[Federal Register Volume 65, Number 16 (Tuesday, January 25, 2000)]
[Rules and Regulations]
[Pages 3803-3812]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1681]


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DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Parts 162, 171 and 191

[T.D. 00-5]
RIN 1515-AC21


Penalties for False Drawback Claims

AGENCY:  U.S. Customs Service, Department of the Treasury.

ACTION:  Final rule.

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SUMMARY:  This document adopts as a final rule, with some changes, 
proposed amendments to the Customs Regulations that implement section 
622 of the Customs Modernization provisions of the North American Free 
Trade Agreement Implementation Act concerning penalties for false 
drawback claims. The document sets forth: procedures that apply when 
false drawback claims are filed and penalties are thereby incurred; 
mitigation guidelines that Customs would follow in arriving at a just 
and reasonable assessment and disposition of liabilities when false 
drawback claims are filed and penalties are incurred; and more specific 
grounds and procedures for removing a participant from the drawback 
compliance program.

EFFECTIVE DATE:  February 24, 2000.

FOR FURTHER INFORMATION CONTACT:  Wende Schuster, Penalties Branch, 
Office of Regulations and Rulings, 202-927-1537.

SUPPLEMENTARY INFORMATION:

Background

    On December 8, 1993, the President signed into law the North 
American Free Trade Agreement Implementation Act (Public Law 103-182, 
107 Stat. 2057). Title VI of that Act contained provisions pertaining 
to Customs Modernization and thus is commonly referred to as the 
Customs Modernization Act or ``Mod Act.'' Paragraph (a) of section 622 
of the Mod Act amended the Tariff Act of 1930, as amended, by adding 
section 593A, which prohibits the filing of false (fraudulent or 
negligent) drawback claims and prescribes the actions that Customs may 
take, including the assessment of monetary penalties, if such claims 
are filed. New section 593A was codified as section 1593a of Title 19 
of the United States Code (19 U.S.C. 1593a, hereinafter ``the 
statute'').
    As in the case of penalties under section 592 of the Tariff Act of 
1930, as amended (19 U.S.C. 1592), specific procedures and other 
requirements are set forth in the statute for prepenalty notices and 
penalty claims, the former not being required by the statute if the 
penalty is $1,000 or less, and provision is made for limited penalty 
assessment if there is a prior disclosure. The statute further provides 
for the applicability of section 618 of the Tariff Act of 1930, as 
amended (19 U.S.C. 1618), which authorizes the administrative remission 
or mitigation of penalties. Written decisions, setting forth a final 
determination and findings of fact and conclusions of law upon which 
that determination was based, are also mandated by the statute.
    The statute provides for the assessment of monetary penalties in 
amounts not to exceed a specific percentage of the actual or potential 
loss of revenue, with the applicable percentage depending on the level 
of culpability, whether there have been prior violations involving the 
same issue, and whether the violator is a participant in the Customs 
drawback compliance program. (The statute provides for the 
establishment of a drawback compliance program; regulatory provisions 
relating to the operation of that program were adopted as part of the 
amendments to the Customs Regulations regarding drawback published in 
the Federal Register as T.D. 98-16 on March 5, 1998, 63 FR 10970.) The 
statute also provides for the issuance of a notice of a violation 
(warning letter) in lieu of a monetary penalty in the case of a 
drawback compliance program participant who commits a first (that is, 
nonrepetitive) negligent violation.
    On September 29, 1998, Customs published a Notice of Proposed 
Rulemaking in the Federal Register (63 FR 51868) setting forth proposed

[[Page 3804]]

amendments to the Customs Regulations to implement the statutory 
changes made by section 622(a) of the Mod Act. The proposed amendments 
involved changes to the penalty procedure provisions within Parts 162 
and 171 of the Customs Regulations (19 CFR Parts 162 and 171), the 
addition of a new Appendix D to Part 171 setting forth guidelines for 
the imposition and mitigation of monetary penalties incurred under the 
statute, and changes regarding the grounds and procedures for revoking 
a certification for participation in the drawback compliance program 
contained in Sec. 191.194 of the Customs Regulations (19 CFR 191.194) 
which was originally adopted in T.D. 98-16 mentioned above. The Notice 
of Proposed Rulemaking also stated that, in accordance with paragraph 
(b) of section 622 of the Mod Act (which provides that the provisions 
of the statute apply only to drawback claims filed on and after 
nationwide implementation by Customs of an automated drawback 
selectivity program and which mandates the publication in the Customs 
Bulletin of the effective date of that selectivity program), the 
proposed regulatory amendments, if adopted as a final rule, will not be 
effective until Customs implements an automated drawback selectivity 
program. Finally, the Notice of Proposed Rulemaking made provision for 
the submission of public comments on the proposed regulatory changes 
for consideration before adoption of those changes as a final rule. The 
prescribed public comment period closed on November 30, 1998.

Discussion of Comments

    Seven commenters responded to the solicitation of comments 
contained in the Notice of Proposed Rulemaking. The comments submitted 
are summarized and responded to below.

