) Customs Brokers

Comment: Nine commenters object to

the change of Customs position

regarding the applicability of section

592 to Customs brokers in ‘‘non-fraud’’

cases and in those cases where the

broker does not share in the benefits of

the violation to an extent over and

above customary brokerage fees. In sum,

in these cases, the commenters object to

the proposed language requiring that

Customs ‘‘shall’’ proceed against the

Customs broker pursuant to the

remedies provided under 19 U.S.C.

1641. The commenters believe that this

language is a clear invitation for

Customs field offices to make every

suspected negligent violation of section

592 by a broker into a 19 U.S.C. 1641

broker penalty case. Most of the

commenters believe that adoption of

such a change would result in the

maximum $30,000 broker penalty for

such infractions. Two of the nine

commenters believe that the current

broker guidelines should be retained

while one of the commenters is of the

opinion that Customs should amend the

proposed language to provide discretion

to local field offices by substituting the

words ‘‘may’’ for ‘‘shall’’ before the

remaining language ‘‘proceed against

the Customs broker pursuant to the

remedies provided under 19 U.S.C.

1641.

Customs Response: In view of the

comments received in connection with

this proposed section, Customs has

reconsidered its position and adopted

the commenter’s suggestion to substitute

the word ‘‘may’’ for ‘‘shall’’ in the

language relating to broker penalty

assessment pursuant to 19 U.S.C. 1641.

The agency notes that the existing

Customs Directive regarding 19 U.S.C.

1641 penalties already provides for

incremental assessment of broker

penalties in appropriate cases (e.g.,

initial warning letters). Therefore,

Customs believes that apprehensions

about immediate $30,000 penalty

assessments in every broker negligence

case are unwarranted.

Proposed Section (L) Arriving Travelers

Comment: One commenter believes

that this section should be clarified to

indicate that alleged violators that are

arriving travelers will be assessed only

one penalty under either section 592, 19

U.S.C. 1497 or 19 U.S.C. 1595(a) so that

the traveler will know how to prepare

his or her petition.

Customs Response: Inasmuch as the

law does not provide that section 592 is

the exclusive remedy available to the

agency in cases involving violations by

arriving travelers, the commenter’s

suggestion cannot be adopted. More

than one statute can be violated by the

arriving traveler. However, the seizure

or penalty notice will indicate the

statute underlying the alleged violation.

Proposed Section (M) Violations of Laws

Administered by Other Federal Agencies

Comment: One commenter

recommends that this section be

clarified so that Customs cannot impose

a penalty for the release of seized

merchandise for laws administered by

other federal agencies.

Customs Response: Customs notes

that in cases where merchandise is

legally seized for violations of laws

administered by other federal agencies,

Customs may, by law, require payment

of a penalty in order to remit the

forfeiture in appropriate cases.

Therefore, we cannot adopt the

commenter’s suggestion.

General Comments

Comment: One commenter

recommends the proposed guidelines

include a definition of the term

‘‘domestic value,’’ since that term is

used frequently within the guidelines.

Customs Response: Customs notes

that the term ‘‘domestic value’’ already

is defined in the Customs Regulations in

19 CFR 162.43(a) and clearly is

applicable to penalty assessments.

Therefore, we do not believe that

adoption of the commenter’s suggestion

is warranted.

Comment: One commenter believes

that Customs should explicitly provide

that the agency has the authority to

mitigate section 592 ‘‘interest’’ penalties

in non-fraudulent actual duty loss cases

involving a valid prior disclosure. The

commenter feels that the proposed

guidelines’ failure to expressly provide

for such mitigation authority diminishes

the agency’s policy position of

encouraging valid prior disclosures.

Customs Response: Although the

language in the proposed guidelines

does not explicitly rule out the

possibility of affording mitigation in

extraordinary cases involving valid

prior disclosures, the agency believes

that the current language best reflects

Congressional intent—namely, that the

monetary benefits of a valid prior

disclosure are those reduced penalties

provided for by law.

Comment: A commenter suggests that

the first sentence of proposed Appendix

B providing for remission or mitigation

of section 592 penalties pursuant to

section 1618 of the Tariff Act of 1930,

be added to the Customs Regulations.

The commenter believes that the

subjects of remission and mitigation

discussed in the guidelines are not

found in the regulations, and that by

including these subjects in the

regulations, Customs would have greater

discretion regarding the use and

application of the guidelines.

Customs Response: Customs notes

that the regulations already discuss the

mitigation and remission authority of

the agency in connection with penalties

and forfeitures in 19 CFR 162.31.

Comment: A commenter expresses

concern that the proposed guidelines do

not explicitly address the situation

where a party makes a false statement,

or engages in an omission or act that

results in the overpayment of duty and

taxes. The commenter is unclear

whether such a case could result in the

imposition of penalties under section

592.

Customs Response: Customs notes

that liability under section 592 may

arise in cases involving an overpayment

of duty and taxes (e.g., an overpayment

to evade a tariff rate quota or an

established government trigger-price

mechanism). In Customs view, the

Federal Register / Vol. 65, No. 122 / Friday, June 23, 2000 / Rules and Regulations 39093

proposed guidelines adequately

addressed these situations. For example,

section (F) provides for penalty

dispositions for such infractions as nonduty loss violations.

Comment: One commenter expresses

reservations about the Customs field

officer’s ability to take into account the

presence of mitigating factors when

considering the issuance of a section

592 prepenalty notice. The commenter

believes that this may be an

unproductive use of the field officer’s

time and appears to be premature since

the necessary information from the

alleged violator has not yet been

received.

The commenter also questions the

need for sending ‘‘information copies’’

of section 592(d) demands to sureties in

all cases except in those cases where

less than a year remains under the

statute of limitations. In the

commenter’s view, this can be a timeconsuming task for Customs field

officers where there are many entries

and multiple sureties. The commenter

also would like the ‘‘shortened response

times’’ discussed in proposed section

(E) made applicable to section 592(d)

demands.

Finally, this commenter suggests that

the ‘‘arriving travelers’’ section be relettered and moved closer in location to

the section involving liability for

penalties so that the Customs officer, in

a rushed situation, will not miss the

section on arriving travelers because the

officer did not read far enough along in

the guidelines.