A. Part 162

Section 162.71--Definitions

    Comment: Three commenters expressed concern that the meaning of 
``revenue,'' as used in the proposed texts, was not sufficiently clear, 
and they suggested that it should have the meaning of ``drawback'' as 
defined in Sec. 191.2(i) of the Customs Regulations (19 CFR 191.2(i)). 
Two of these commenters specifically suggested as a solution the 
inclusion of a reference to Sec. 191.2(i) in the definition of ``loss 
of revenue'' in the introductory text of proposed Sec. 162.71(b), in 
the definition of ``actual loss of revenue'' in proposed 
Sec. 162.71(b)(1) and in the definition of ``potential loss of 
revenue'' in proposed Sec. 162.71(b)(2), each of which defines the term 
at issue with reference to ``the amount of drawback that is claimed * * 
*.''
    Customs response: Customs agrees that the meaning of ``revenue'' 
should be clarified in the regulatory texts with reference to the 
meaning of ``drawback'' contained in Sec. 191.2(i) within the drawback 
regulations. Customs also agrees that the best approach would be to 
insert a cross-reference to Sec. 191.2(i) after the word ``drawback'' 
in the definitions of ``loss of revenue'' and ``actual loss of 
revenue'' and ``potential loss of revenue'' within proposed 
Sec. 162.71(b) which, as set forth below, has been modified 
accordingly.
    On a related matter, Customs notes that the current Sec. 162.74 
prior disclosure provisions adopted in T.D. 98-49 (which was published 
in the Federal Register at 63 FR 29126 on May 28, 1998, and corrected 
at 63 FR 35798 on July 1, 1998) included appropriate references to 19 
U.S.C. 1593a but inadvertently did not include corresponding references 
to the tender of actual loss of ``revenue'' in paragraphs (a) and (c). 
Section 162.74 is amended below in order to correct this oversight.

Section 162.73a(b)(2) and Subsection (G)(2) of Appendix D to Part 171--
Notice of Violation and Response Thereto

    Comment: Four comments were received on proposed Sec. 162.73a(b)(2) 
and subsection (G)(2) of Appendix D to Part 171, which concern 
alternatives to penalties for participants in the drawback compliance 
program. Under these provisions, when a participant commits a violation 
of section 593A, in the absence of fraud or a repeat violation and in 
lieu of a monetary penalty, Customs will issue a written notice of the 
violation (a warning letter). These commenters noted that there is no 
provision in either case for a person who receives such a warning 
letter to contest, challenge, or appeal it. The commenters proposed the 
inclusion of language in Sec. 162.73a(b)(2) and in subsection (G)(2) of 
Appendix D to Part 171 to allow a person who receives a warning letter 
to have the opportunity to formally appeal that action within 30 days 
from issuance. Furthermore, these commenters suggested that the program 
participant should be entitled to challenge any denial of an appeal 
with Customs Headquarters within 30 days after the issuance of the 
applicable drawback office's appeal decision.
    Customs response: Pursuant to Sec. 162.73a(b)(2)(ii), within 30 
days from the date of mailing of the warning letter under 
Sec. 162.73a(b)(1)(ii)(A), the person concerned must notify Customs in 
writing of the steps that have been taken to prevent a recurrence of 
the violation. In consideration of the fact that the issuance of a 
warning letter has legal consequences in that it has an effect on the 
liability for a penalty for a subsequent repetitive violation, Customs 
agrees with the suggestion of these commenters that during the 
prescribed 30-day period the alleged violator should have the 
opportunity to refute the allegations made in the warning letter if he 
believes that no violation took place (in which case the need to take 
steps to prevent a recurrence would not exist). Accordingly, 
Sec. 162.73a(b)(2)(ii) has been modified as set forth below to include 
a procedure for challenging a warning letter and to provide that if, 
after considering any arguments made in response to the warning letter, 
Customs determines that no violation occurred, Customs will in writing 
notify the person of that determination and rescind the warning letter; 
however, if Customs affirms the warning letter, the requirement to 
provide notice of the steps taken to prevent a recurrence would remain 
applicable and the person would have a minimum of 15 days in which to 
comply with that requirement. A conforming change has been included in 
corresponding subsection (G)(2) of Appendix D to Part 171 as set forth 
below.
    While the alleged violator is specifically required under the 
statute to respond to the warning letter (see 19 U.S.C. 1593a(f)(3)), 
there is no statutory provision for an additional appeal mechanism at 
this stage in the penalty process. Customs believes that it would 
create an unacceptable administrative burden to provide for a further 
appeal procedure to Headquarters as suggested by these commenters.

Section 162.77a(c)--Exceptions to Prepenalty Notice

    Comment: One comment was received on proposed Sec. 162.77a(c) which 
provides that a prepenalty notice will not be issued for a violation of 
19 U.S.C. 1593a if the amount of the proposed monetary penalty is 
$1,000 or less. The commenter questioned whether a person will have the 
right to make an oral and written presentation if the amount of the 
proposed monetary penalty is $1,000 or less and, if so, whether the 
petitioner will have a 30-day deadline in which to file a petition for 
remission or mitigation.
    Customs response: Even though Customs under the statute may only 
proceed directly with the issuance of a

[[Page 3805]]

penalty claim to the alleged violator (rather than first issue a 
prepenalty notice) when the penalty claim is $1,000 or less, the 
alleged violator will be afforded a reasonable opportunity under the 
provisions of 19 U.S.C. 1618 to make representations, both oral and 
written, seeking remission or mitigation of the monetary penalty. 
Unless additional time has been authorized by Customs, under Part 171 
the alleged violator will have 60 days from the date of mailing of the 
notice of penalty incurred in which to file a petition. In addition, 
under Part 171 the person named in the penalty notice may also request 
an opportunity to make an oral presentation seeking relief.