Customs Response: With respect to

the first suggestion, Customs notes that

the proposed guidelines set forth that

the field officer consider whether

mitigating factors are present at the prepenalty stage regardless of the level of

culpability. Customs is not instructing

the field officer at the pre-penalty stage

of the proceedings to manufacture

mitigating factors or speculate regarding

their existence, but rather is attempting

to promote development of realistic

initial penalty assessments

commensurate with the level of

available evidence.

With respect to the commenter’s

concern involving the need for

furnishing information copies of section

592(d) demands to sureties, Customs

believes that in view of statute of

limitations concerns associated with

section 592(d) demands, and in order to

assist sureties in tracking contingent

liabilities, the benefits derived from

such practice for both the government

and the sureties outweighs any

administrative burden imposed upon

the Customs field office. Also, inasmuch

as the Customs regulations do not

provide for a shortened response time in

connection with section 592(d)

demands, the commenter’s

recommendation is rejected.

Lastly, to reduce the likelihood of the

problem discussed in the commenter’s

last recommendation, we have added a

sentence to the end of proposed section

(E)(1)(a) to direct parties to the special

assessments and dispositions section in

cases involving arriving travelers.

Conclusion

Accordingly, based on the comments

received and the analysis of those

comments as set forth above, and after

further review of this matter, Customs

believes that the proposed revised

guidelines should be adopted with the

changes discussed above. Certain other

clarifying changes are made as well.

Regulatory Flexibility Act

Because this revision of the guidelines

relates to rules of agency procedure and

policy, and no notice of proposed

rulemaking was required pursuant to 5

U.S.C. 553, the document is not subject

to the provisions of the Regulatory

Flexibility Act (5 U.S.C. 601 et seq.).

Executive Order 12866

Because the document is not

regulatory in nature, but merely serves

to inform the public about certain

agency procedures and practices, the

revised guidelines do not meet the

criteria for a ‘‘significant regulatory

action’’ under E.O. 12866.

List of Subjects in 19 CFR Part 171

Customs duties and inspection, Law

enforcement, Penalties, Seizures and

forfeitures.

Amendment to the Regulations

Part 171 of the Customs Regulations

(19 CFR part 171) is amended as set

forth below:

PART 171—FINES, PENALTIES, AND

FORFEITURES

1. The general authority citation for

Part 171 continues to read as follows:

Authority: 19 U.S.C. 66, 1592, 1618, 1624.

The provisions of subpart C also issued

under 22 U.S.C. 401; 46 U.S.C. App. 320

unless otherwise noted.

2. Appendix B to Part 171 is revised

to read as follows:

Appendix B to Part 171—Customs

Regulations, Guidelines for the

Imposition and Mitigation of Penalties

for Violations of 19 U.S.C. 1592

A monetary penalty incurred under section

592 of the Tariff Act of 1930, as amended (19

U.S.C. 1592; hereinafter referred to as section

592) may be remitted or mitigated under

section 618 of the Tariff Act of 1930, as

amended (19 U.S.C. 1618), if it is determined

that there are mitigating circumstances to

justify remission or mitigation. The

guidelines below will be used by the

Customs Service in arriving at a just and

reasonable assessment and disposition of

liabilities arising under section 592 within

the stated limitations. It is intended that

these guidelines shall be applied by Customs

officers in pre-penalty proceedings and in

determining the monetary penalty assessed

in any penalty notice. The assessed penalty

or penalty amount set forth in Customs

administrative disposition determined in

accordance with these guidelines does not

limit the penalty amount which the

Government may seek in bringing a civil

enforcement action pursuant to section

592(e). It should be understood that any

mitigated penalty is conditioned upon

payment of any actual loss of duty as well

as a release by the party that indicates that

the mitigation decision constitutes full

accord and satisfaction. Further, mitigation

decisions are not rulings within the meaning

of part 177 of the Customs Regulations (19

CFR part 177). Lastly, these guidelines may

supplement, and are not intended to

preclude application of, any other special

guidelines promulgated by Customs.

(A) Violations of Section 592

Without regard to whether the United

States is or may be deprived of all or a

portion of any lawful duty, tax or fee thereby,

a violation of section 592 occurs when a

person, through fraud, gross negligence, or

negligence, enters, introduces, or attempts to

enter or introduce any merchandise into the

commerce of the United States by means of

any document, electronic transmission of

data or information, written or oral

statement, or act that is material and false, or

any omission that is material; or when a

person aids or abets any other person in the

entry, introduction, or attempted entry or

introduction of merchandise by such means.

It should be noted that the language ‘‘entry,

introduction, or attempted entry or

introduction’’ encompasses placing

merchandise in-bond (e.g., filing an

immediate transportation application). There

is no violation if the falsity or omission is

due solely to clerical error or mistake of fact,

unless the error or mistake is part of a pattern

of negligent conduct. Also, the unintentional

repetition by an electronic system of an

initial clerical error generally will not

constitute a pattern of negligent conduct.

Nevertheless, if Customs has drawn the

party’s attention to the unintentional

repetition by an electronic system of an

initial clerical error, subsequent failure to

correct the error could constitute a violation

of section 592. Also, the unintentional

repetition of a clerical mistake over a

significant period of time or involving many

entries could indicate a pattern of negligent

conduct and a failure to exercise reasonable

care.

(B) Definition of Materiality Under Section

592

A document, statement, act, or omission is

material if it has the natural tendency to

39094 Federal Register / Vol. 65, No. 122 / Friday, June 23, 2000 / Rules and Regulations

influence or is capable of influencing agency

action including, but not limited to a

Customs action regarding: (1) Determination

of the classification, appraisement, or

admissibility of merchandise (e.g., whether

merchandise is prohibited or restricted); (2)

determination of an importer’s liability for

duty (including marking, antidumping, and/

or countervailing duty); (3) collection and

reporting of accurate trade statistics; (4)

determination as to the source, origin, or

quality of merchandise; (5) determination of

whether an unfair trade practice has been

committed under the anti-dumping or

countervailing duty laws or a similar statute;

(6) determination of whether an unfair act

has been committed involving patent,

trademark, or copyright infringement; or (7)

the determination of whether any other

unfair trade practice has been committed in

violation of federal law. The ‘‘but for’’ test of

materiality is inapplicable under section 592.