B. Appendix D to Part 171

Section (A)--Violations of Section 593A

    Comment: Two commenters requested definitions of the terms 
``clerical error'' and ``mistake of fact'' as used in proposed Appendix 
D to Part 171.
    Customs response: The terms in question are already defined for 
purposes of new Appendix D to Part 171. It is noted in this regard that 
the definitions contained in Sec. 162.71 apply for purposes of Subpart 
G of Part 162 and include a definition of ``clerical error'' in 
paragraph (c) (redesignated in this document as paragraph (e)) and a 
definition of ``mistake of fact'' in paragraph (d) (redesignated in 
this document as paragraph (f)). Therefore, since new Appendix D to 
Part 171 relates specifically to the imposition and mitigation of the 
penalties provided for in new Sec. 162.73a (which, as adopted in this 
document, will fall within Subpart G of Part 162), those definitions 
also will apply for purposes of those Appendix D provisions.

Section (D), Paragraph (3)(e)--Exclusivity

    Comment: One comment was received concerning proposed paragraph 
(3)(e) of section D which states that penalty claims under section D 
shall be the exclusive civil remedy for any drawback-related violation 
of section 593A. The commenter was of the opinion that Part 162 or Part 
171 of the regulations should be revised to include the language of 
this provision.
    Customs response: The language in question reflects the terms of 
the statute (19 U.S.C. 1593a(c)(5)) and was included in the Appendix 
for information purposes. Customs does not believe that it is necessary 
to repeat this statutory language in the Part 162 or Part 171 
regulations.

Section (F), Paragraph (4)(a)--Contributory Customs Error

    Comment: Two comments were received on proposed paragraph(4)(a) of 
section F which sets forth ``contributory Customs error'' as a 
mitigating factor. This provision states, in pertinent part, that if it 
is determined that the Customs error was the sole cause of the 
violation, the proposed or assessed penalty is to be canceled. One 
commenter stated that the text should include examples of Customs 
errors as the sole cause, the other commenter requested clarification 
on whether Customs will make the determination, and both commenters 
were of the opinion that the alleged violator should have an 
opportunity to appeal a determination that a Customs error was not the 
sole cause of the violation.
    Customs response: One of the factors which may be considered by 
Customs in mitigation of a proposed or assessed penalty claim or final 
penalty amount is contributory Customs error. This factor includes 
misleading or erroneous advice given by a Customs official in writing 
to the alleged violator, but this factor may be applied in such a case 
only if it appears that the alleged violator reasonably relied upon the 
written information and the alleged violator fully and accurately 
informed Customs of all relevant facts. It is the responsibility of the 
particular Customs official to determine whether an error made by 
Customs was the sole cause of the violation. If a party is not 
satisfied with a decision made by Customs with regard to this factor, a 
supplemental petition may be filed with the Fines, Penalties, and 
Forfeitures Officer under Part 171. Finally, Customs does not believe 
that examples of Customs errors that are the sole cause of a violation 
should be included in the Appendix text because each case is unique and 
must be decided on its particular facts.

Section (F), Paragraph (4)(f)--Customs Knowledge

    Comment: Two comments were received on proposed paragraph (4)(f) of 
section (F) which sets forth, as a mitigating factor in non-fraud 
cases, the fact that Customs had actual knowledge of a violation and 
failed, without justification, to inform the violator so that it could 
have taken earlier remedial action. One commenter requested 
clarification on whether the alleged violator will be expected to 
demonstrate that Customs did not act and, if so, how the violator can 
prove that fact. The other commenter stated that specific guidelines 
should be provided regarding the type of evidence that must be produced 
to establish that Customs knew of the violation but never informed the 
violator.
    Customs response: An alleged violator is responsible for proving by 
a preponderance of the evidence that Customs had actual knowledge of a 
violation and failed, without justification, to inform the violator so 
that it could have taken earlier remedial action. However, if Customs 
can show that it was justified in withholding the information, then 
this factor will not be considered in mitigation of a proposed or 
assessed penalty. Because each case must be decided on its own unique 
facts, Customs does not believe that specific examples of types of 
evidence should be included here.

Section (G), Paragraph (1)--Drawback Compliance Program Participants In 
General

    Comment: One comment was received concerning the separate treatment 
afforded drawback compliance program participants under section (G). 
This commenter argued that participants in the drawback compliance 
program should be subject to the same penalties (if not even more 
severe penalties) than persons who are not participants in the drawback 
compliance program. The commenter argued that exporters that are 
approved for participation in the drawback compliance program should be 
held to a higher standard of compliance with the drawback regulations 
than the infrequent exporter.
    Customs response: The distinction between participants in the 
drawback compliance program and nonparticipants for purposes of 
assessing penalties for false drawback claims must remain in the 
guidelines because it reflects the terms of the statute (19 U.S.C. 
1593a(f)) which specifically provides both for alternatives to 
penalties and for a lower penalty level when a party has been certified 
as a participant in the drawback compliance program.
    Comment: Four commenters expressed concern that the subject of 
remission or mitigation of a monetary penalty incurred under 19 U.S.C. 
1593a is not found in the proposed regulations themselves but rather 
appears only in proposed Appendix D to Part 171. The commenters were of 
the opinion that the status of the Appendix is more closely analogous 
to ``guidelines'' and does not rise to the level of a regulation. Three 
of these commenters specifically suggested that the first sentence of 
Appendix D to Part 171, or a slight variation thereof, should be added 
to the regulatory text.