(C) Degrees of Culpability Under Section 592

The three degrees of culpability under

section 592 for the purposes of

administrative proceedings are:

(1) Negligence. A violation is determined to

be negligent if it results from an act or acts

(of commission or omission) done through

either the failure to exercise the degree of

reasonable care and competence expected

from a person in the same circumstances

either: (a) in ascertaining the facts or in

drawing inferences therefrom, in ascertaining

the offender’s obligations under the statute;

or (b) in communicating information in a

manner so that it may be understood by the

recipient. As a general rule, a violation is

negligent if it results from failure to exercise

reasonable care and competence: (a) to

ensure that statements made and information

provided in connection with the importation

of merchandise are complete and accurate; or

(b) to perform any material act required by

statute or regulation.

(2) Gross Negligence. A violation is deemed

to be grossly negligent if it results from an

act or acts (of commission or omission) done

with actual knowledge of or wanton

disregard for the relevant facts and with

indifference to or disregard for the offender’s

obligations under the statute.

(3) Fraud. A violation is determined to be

fraudulent if a material false statement,

omission, or act in connection with the

transaction was committed (or omitted)

knowingly, i.e., was done voluntarily and

intentionally, as established by clear and

convincing evidence.

(D) Discussion of Additional Terms

(1) Duty Loss Violations. A section 592

duty loss violation involves those cases

where there has been a loss of duty including

any marking, anti-dumping, or countervailing

duties, or any tax and fee (e.g., merchandise

processing and/or harbor maintenance fees)

attributable to an alleged violation.

(2) Non-duty Loss Violations. A section 592

non-duty loss violation involves cases where

the record indicates that an alleged violation

is principally attributable to, for example,

evasion of a prohibition, restriction, or other

non-duty related consideration involving the

importation of the merchandise.

(3) Actual Loss of Duties. An actual loss of

duty occurs where there is a loss of duty

including any marking, anti-dumping, or

countervailing duties, or any tax and fee (e.g.,

merchandise processing and/or harbor

maintenance fees) attributable to a liquidated

Customs entry, and the merchandise covered

by the entry has been entered or introduced

(or attempted to be entered or introduced) in

violation of section 592.

(4) Potential Loss of Duties. A potential

loss of duty occurs where an entry remains

unliquidated and there is a loss of duty,

including any marking, anti-dumping or

countervailing duties or any tax and fee (e.g.,

merchandise processing and/or harbor

maintenance fees) attributable to a violation

of section 592, but the violation was

discovered prior to liquidation. In addition,

a potential loss of duty exists where Customs

discovers the violation and corrects the entry

to reflect liquidation at the proper

classification and value. In other words, the

potential loss in such cases equals the

amount of duty, tax and fee that would have

occurred had Customs not discovered the

violation prior to liquidation and taken steps

to correct the entry.

(5) Total Loss of Duty. The total loss of

duty is the sum of any actual and potential

loss of duty attributable to alleged violations

of section 592 in a particular case. Payment

of any actual and/or potential loss of duty

shall not affect or reduce the total loss of

duty used for assessing penalties as set forth

in these guidelines. The ‘‘multiples’’ set forth

below in paragraph (F)(2) involving

assessment and disposition of cases shall

utilize the ‘‘total loss of duty’’ amount in

arriving at the appropriate assessment or

disposition.

(6) Reasonable Care. General Standard: All

parties, including importers of record or their

agents, are required to exercise reasonable

care in fulfilling their responsibilities

involving entry of merchandise. These

responsibilities include, but are not limited

to: providing a classification and value for

the merchandise; furnishing information

sufficient to permit Customs to determine the

final classification and valuation of

merchandise; taking measures that will lead

to and assure the preparation of accurate

documentation, and determining whether

any applicable requirements of law with

respect to these issues are met. In addition,

all parties, including the importer, must use

reasonable care to provide accurate

information or documentation to enable

Customs to determine if the merchandise

may be released. Customs may consider an

importer’s failure to follow a binding

Customs ruling a lack of reasonable care. In

addition, unreasonable classification will be

considered a lack of reasonable care (e.g.,

imported snow skis are classified as water

skis). Failure to exercise reasonable care in

connection with the importation of

merchandise may result in imposition of a

section 592 penalty for fraud, gross

negligence or negligence.

(7) Clerical Error. A clerical error is an

error in the preparation, assembly or

submission of import documentation or

information provided to Customs that results

from a mistake in arithmetic or transcription

that is not part of a pattern of negligence. The

mere non-intentional repetition by an

electronic system of an initial clerical error

does not constitute a pattern of negligence.

Nevertheless, as stated earlier, if Customs has

drawn a party’s attention to the nonintentional repetition by an electronic system

of an initial clerical error, subsequent failure

to correct the error could constitute a

violation of section 592. Also, the

unintentional repetition of a clerical mistake

over a significant period of time or involving

many entries could indicate a pattern of

negligent conduct and a failure to exercise

reasonable care.

(8) Mistake of Fact. A mistake of fact is a

false statement or omission that is based on

a bona fide erroneous belief as to the facts,

so long as the belief itself did not result from

negligence in ascertaining the accuracy of the

facts.

(E) Penalty Assessment

(1) Case Initiation—Pre-penalty Notice.

(a) Generally. As provided in § 162.77,

Customs Regulations (19 CFR 162.77), if the

appropriate Customs field officer has

reasonable cause to believe that a violation of

section 592 has occurred and determines that

further proceedings are warranted, the

Customs field officer will issue to each

person concerned a notice of intent to issue

a claim for a monetary penalty (i.e., the ‘‘prepenalty notice’’). In issuing such a prepenalty notice, the Customs field officer will

make a tentative determination of the degree

of culpability and the amount of the

proposed claim. Payment of any actual and/

or potential loss of duty will not affect or

reduce the total loss of duty used for

assessing penalties as set forth in these

guidelines. The ‘‘multiples’’ set forth in

paragraphs (F)(2)(a)(i), (b)(i) and (c)(i)

involving assessment and disposition of duty

loss violation cases will use the amount of

total loss of duty in arriving at the

appropriate assessment or disposition.