[[Page 3806]]

    Customs response: The commenters are correct that a distinction can 
be made between the guidelines in Appendix D to Part 171 and the 
regulatory texts in Parts 162 and 171, because the guidelines serve 
primarily to inform the general public regarding how Customs officers 
will carry out their statutory functions rather than to directly 
control the actions of the general public. However, Customs does not 
agree that the general language concerning remission or mitigation of a 
penalty under 19 U.S.C. 1593a at the beginning of Appendix D should be 
added to the regulatory text. Customs has included similar language 
involving remission or mitigation of a penalty in Appendix A to Part 
171 (guidelines for disposition of violations of 19 U.S.C. 1497) and in 
Appendix B to Part 171 (revised penalty guidelines under 19 U.S.C. 
1592). Customs believes that it is unnecessary to repeat in the 
regulatory text that which is already clearly and adequately stated in 
the guidelines and in the applicable statute.

C. Part 191

Section 191.194(e)(1)(ii)--Certification Removal for Noncompliance

    Comment: One comment was received on proposed 
Sec. 191.194(e)(1)(ii) which sets forth, as a ground for removal of a 
participant from the drawback compliance program, the failure to remain 
in compliance with the Customs laws and regulations. The commenter 
requested clarification regarding who within Customs is empowered to 
remove a program participant from the drawback compliance program. In 
addition, the commenter asked whether a party will be removed from the 
drawback compliance program if the party notifies Customs of a 
violation through a prior disclosure.
    Customs response: The initial decision to remove a program 
participant from the drawback compliance program will be made by the 
appropriate Customs drawback office, and that decision may be appealed 
to the Office of Trade Programs at Headquarters. The eight drawback 
offices are located in Boston, MA; New York, N.Y.; Miami, FL; New 
Orleans, LA; Houston, TX; Long Beach, CA; Chicago, IL; and San 
Francisco, CA. It is the position of Customs that a party will not 
automatically be removed from the drawback compliance program for 
disclosing the circumstances of a violation by means of a prior 
disclosure. However, it always remains within the discretion of Customs 
to determine whether the circumstances of a particular violation 
warrant removal of a party from the drawback compliance program.

Section 191.194(e)(1)(iv)--Certification Removal for Felony or 
Misdemeanor

    Comment: One comment was received on proposed 
Sec. 191.194(e)(1)(iv) concerning removal of a participant from the 
drawback compliance program due to conviction of any felony or where 
the program participant has committed acts which would constitute a 
misdemeanor or felony involving theft, smuggling, or any theft-
connected crime. The commenter requested that the regulation state 
which Customs official is empowered to make a determination that a 
program participant should be removed under this provision. It was the 
opinion of the commenter that the language of this provision is vague 
and does not afford the participant any due process. The commenter 
suggested either deleting the language or changing the language of this 
provision to read as follows: ``The program participant is convicted of 
any felony or convicted of any misdemeanor involving theft, smuggling, 
or any theft-connected crime.''
    Customs response: As indicated in the previous comment response, 
the appropriate drawback office is initially responsible for 
determining whether a participant should be removed from the drawback 
compliance program, but Customs does not believe that it is necessary 
to specify this in the regulatory text. Customs does not believe that 
the language of this provision should be changed as specifically 
proposed by this commenter. To require that a participant be convicted 
of a felony or any misdemeanor involving theft, smuggling, or any 
theft-connected crime before removal from the drawback compliance 
program would be inconsistent with sound administrative practice, 
particularly in cases where there is an impact on the revenue.

Section 191.194(e)(3)--Effect of Removal

    Comment: With regard to proposed Sec. 191.194(e)(3) which concerns 
the effect of removal of certification for participation in the 
drawback compliance program, one commenter asked whether removal from 
the drawback compliance program automatically revokes the participant's 
other drawback privileges (that is, accelerated payment and waiver of 
prior notice).
    Customs response: Pursuant to Sec. 191.195 of the Customs 
Regulations (19 CFR 191.195), a party may make a combined application 
for certification in the drawback compliance program and for waiver of 
prior notice of intent to export and/or approval of accelerated payment 
of drawback. The basic purpose behind applying for certification for 
participation in the drawback compliance program is fundamentally 
different from the purpose served by applying for waiver of prior 
notice of intent to export and/or approval of accelerated payment of 
drawback. Accordingly, a party who is removed from the drawback 
compliance program will not automatically also lose a waiver of prior 
notice or accelerated payment of drawback privilege. However, the 
factual basis for removal from the drawback compliance program could 
also form the basis for a separate action to revoke the waiver of prior 
notice or accelerated payment privilege.
    Comment: One comment was received on that portion of proposed 
Sec. 191.194(e)(3) that provides that the removal of certification 
shall be effective immediately in cases of willfulness on the part of 
the program participant or when required by public health, interest, or 
safety. The commenter pointed out that there is no definition of 
``willfulness'' in Part 191 nor any indication of what party will make 
that determination. The commenter also suggested removing the language 
in this provision which refers to the ``public health, interest, or 
safety.''
    Customs response: Customs believes that the language in question 
should remain unchanged. As stated in the background portion of the 
Notice of Proposed Rulemaking, the language in question was taken from 
the provisions of the Administrative Procedure Act (see 5 U.S.C. 
558(c)). Customs believes that it would be inappropriate to attempt to 
define in these regulations terms that are of such general application 
and not limited to drawback penalty concepts. Customs is responsible 
for determining whether the particular behavior of a program 
participant rises to the level of willfulness and whether this behavior 
warrants removal from the program.