Further, where separate duty loss and nonduty loss violations occur on the same entry,

it is within the Customs field officer’s

discretion to assess both duty loss and nonduty loss penalties, or only one of them.

Where only one of the penalties is assessed,

the Customs field officer has the discretion

to select which penalty (duty loss or nonduty loss) shall be assessed. Also, where

there is a violation accompanied by an

incidental or nominal loss of duties, the

Customs field officer may assess a non-duty

loss penalty where the incidental or nominal

duty loss resulted from a separate non-duty

loss violation. The Customs field officer will

propose a level of culpability in the prepenalty notice that conforms to the level of

culpability suggested by the evidence at the

time of issuance. Moreover, the pre-penalty

notice will include a statement that it is

Customs practice to base its actions on the

earliest point in time that the statute of

limitations may be asserted (i.e., the date of

occurrence of the alleged violation) inasmuch

as the final resolution of a case in court may

be less than a finding of fraud. A pre-penalty

notice that is issued to a party in a case

where Customs determines a claimed prior

disclosure is not valid—owing to the

Federal Register / Vol. 65, No. 122 / Friday, June 23, 2000 / Rules and Regulations 39095

disclosing party’s knowledge of the

commencement of a formal investigation of a

disclosed violation—will include a copy of a

written document that evidences the

commencement of a formal investigation. In

addition, a pre-penalty notice is not required

if a violation involves a non-commercial

importation or if the proposed claim does not

exceed $1,000. Special guidelines relating to

penalty assessment and dispositions

involving ‘‘Arriving Travelers,’’ are set forth

in section (L) below.

(b) Pre-penalty Notice—Proposed Claim

Amount

(i) Fraud. In general, if a violation is

determined to be the result of fraud, the

proposed claim ordinarily will be assessed in

an amount equal to the domestic value of the

merchandise. Exceptions to assessing the

penalty at the domestic value may be

warranted in unusual circumstances such as

a case where the domestic value of the

merchandise is disproportionately high in

comparison to the loss of duty attributable to

an alleged violation (e.g., a total loss of duty

of $10,000 involving 10 entries with a total

domestic value of $2,000,000). Also, it is

incumbent upon the appropriate Customs

field officer to consider whether mitigating

factors are present warranting a reduction in

the customary domestic value assessment. In

all section 592 cases of this nature regardless

of the dollar amount of the proposed claim,

the Customs field officer will obtain the

approval of the Penalties Branch at

Headquarters prior to issuance of a prepenalty notice at an amount less than

domestic value.

(ii) Gross Negligence and Negligence. In

determining the amount of the proposed

claim in cases involving gross negligence and

negligence, the appropriate Customs field

officer will take into account the gravity of

the offense, the amount of loss of duty, the

extent of wrongdoing, mitigating or

aggravating factors, and other factors bearing

upon the seriousness of a violation, but in no

case will the assessed penalty exceed the

statutory ceilings prescribed in section 592.

In cases involving gross negligence and

negligence, penalties equivalent to the

ceilings stated in paragraphs (F)(2)(b) and (c)

regarding disposition of cases may be

appropriate in cases involving serious

violations, e.g., violations involving a high

loss of duty or significant evasion of import

prohibitions or restrictions. A ‘‘serious’’

violation need not result in a loss of duty.

The violation may be serious because it

affects the admissibility of merchandise or

the enforcement of other laws, as in the case

of quota evasions, false statements made to

conceal the dumping of merchandise, or

violations of exclusionary orders of the

International Trade Commission.

(c) Technical Violations. Violations where

the loss of duty is nonexistent or minimal

and/or that have an insignificant impact on

enforcement of the laws of the United States

may justify a proposed penalty in a fixed

amount not related to the value of

merchandise, but an amount believed

sufficient to have a deterrent effect: e.g.,

violations involving the subsequent sale of

merchandise or vehicles entered for personal

use; violations involving failure to comply

with declaration or entry requirements that

do not change the admissibility or entry

status of merchandise or its appraised value

or classification; violations involving the

illegal diversion to domestic use of

instruments of international traffic; and local

point-to-point traffic violations. Generally, a

penalty in a fixed amount ranging from

$1,000 to $2,000 is appropriate in cases

where there are no prior violations of the

same kind. However, fixed sums ranging

from $2,000 to $10,000 may be appropriate

in the case of multiple or repeated violations.

Fixed sum penalty amounts are not subject

to further mitigation and may not exceed the

maximum amounts stated in section 592 and

in these guidelines.

(d) Statute of Limitations Considerations—

Waivers. Prior to issuance of any section 592

pre-penalty notice, the appropriate Customs

field officer will calculate the statute of

limitations attributable to an alleged

violation. Inasmuch as section 592 cases are

reviewed de novo by the Court of

International Trade, the statute of limitations

calculation in cases alleging fraud should

assume a level of culpability of gross

negligence or negligence, i.e., ordinarily

applying a shorter period of time for statute

of limitations purposes. In accordance with

section 162.78 of the Customs Regulations

(19 CFR 162.78), if less than 1 year remains

before the statute of limitations may be raised

as a defense, a shortened response time may

be specified in the notice—but in no case,

less than 7 business days from the date of

mailing. In cases of shortened response

times, the Customs field officer should notify

alleged violators by telephone and use all

reasonable means (e.g., facsimile

transmission of a copy of the notice) to

expedite receipt of the notice by the alleged

violators. Also in such cases, the appropriate

Customs field officer should advise the

alleged violator that additional time to

respond to the pre-penalty notice will be

granted only if an acceptable waiver of the

statute of limitations is submitted to

Customs. With regard to waivers of the

statute of limitations, it is Customs practice

to request waivers concurrently both from all

potential alleged violators and their sureties.

(2) Closure of Case or Issuance of Penalty

Notice.

(a) Case Closure. The appropriate Customs

field officer may find, after consideration of

the record in the case, including any prepenalty response/oral presentation, that

issuance of a penalty notice is not warranted.

In such cases, the Customs field officer will

provide written notification to the alleged

violator who received the subject pre-penalty

notice that the case is closed.

(b) Issuance of Penalty Notice. In the event

that circumstances warrant issuance of a

notice of penalty pursuant to § 162.79 of the

Customs Regulations (19 CFR 162.79), the

appropriate Customs field officer will give

consideration to all available evidence with

respect to the existence of material false

statements or omissions (including evidence

presented by an alleged violator), the degree

of culpability, the existence of a prior

disclosure, the seriousness of the violation,

and the existence of mitigating or aggravating

factors. In cases involving fraud, the penalty

notice will be in the amount of the domestic

value of the merchandise unless a lesser

amount is warranted as described in

paragraph (E)(1)(b)(i). In general, the degree

of culpability or proposed penalty amount

stated in a pre-penalty notice will not be

increased in the penalty notice. If,

subsequent to the issuance of a pre-penalty

notice and upon further review of the record,

the appropriate Customs field officer

determines that a higher degree of culpability

exists, the original pre-penalty notice should

be rescinded and a new pre-penalty notice

issued that indicates the higher degree of

culpability and increased proposed penalty

amount. However, if less than 9 months

remain before expiration of the statute of

limitations or any waiver thereof by the party

named in the pre-penalty notice, the higher

degree of culpability and higher penalty

amount may be indicated in the notice of

penalty without rescinding the earlier prepenalty notice. In such cases, the Customs

field officer will consider whether a lower

degree of culpability is appropriate or

whether to change the information contained

in the pre-penalty notice.

(c) Statute of Limitations Considerations.

Prior to issuance of any section 592 penalty

notice, the appropriate Customs field officer

again shall calculate the statute of limitations

attributable to the alleged violation and

request a waiver(s) of the statute, if

necessary. In accordance with part 171 of the

Customs Regulations (19 CFR part 171), if

less than 180 days remain before the statute

of limitations may be raised as a defense, a

shortened response time may be specified in

the notice—but in no case less than 7

business days from the date of mailing. In

such cases, the Customs field officer should

notify an alleged violator by telephone and

use all reasonable means (e.g., facsimile

transmission of a copy) to expedite receipt of

the penalty notice by the alleged violator.

Also, in such cases, the Customs field officer

should advise an alleged violator that, if an

acceptable waiver of the statute of limitations

is provided, additional time to respond to the

penalty notice may be granted.

(F) Administrative Penalty Disposition

(1) Generally. It is the policy of the

Department of the Treasury and the Customs

Service to grant mitigation in appropriate

circumstances. In certain cases, based upon

criteria to be developed by Customs,

mitigation may take an alternative form,

whereby a violator may eliminate or reduce

his or her section 592 penalty liability by

taking action(s) to correct problems that

caused the violation. In any case, in

determining the administrative section 592

penalty disposition, the appropriate Customs

field officer will consider the entire case

record—taking into account the presence of

any mitigating or aggravating factors. All

such factors should be set forth in the written

administrative section 592 penalty decision.

Once again, Customs emphasizes that any

penalty liability which is mitigated is

conditioned upon payment of any actual loss

of duty in addition to that penalty as well as

a release by the party that indicates that the

mitigation decision constitutes full accord

and satisfaction. Finally, section 592 penalty

39096 Federal Register / Vol. 65, No. 122 / Friday, June 23, 2000 / Rules and Regulations

dispositions in duty-loss and non-duty-loss

cases will proceed in the manner set forth

below.

(2) Dispositions.

(a) Fraudulent Violation. Penalty

dispositions for a fraudulent violation will be

calculated as follows:

(i) Duty Loss Violation. An amount ranging

from a minimum of 5 times the total loss of

duty to a maximum of 8 times the total loss

of duty—but in any such case the amount

may not exceed the domestic value of the

merchandise. A penalty disposition greater

than 8 times the total loss of duty may be

imposed in a case involving an egregious

violation, or a public health and safety

violation, or due to the presence of

aggravating factors, but again, the amount

may not exceed the domestic value of the

merchandise.

(ii) Non-Duty Loss Violation. An amount

ranging from a minimum of 50 percent of the

dutiable value to a maximum of 80 percent

of the dutiable value of the merchandise. A

penalty disposition greater than 80 percent of

the dutiable value may be imposed in a case

involving an egregious violation, or a public

health and safety violation, or due to the

presence of aggravating factors, but the

amount may not exceed the domestic value

of the merchandise.

(b) Grossly Negligent Violation. Penalty

dispositions for a grossly negligent violation

shall be calculated as follows:

(i) Duty Loss Violation. An amount ranging

from a minimum of 2.5 times the total loss

of duty to a maximum of 4 times the total

loss of duty—but in any such case, the

amount may not exceed the domestic value

of the merchandise.

(ii) Non-Duty Loss Violation. An amount

ranging from a minimum of 25 percent of the

dutiable value to a maximum of 40 percent

of the dutiable value of the merchandise—but

in any such case, the amount may not exceed

the domestic value of the merchandise.

(c) Negligent Violation. Penalty

dispositions for a negligent violation shall be

calculated as follows:

(i) Duty Loss Violation. An amount ranging

from a minimum of 0.5 times the total loss

of duty to a maximum of 2 times the total

loss of duty but, in any such case, the amount

may not exceed the domestic value of the

merchandise.

(ii) Non-Duty Loss Violation. An amount

ranging from a minimum of 5 percent of the

dutiable value to a maximum of 20 percent

of the dutiable value of the merchandise, but,

in any such case, the amount may not exceed

the domestic value of the merchandise.

(d) Authority to Cancel Claim. Upon

issuance of a penalty notice, Customs has set

forth its formal monetary penalty claim.

Except as provided in 19 CFR part 171, in

those section 592 cases within the

administrative jurisdiction of the concerned

Customs field office, the appropriate Customs

field officer will cancel any such formal

claim whenever it is determined that an

essential element of the alleged violation is

not established by the agency record,

including pre-penalty and penalty responses

provided by the alleged violator. Except as

provided in 19 CFR part 171, in those section

592 cases within Customs Headquarters

jurisdiction, the appropriate Customs field

officer will cancel any such formal claim

whenever it is determined that an essential

element of the alleged violation is not

established by the agency record, and such

cancellation action precedes the date of the

Customs field officer’s receipt of the alleged

violator’s petition responding to the penalty

notice. On and after the date of Customs

receipt of the petition responding to the

penalty notice, jurisdiction over the action

rests with Customs Headquarters including

the authority to cancel the claim.