D. Miscellaneous Comments

    Comment: One commenter noted that there is no reference to a time 
limitation for the issuance of penalties or the recovery of the loss of 
revenue in the proposed regulations. The commenter also suggested that 
the proposed regulations be amended to include the context of 19 U.S.C. 
1621 which covers the time period in which Customs may commence a suit 
or action in the case of an alleged violation under 19 U.S.C. 1592 or 
1593a.

[[Page 3807]]

    Customs response: Under 19 U.S.C. 1621, Customs is forever barred 
from recovering a penalty under 19 U.S.C. 1593a unless Customs 
commences an appropriate suit or action within five years from the date 
of discovery of the alleged violation if the violation resulted from 
fraud or within five years from the date the alleged violation was 
committed if the violation resulted from negligence. Customs does not 
believe that the regulations should be amended to include the 
provisions of 19 U.S.C. 1621 because that statute references 19 U.S.C. 
1593a and is clear and unambiguous. There is no reason to repeat those 
statute of limitations provisions in the regulations.
    Comment: Three commenters noted that in the Background section of 
the Notice of Proposed Rulemaking there was a reference to an 
``automated drawback selectivity program.'' The commenters stated that 
there are differences of opinion between the trade and Customs 
concerning exactly what selectivity is and how it is to be determined 
and implemented. For purposes of uniformity and certainty of 
application, the commenters requested that the term ``Drawback 
Selectivity Program'' be addressed in the regulations.
    Customs response: The issue of drawback selectivity as it relates 
to penalties for false drawback claims was addressed in T.D. 98-88 
which was published in the Customs Bulletin on November 25, 1998 (32 
Cust. Bull. 47), pursuant to section 622(b) of the Mod Act as discussed 
above. In T.D. 98-88, Customs gave notice to the public that on August 
29, 1998, Customs implemented, on a nationwide operational basis, an 
automated drawback selectivity program. This criteria-based selectivity 
program automates the previously manual, labor-intensive processing of 
drawback claims. The automated drawback selectivity program is 
significant because it will result in more efficient processing of 
drawback data and will move Customs one step closer to paperless 
processing of drawback claims. As a consequence of implementation of 
the drawback selectivity program and publication of T.D. 98-88, any 
person who files a false drawback claim on and after November 25, 1998, 
will become potentially liable for a monetary penalty under 19 U.S.C. 
1593a. However, T.D. 98-88 further stated that, until such time as 
final regulations implementing the provisions of 19 U.S.C. 1593a are in 
effect, Customs does not intend to issue a penalty notice or take any 
other action authorized by 19 U.S.C. 1593a. With regard to the question 
of how selectivity will be implemented by Customs, the criteria used in 
the cargo selectivity process is based upon internal Customs 
enforcement policy and therefore is not an appropriate subject for this 
document.
    Comment: One commenter requested advice regarding the effective 
date of the final rule.
    Customs response: The regulatory changes adopted in this final rule 
are effective on the date set forth under the Effective Date caption in 
the preamble of this document, and that date is the date on which 
Customs will commence actions authorized by 19 U.S.C. 1593a (see the 
discussion of T.D. 98-88 in the preceding comment response).
    Comment: One commenter requested examples of what would be 
considered a negligent violation and a fraudulent violation for 
purposes of assessing a penalty under 19 U.S.C. 1593a.
    Customs response: In general, fraudulent and negligent violations 
are determined on a case-by-case basis depending upon the facts of the 
particular case. An example of a negligent violation for purposes of 19 
U.S.C. 1593a is as follows: An importer makes a claim for drawback 
under 19 U.S.C. 1313(j)(2) (substitution unused merchandise drawback) 
for concentrated orange juice. The importer makes no effort to 
determine if the concentrated orange juice which is exported is 
commercially interchangeable with the concentrated orange juice that 
was imported as required by law and, in fact, the exported and imported 
juices are not commercially interchangeable.
    An example of a fraudulent violation for purposes of 19 U.S.C. 
1593a is as follows: A person makes a false drawback claim asserting 
that certain drawback eligible merchandise was exported from the United 
States. In connection with this claim, the claimant submits fabricated 
bills of lading or other documents of exportation. In actuality, the 
claimant knows that the merchandise was never exported from the United 
States.
    Comment: With reference to the use of the term ``a person'' in the 
proposed drawback penalty regulations, one commenter requested 
clarification on when that term refers to a drawback claimant, a 
drawback broker or a drawback consultant, and when the term refers to a 
combination of these three persons.
    Customs response: For purposes of drawback, a ``person'' or 
``party'' is considered to include any person or company who is 
involved in providing data on which a drawback claim may be based or 
who is the drawback claimant. This would include importers, 
intermediary parties, drawback claimants, and agents such as drawback 
brokers and drawback consultants. Therefore, any party that provides 
information or documentation to one who intends to file a drawback 
claim may be subject to the drawback penalty provisions.
    Comment: One commenter believed that a minimum penalty amount of 
$100 should be established for all willful and negligent violations 
under 19 U.S.C. 1593a in order for the amount of the penalty to have 
any real deterrent effect and in order to be more cost-effective.
    Customs response: Rather than setting forth specific penalty 
amounts, the drawback statute provides for the assessment of monetary 
penalties in amounts not to exceed a specific percentage of the actual 
or potential loss of revenue, with the applicable percentage depending 
on the level of culpability, whether there have been prior violations 
involving the same issue, and whether the violator is a participant in 
the drawback compliance program. The guidelines for mitigation of a 
drawback penalty are general in nature and are intended to give Customs 
discretion in granting relief from a penalty below the statutory 
maximum amount in those cases where Customs deems that it is 
appropriate. Those guidelines were modeled on the 19 U.S.C. 1592 
mitigation guidelines, and since the 19 U.S.C. 1592 mitigation 
guidelines do not provide for a minimum penalty amount for fraud, gross 
negligence or negligence cases, a minimum penalty amount was not 
included in the mitigation guidelines for 19 U.S.C. 1593a purposes. 
Customs would prefer to be able to automate non-serious penalties 
(penalties less than $1,000) by simply issuing a bill to the violator, 
so that the imposition and collection of a small penalty amount would 
be more cost-effective, but Customs does not have authority to take 
such action under the current statutory framework.

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 regulatory amendments should 
be adopted as a final rule with certain changes thereto as discussed 
above and as set forth below. In addition, a number of minor changes 
have been made in the regulatory texts to conform to statutory language 
and to reflect plain language principles.

[[Page 3808]]

Regulatory Flexibility Act and Executive Order 12866

    For the reasons set forth above and because the amendments closely 
follow legislative direction, pursuant to the provisions of the 
Regulatory Flexibility Act (5 U.S.C. 601, et seq.), it is certified 
that the amendments will not have a significant economic impact on a 
substantial number of small entities. Accordingly, the amendments are 
not subject to the regulatory analysis or other requirements of 5 
U.S.C. 603 and 604. Further, this document does not meet the criteria 
for a ``significant regulatory action'' as specified in E.O. 12866.

List of Subjects

19 CFR Part 162

    Customs duties and inspection; Law enforcement; Penalties; Seizures 
and forfeitures.

19 CFR Part 171

    Administrative practice and procedure; Customs duties and 
inspection; Law enforcement; Penalties; Seizures and forfeitures.

19 CFR Part 191

    Administrative practice and procedure; Customs duties and 
inspection; Drawback.

Amendments to the Regulations

    For the reasons stated in the preamble, parts 162, 171 and 191 of 
the Customs Regulations (19 CFR parts 162, 171 and 191) are amended as 
set forth below:

PART 162--INSPECTION, SEARCH, AND SEIZURE

    1. The general authority citation for part 162 is revised to read 
as follows:

    Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1592, 1593a, 1624.
* * * * *

    2. In Sec. 162.71, paragraphs (b) through (d) are redesignated as 
paragraphs (d) through (f), the heading for paragraph (a) is revised, 
and new paragraphs (b) and (c) are added, to read as follows:


Sec. 162.71  Definitions.

* * * * *
    (a) Loss of duties under section 592. * * *
    (b) Loss of revenue under section 593A. When used in Sec. 162.73a, 
the term ``loss of revenue'' means the amount of drawback (see 
Sec. 191.2(i) of this chapter) that is claimed and to which the 
claimant is not entitled and includes both actual and potential loss of 
revenue.
    (1) Actual loss of revenue. When used in Secs. 162.73a, 162.74, 
162.77a and 162.79b, the term ``actual loss of revenue'' means the 
amount of drawback (see Sec. 191.2(i) of this chapter) that is claimed 
and has been paid to the claimant and to which the claimant is not 
entitled.
    (2) Potential loss of revenue. When used in Sec. 162.77a, the term 
``potential loss of revenue'' means the amount of drawback (see 
Sec. 191.2(i) of this chapter) that is claimed and has not been paid to 
the claimant and to which the claimant is not entitled.
    (c) Repetitive violation. When used in Sec. 162.73a to describe a 
violation, ``repetitive'' has reference to a violation by a person that 
involves the same issue as a prior violation by that person.
* * * * *

    3. A new Sec. 162.73a is added to read as follows:


Sec. 162.73a  Penalties under section 593A, Tariff Act of 1930, as 
amended.