(e) Remission of Claim. If the Customs field

officer believes that a claim for monetary

penalty should be remitted for a reason not

set forth in these guidelines, the Customs

field officer should first seek approval from

the Chief, Penalties Branch, Customs Service

Headquarters.

(f) Prior Disclosure Dispositions. It is the

policy of the Department of the Treasury and

the Customs Service to encourage the

submission of valid prior disclosures that

comport with the laws, regulations, and

policies governing this provision of section

592. Customs will determine the validity of

the prior disclosure including whether or not

the prior disclosure sets forth all the required

elements of a violation of section 592. A

valid prior disclosure warrants the

imposition of the reduced Customs civil

penalties set forth below:

(1) Fraudulent Violation.

(a) Duty Loss Violation. The claim for

monetary penalty shall be equal to 100

percent of the total loss of duty (i.e., actual

+ potential) resulting from the violation. No

mitigation will be afforded.

(b) Non-Duty Loss Violation. The claim for

monetary penalty shall be equal to 10 percent

of the dutiable value of the merchandise in

question. No mitigation will be afforded.

(2) Gross Negligence and Negligence

Violation.

(a) Duty Loss Violation. The claim for

monetary penalty shall be equal to the

interest on the actual loss of duty computed

from the date of liquidation to the date of the

party’s tender of the actual loss of duty

resulting from the violation. Customs notes

that there is no monetary penalty in these

cases if the duty loss is potential in nature.

Absent extraordinary circumstances, no

mitigation will be afforded.

(b) Non-Duty Loss Violation. There is no

monetary penalty in such cases and any

claim for monetary penalty which had been

issued prior to the decision granting prior

disclosure will be remitted in full.

(G) Mitigating Factors

The following factors will be considered in

mitigation of the proposed or assessed

penalty claim or the amount of the

administrative penalty decision, provided

that the case record sufficiently establishes

their existence. The list is not all-inclusive.

(1) Contributory Customs Error. This factor

includes misleading or erroneous advice

given by a Customs official in writing to the

alleged violator, or established by a

contemporaneously created written Customs

record, only if it appears that the alleged

violator reasonably relied upon the

information and the alleged violator fully and

accurately informed Customs of all relevant

facts. The concept of comparative negligence

may be utilized in determining the weight to

be assigned to this factor. If it is determined

that the Customs error was the sole cause of

the violation, the proposed or assessed

penalty claim shall be canceled. If the

Customs error contributed to the violation,

but the violator also is culpable, the Customs

error will be considered as a mitigating

factor.

(2) Cooperation with the Investigation. To

obtain the benefits of this factor, the violator

must exhibit extraordinary cooperation

beyond that expected from a person under

investigation for a Customs violation. Some

examples of the cooperation contemplated

include assisting Customs officers to an

unusual degree in auditing the books and

records of the violator (e.g., incurring

extraordinary expenses in providing

computer runs solely for submission to

Customs to assist the agency in cases

involving an unusually large number of

entries and/or complex issues). Another

example consists of assisting Customs in

obtaining additional information relating to

the subject violation or other violations.

Merely providing the books and records of

the violator should not be considered

cooperation justifying mitigation inasmuch

as Customs has the right to examine an

importer’s books and records pursuant to 19

U.S.C. 1508–1509.

(3) Immediate Remedial Action. This factor

includes the payment of the actual loss of

duty prior to the issuance of a penalty notice

and within 30 days after Customs notifies the

alleged violator of the actual loss of duties

attributable to the alleged violation. In

appropriate cases, where the violator

provides evidence that immediately after

learning of the violation, substantial remedial

action was taken to correct organizational or

procedural defects, immediate remedial

action may be granted as a mitigating factor.

Customs encourages immediate remedial

action to ensure against future incidents of

non-compliance.

(4) Inexperience in Importing. Inexperience

is a factor only if it contributes to the

violation and the violation is not due to fraud

or gross negligence.

(5) Prior Good Record. Prior good record is

a factor only if the alleged violator is able to

demonstrate a consistent pattern of

importations without violation of section

592, or any other statute prohibiting false or

fraudulent importation practices. This factor

will not be considered in alleged fraudulent

violations of section 592.

(6) Inability to Pay the Customs Penalty.

The party claiming the existence of this

factor must present documentary evidence in

support thereof, including copies of income

tax returns for the previous 3 years, and an

audited financial statement for the most

recent fiscal quarter. In certain cases,

Customs may waive the production of an

audited financial statement or may request

alternative or additional financial data in

order to facilitate an analysis of a claim of

inability to pay (e.g., examination of the

financial records of a foreign entity related to

the U.S. company claiming inability to pay).

(7) Customs Knowledge. Additional relief

in non-fraud cases (which also are not the

Federal Register / Vol. 65, No. 122 / Friday, June 23, 2000 / Rules and Regulations 39097

subject of a criminal investigation) will be

granted if it is determined that Customs had

actual knowledge of a violation and, without

justification, failed to inform the violator so

that it could have taken earlier corrective

action. In such cases, if a penalty is to be

assessed involving repeated violations of the

same kind, the maximum penalty amount for

violations occurring after the date on which

actual knowledge was obtained by Customs

will be limited to two times the loss of duty

in duty-loss cases or twenty percent of the

dutiable value in non-duty-loss cases if the

continuing violations were the result of gross

negligence, or the lesser of one time the loss

of duty in duty-loss cases or ten percent of

dutiable value in non-duty-loss cases if the

violations were the result of negligence. This

factor will not be applicable when a

substantial delay in the investigation is

attributable to the alleged violator.

(H) Aggravating Factors

Certain factors may be determined to be

aggravating factors in calculating the amount

of the proposed or assessed penalty claim or

the amount of the administrative penalty

decision. The presence of one or more

aggravating factors may not be used to raise

the level of culpability attributable to the

alleged violations, but may be utilized to

offset the presence of mitigating factors. The

following factors will be considered

‘‘aggravating factors,’’ provided that the case

record sufficiently establishes their existence.