    (a) Maximum penalty without prior disclosure for a drawback 
compliance program nonparticipant. If the person concerned has not made 
a prior disclosure as provided in Sec. 162.74 and has not been 
certified as a participant in the drawback compliance program under 
part 191 of this chapter, the monetary penalty under section 593A, 
Tariff Act of 1930, as amended (19 U.S.C. 1593a), cannot exceed:
    (1) For fraudulent violations, three times the loss of revenue; and
    (2) For negligent violations,
    (i) 20 percent of the loss of revenue for the first violation,
    (ii) 50 percent of the loss of revenue for the first repetitive 
violation, or
    (iii) One times the loss of revenue for the second and each 
subsequent repetitive violation.
    (b) Maximum penalty without prior disclosure for a drawback 
compliance program participant--(1) General. If the person concerned 
has not made a prior disclosure as provided in Sec. 162.74 and has been 
certified as a participant in, and is generally in compliance with the 
procedures and requirements of, the drawback compliance program 
provided for in part 191 of this chapter, the monetary penalty or other 
sanction under section 593A, Tariff Act of 1930, as amended (19 U.S.C. 
1593a), cannot exceed:
    (i) For fraudulent violations, three times the loss of revenue; and
    (ii) For negligent violations,
    (A) Issuance of a written notice of a violation (warning letter) 
for the first violation and for any other violation that is not 
repetitive or that is repetitive but does not occur within three years 
from the date of the violation of which it is repetitive,
    (B) 20 percent of the loss of revenue for the first repetitive 
violation that occurs within three years from the date of the violation 
of which it is repetitive,
    (C) 50 percent of the loss of revenue for the second repetitive 
violation that occurs within three years from the date of the first of 
two violations of which it is repetitive, or
    (D) One times the loss of revenue for the third and each subsequent 
repetitive violation that occurs within three years from the date of 
the first of three or more violations of which it is repetitive.
    (2) Notice of violation and required response to notice--(i) The 
notice issued by Customs under paragraph (b)(1)(ii)(A) of this section 
will:
    (A) State that the person concerned has violated section 593A;
    (B) Explain the nature of the violation; and
    (C) Warn the person concerned that future violations of section 
593A may result in the imposition of monetary penalties. The notice 
will also warn the person concerned that repetitive violations may 
result in removal of certification under the drawback compliance 
program provided for in part 191 of this chapter until the person takes 
corrective action that is satisfactory to Customs.
    (ii) Within 30 days from the date of mailing of the notice issued 
under paragraph (b)(1)(ii)(A) of this section:
    (A) The person concerned must notify Customs in writing of the 
steps that have been taken to prevent a recurrence of the violation; or
    (B) If the person concerned believes that no violation took place, 
he may advise Customs in writing of the basis for that position. If 
Customs agrees on further review that no violation in fact took place, 
Customs will in writing advise the person concerned and rescind the 
notice of violation. If on further review Customs remains of the 
opinion that the violation took place as alleged in the notice of 
violation, Customs will issue a written affirmation of the notice of 
violation advising the person concerned that the notice requirement of 
paragraph (b)(2)(ii)(A) of this section remains applicable and must be 
complied with either within the remainder of the prescribed 30-day 
period or within 15 days after issuance of the written affirmation, 
whichever period is longer.
    (c) Maximum penalty with prior disclosure. If the person concerned 
has made a prior disclosure as provided in Sec. 162.74, whether or not 
such person has been certified as a participant in the drawback 
compliance program under

[[Page 3809]]

part 191 of this chapter, the monetary penalty under section 593A, 
Tariff Act of 1930, as amended (19 U.S.C. 1593a), cannot exceed:
    (1) For fraudulent violations, one times the loss of revenue; and
    (2) For negligent violations, an amount equal to the interest 
accruing on the actual loss of revenue during the period from the date 
of overpayment of the claim to the date on which the person concerned 
tenders the amount of the overpayment based on the prevailing rate of 
interest under 26 U.S.C. 6621.

    4. In Sec. 162.74:
    a. In paragraph (a)(1), the first sentence is amended by adding 
after ``fees'' the words ``or actual loss of revenue'';
    b. In paragraph (c), the heading and the first, second, eleventh, 
and twenlfth sentences are amended by adding after ``and fees'' the 
words ``or actual loss of revenue''; and
    c. Also in paragraph (c), the fourth, seventh, and ninth sentences 
are amended by removing the words ``or fees'' wherever they appear and 
adding, in their place, the words ``and fees or actual loss of 
revenue''.

    5. A new Sec. 162.77a is added to read as follows:


Sec. 162.77a  Prepenalty notice for violation of section 593A, Tariff 
Act of 1930, as amended.

    (a) When required. If the appropriate Customs field officer has 
reasonable cause to believe that a violation of section 593A, Tariff 
Act of 1930, as amended (19 U.S.C. 1593a) has occurred, and determines 
that further proceedings are warranted, the officer will issue to the 
person concerned a notice of intent to issue a claim for a monetary 
penalty.
    (b) Contents--(1) Facts of violation. The prepenalty notice will:
    (i) Identify the drawback claim;
    (ii) Set forth the details relating to the seeking, inducing, or 
affecting, or the attempted seeking, inducing, or affecting, or the 
aiding or procuring of, the drawback claim;
    (iii) Specify all laws and regulations allegedly violated;
    (iv) Disclose all the material facts which establish the alleged 
violation;
    (v) State whether the alleged violation occurred as a result of 
fraud or negligence; and
    (vi) State the estimated actual or potential loss of revenue due to 
the drawback claim and, taking into account all circumstances, the 
amount of the proposed monetary penalty.
    (2) Right to make presentations. The prepenalty notice also will 
inform the person of his right to make an oral and a written 
presentation within 30 days of mailing of the notice (or such shorter 
period as may be prescribed under Sec. 162.78) as to why a claim for a 
monetary penalty should not be issued or, if issued, why it should be 
in a lesser amount than proposed.
    (c) Exceptions. A prepenalty notice will not be issued for a 
violation of 19 U.S.C. 1593a if the amount of the proposed monetary 
penalty is $1,000 or less.
    (d) Prior approval. If an alleged violation of 19 U.S.C. 1593a 
occurred as a result of fraud, a prepenalty notice will not be issued 
without prior approval by Customs Headquarters.