The list is not exclusive.

(1) Obstructing an investigation or audit,

(2) Withholding evidence,

(3) Providing misleading information

concerning the violation,

(4) Prior substantive violations of section

592 for which a final administrative finding

of culpability has been made,

(5) Textile imports that have been the

subject of illegal transshipment (i.e., false

country of origin declaration), whether or not

the merchandise bears false country of origin

markings,

(6) Evidence of a motive to evade a

prohibition or restriction on the admissibility

of the merchandise (e.g., evading a quota

restriction),

(7) Failure to comply with a lawful

demand for records or a Customs summons.

(I) Offers in Compromise (‘‘Settlement

Offers’’)

Parties who wish to submit a civil offer in

compromise pursuant to 19 U.S.C. 1617 (also

known as a ‘‘settlement offer’’ ) in connection

with any section 592 claim or potential

section 592 claim should follow the

procedures outlined in § 161.5 of the

Customs Regulations (19 CFR 161.5).

Settlement offers do not involve ‘‘mitigation’’

of a claim or potential claim, but rather

‘‘compromise’’ an action or potential action

where Customs evaluation of potential

litigation risks, or the alleged violator’s

financial position, justifies such a

disposition. In any case where a portion of

the offered amount represents a tender of

unpaid duties, taxes and fees, Customs letter

of acceptance may identify the portion

representing any such duty, tax and fee. The

offered amount should be deposited at the

Customs field office responsible for handling

the section 592 claim or potential section 592

claim. The offered amount will be held in a

suspense account pending acceptance or

rejection of the offer in compromise. In the

event the offer is rejected, the concerned

Customs field office will promptly initiate a

refund of the money deposited in the

suspense account to the offeror.

(J) Section 592(d) Demands

Section 592(d) demands for actual losses of

duty ordinarily are issued in connection with

a penalty action, or as a separate demand

without an associated penalty action. In

either case, information must be present

establishing a violation of section 592(a). In

those cases where the appropriate Customs

field officer determines that issuance of a

penalty under section 592 is not warranted

(notwithstanding the presence of information

establishing a violation of section 592(a)), but

that circumstances do warrant issuance of a

demand for payment of an actual loss of duty

pursuant to section 592(d), the Customs field

officer shall follow the procedures set forth

in section 162.79b of the Customs

Regulations (19 CFR 162.79b). Except in

cases where less than one year remains

before the statute of limitations may be raised

as a defense, information copies of all section

592(d) demands should be sent to all

concerned sureties and the importer of record

if such party is not an alleged violator. Also,

except in cases where less than one year

remains before the statute of limitations may

be raised as a defense, Customs will endeavor

to issue all section 592(d) demands to

concerned sureties and non-violator

importers of record only after default by

principals.

(K) Customs Brokers

If a customs broker commits a section 592

violation and the violation involves fraud, or

the broker commits a grossly negligent or

negligent violation and shares in the benefits

of the violation to an extent over and above

customary brokerage fees, the customs broker

will be subject to these guidelines. However,

if the customs broker commits either a

grossly negligent or negligent violation of

section 592 (without sharing in the benefits

of the violation as described above), the

concerned Customs field officer may proceed

against the customs broker pursuant to the

remedies provided under 19 U.S.C. 1641.

(L) Arriving Travelers

(1) Liability. Except as set forth below,

proposed and assessed penalties for

violations by an arriving traveler must be

determined in accordance with these

guidelines.

(2) Limitations on Liability on Noncommercial Violations. In the absence of a

referral for criminal prosecution, monetary

penalties assessed in the case of an alleged

first-offense, non-commercial, fraudulent

violation by an arriving traveler will

generally be limited as follows:

(a) Fraud—Duty Loss Violation. An amount

ranging from a minimum of three times the

loss of duty to a maximum of five times the

loss of duty, provided the loss of duty is also

paid;

(b) Fraud—Non-duty Loss Violation. An

amount ranging from a minimum of 30

percent of the dutiable value of the

merchandise to a maximum of 50 percent of

its dutiable value;

(c) Gross Negligence—Duty Loss Violation.

An amount ranging from a minimum of 1.5

times the loss of duty to a maximum of 2.5

times the loss of duty provided the loss of

duty is also paid;

(d) Gross Negligence—Non-duty Loss

Violation. An amount ranging from a

minimum of 15 percent of the dutiable value

of the merchandise to a maximum of 25

percent of its dutiable value;

(e) Negligence—Duty Loss Violation. An

amount ranging from a minimum of .25 times

the loss of duty to a maximum of 1.25 times

the loss of duty provided that the loss of duty

is also paid;

(f) Negligence—Non-duty Loss Violation.

An amount ranging from a minimum of 2.5

percent of the dutiable value of the

merchandise to a maximum of 12.5 percent

of its dutiable value;

(g) Special Assessments/Dispositions. No

penalty action under section 592 will be

initiated against an arriving traveler if the

violation is not fraudulent or commercial, the

loss of duty is $100.00 or less, and there are

no other concurrent or prior violations of

section 592 or other statutes prohibiting false

or fraudulent importation practices.

However, all lawful duties, taxes and fees

will be collected. Also, no penalty under

section 592 will be initiated against an

arriving traveler if the violation is not

fraudulent or commercial, there are no other

concurrent or prior violations of section 592,

and a penalty is not believed necessary to

deter future violations or to serve a law

enforcement purpose.

(M) Violations of Laws Administered by

Other Federal Agencies.

Violations of laws administered by other

federal agencies (such as the Food and Drug

Administration, Consumer Product Safety

Commission, Office of Foreign Assets

Control, Department of Agriculture, Fish and

Wildlife Service) should be referred to the

appropriate agency for its recommendation.

Such recommendation, if promptly tendered,

will be given due consideration, and may be

followed provided the recommendation

would not result in a disposition inconsistent

with these guidelines.

(N) Section 592 Violations by Small Entities

In compliance with the mandate of the

Small Business Regulatory Enforcement

Fairness Act of 1996, under appropriate

circumstances, the issuance of a penalty

under section 592 may be waived for

businesses qualifying as small business

entities.

Procedures established for small business

entities regarding violations of 19 U.S.C.

1592 were published as Treasury Decision

39098 Federal Register / Vol. 65, No. 122 / Friday, June 23, 2000 / Rules and Regulations

97–46 in the Federal Register (62 FR 30378)

on June 3, 1997.

Raymond W. Kelly,

Commissioner of Customs.

Approved: June 19, 2000.

John P. Simpson,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 00–15874 Filed 6–22–00; 8:45 am]

BILLING CODE 4820–02–P

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Food and Drug Administration

21 CFR Part 868

[Docket No. 00P–1117]

Medical Devices; Anesthesiology

Devices; Classification of Devices to

Relieve Upper Airway Obstruction

AGENCY: Food and Drug Administration,

HHS.

ACTION: Final rule.

SUMMARY: The Food and Drug

Administration (FDA) is classifying

devices to relieve upper airway

obstruction into class II (special

controls). The special control that will

apply to this device is a labeling and

design control guidance document. This

action is being taken in response to a

petition submitted under the Federal

Food, Drug, and Cosmetic Act (the act)

as amended by the Medical Device

Amendments of 1976 (the amendments),

the Safe Medical Devices Act of 1990

(the SMDA), and the Food and Drug

Administration Modernization Act of

1997 (FDAMA). The agency is

classifying this device into class II in

order to provide a reasonable assurance

of the safety and effectiveness of the

device.

DATES: This rule is effective July 24,

2000.

FOR FURTHER INFORMATION CONTACT:

Carroll O’Neill, Center for Devices and

Radiological Health (CDRH) (HFZ–450),

Food and Drug Administration, 9200

Corporate Blvd., Rockville, MD 20850,

301–443–8262, ext. 170.

SUPPLEMENTARY INFORMATION:

I. Background

The act, as amended by the

amendments (Public Law 94–295), the

SMDA (Public Law 101–629), and

FDAMA (Public Law 105–115),

establishes a comprehensive system for

the regulation of medical devices

intended for human use. Section 513 of

the act (21 U.S.C. 360c) establishes three

categories (classes) of devices,

depending on the regulatory controls

needed to provide reasonable assurance

of their safety and effectiveness. The

three categories of devices are class I

(general controls), class II (special

controls), and class III (premarket

approval).

Under section 513(f)(1) of the act,

devices that were not in commercial

distribution before May 28, 1976, the

date of enactment of the amendments,

generally referred to as postamendments

devices, are classified automatically by

statute into class III without any FDA

rulemaking process. These devices

remain in class III and require

premarket approval, unless and until

the device is classified or reclassified

into class I or class II or FDA issues an

order finding the device to be

substantially equivalent, in accordance

with section 513(i) of the act, to a

predicate device that does not require

premarket approval. The agency

determines whether new devices are

substantially equivalent to previously

marketed devices by means of

premarket notification procedures in

section 510(k) of the act (21 U.S.C.

360(k)) and part 807 of the FDA

regulations (21 CFR part 807).

Section 513(f)(2) of the act provides

that any person who submits a

premarket notification under section

510(k) of the act for a device that has not

previously been classified may, within

30 days after receiving an order

classifying the device in class III under

section 513(f)(1), request FDA to classify

the device under the criteria set forth in

section 513(a)(1). FDA shall, within 60

days of receiving such a request, classify

the device by written order. This

classification shall be the initial

classification of the device. Within 30

days after the issuance of an order

classifying the device, FDA must

publish a notice in the Federal Register

announcing such classification.

In accordance with section 513(f)(1) of

the act, FDA issued an order on

December 29, 1999, classifying the

Quickair Choke Reliever, Model 59–

001A in class III, because it was not

substantially equivalent to a device that

was introduced or delivered for

introduction into interstate commerce

for commercial distribution before May

28, 1976, or a device that was

subsequently reclassified into class I or

class II. On December 20, 1999, FDA

filed a petition from Maet, Industries,

Inc., requesting classification of the

device into class II under section

513(f)(2) of the act.

After review of the information

submitted in the petition, FDA

determined that the Quickair Choke

Reliever, Model 59–001A can be

classified in class II with the

establishment of special controls. FDA

believes that class II special controls, in

addition to the general controls, provide

reasonable assurance of the safety and

effectiveness of the device. On February

29, 2000, FDA issued an order to the

petitioner classifying the Quickair

Choke Reliever, Model 59–001A, and

substantially equivalent devices of this

generic type into class II under the

generic name, ‘‘Devices to relieve upper

airway acute obstruction.’’ In addition

to the general controls of the act, the

Quickair Choke Reliever, Model 59–

001A is subject to the following special

control: ‘‘Class II Special Control

Guidance Document for Acute Upper

Airway Obstruction Devices.’’ The

guidance document covers:

(1) Labeling that includes instructions

for reporting complications resulting

from the use of the device directly to the

manufacturer, as well as any applicable

medical device reporting requirements

(21 CFR part 803).

(2) Labeling for the lay user that

includes adequate instructions for use

including: (a) A clear identification of

the minimum victim size threshold

(weight), as well as any device-specific

limitations identified through

application of design controls, and (b)

instructions for use of the Heimlich

maneuver.

(3) Design controls that satisfactorily

evaluate:

(a) The potential for excessive

generation and application of pressure

to the abdomen that can result in

damage to the internal organs;

(b) The generated pressures and their

distributions over the abdomen as

compared to the Heimlich maneuver in

a variety of victim sizes and user

strengths;

(c) The initial and peak airway

pressures and the duration of pressure

application of the device as compared to

the Heimlich maneuver;

(d) Bench testing to include static

load, mechanical shock, fatigue and

intra-abdominal pressure simulation;

and

(e) Human factors testing to

demonstrate that the lay user is able to

understand and follow the device

instructions for use with respect to

device placement and applied force.

The testing should include a range of

rescuer’s sizes, ages and educational

levels, as well as an appropriate range

of victim size and position.

In order to receive the document

entitled ‘‘Class II Special Control

Guidance Document for Acute Upper

Airway Obstruction Devices’’ via your

fax machine, call the CDRH Facts-OnDemand (FOD) system at 800–899–0381