    6. Section 162.79a is amended by removing the references 
``Sec. 162.76(b)(1) or Sec. 162.77(b)(1)'' and adding, in their place, 
``Sec. 162.76(b)(1), Sec. 162.77(b)(1) or Sec. 162.77a(b)(1) and 
(b)(2)''.

    7. Section 162.79b is revised to read as follows:


Sec. 162.79b  Recovery of actual loss of duties, taxes and fees or 
actual loss of revenue.

    Whether or not a monetary penalty is assessed under this subpart, 
the appropriate Customs field officer will require the deposit of any 
actual loss of duties, taxes and fees resulting from a violation of 
section 592, Tariff Act of 1930, as amended (19 U.S.C. 1592) or any 
actual loss of revenue resulting from a violation of section 593A, 
Tariff Act of 1930, as amended (19 U.S.C. 1593a), notwithstanding that 
the liquidation of the entry to which the loss is attributable has 
become final. If a person is liable for the payment of actual loss of 
duties, taxes and fees or actual loss of revenue in any case in which a 
monetary penalty is not assessed or a written notification of claim of 
monetary penalty is not issued, the port director will issue a written 
notice to the person of the liability for the actual loss of duties, 
taxes and fees or actual loss of revenue. The notice will identify the 
merchandise and entries involved, state the loss of duties, taxes and 
fees or loss of revenue and how it was calculated, and require the 
person to deposit or arrange for payment of the duties, taxes and fees 
or revenue within 30 days from the date of the notice. Any 
determination of actual loss of duties, taxes and fees or actual loss 
of revenue under this section is subject to review upon written 
application to the Commissioner of Customs.

PART 171--FINES, PENALTIES, AND FORFEITURES

    1. The authority citation for part 171 is revised to read in part 
as follows:

    Authority: 19 U.S.C. 66, 1592, 1593a, 1618, 1624. * * *

    2. Section 171.31a is revised to read as follows:


Sec. 171.31a  Written decisions.

    If a petition for relief relates to a violation of section 592, 
593A or 641, Tariff Act of 1930, as amended (19 U.S.C. 1592, 19 U.S.C. 
1593a or 19 U.S.C. 1641), the petitioner will be provided with a 
written statement setting forth the decision on the matter and the 
findings of fact and conclusions of law upon which the decision is 
based.

    3. Part 171 is amended by adding a new Appendix D to read as 
follows:

Appendix D to Part 171--Guidelines for the Imposition and 
Mitigation of Penalties for Violations of 19 U.S.C. 1593A

    A monetary penalty incurred under section 593A, Tariff Act of 
1930, as amended (19 U.S.C. 1593a; hereinafter referred to as 
section 593A), may be remitted or mitigated under section 618, 
Tariff Act of 1930, as amended (19 U.S.C. 1618; hereinafter referred 
to as section 618), if it is determined that there exist such 
mitigating circumstances as to justify remission or mitigation. The 
guidelines below will be used by Customs in arriving at a just and 
reasonable assessment and disposition of liabilities arising under 
section 593A within the stated limitations. It is intended that 
these guidelines will be applied by Customs officers in prepenalty 
proceedings, in determining the monetary penalty assessed in the 
penalty notice, and in arriving at a final penalty disposition. The 
assessed or mitigated 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 19 
U.S.C. 1593a(i).

(A) Violations of Section 593A

    A violation of section 593A occurs when a person, through fraud 
or negligence, seeks, induces, or affects, or attempts to seek, 
induce, or affect, the payment or credit to that person or others of 
any drawback claim by means of any document, written or oral 
statement, or electronically transmitted data or information, or act 
which is material and false, or any omission which is material, or 
aids or abets any other person in the foregoing violation. There is 
no violation if the falsity 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 mere nonintentional repetition by an 
electronic system of an initial clerical error will not constitute a 
pattern of negligent

[[Page 3810]]

conduct. Nevertheless, if Customs has drawn the person'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 593A.

(B) Degrees of Culpability

    There are two degrees of culpability under section 593A: 
negligence and fraud.
    (1) Negligence. A violation is determined to be 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 or done through the failure to exercise the degree 
of reasonable care and competence expected from a person in the same 
circumstances in ascertaining the facts or in drawing inferences 
from those facts, in ascertaining the offender's obligations under 
the statute, or in communicating information so that it may be 
understood by the recipient. As a general rule, a violation is 
determined to be negligent if it results from the offender's failure 
to exercise reasonable care and competence to ensure that a 
statement made is correct.
    (2) Fraud. A violation is determined to be fraudulent if the 
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.

(C) Assessment of Penalties

    (1) Issuance of Prepenalty Notice. As provided in Sec. 162.77a 
of the Customs Regulations (19 CFR 162.77a), if Customs has 
reasonable cause to believe that a violation of section 593A has 
occurred and determines that further proceedings are warranted, a 
notice of intent to issue a claim for a monetary penalty will be 
issued to the person concerned. In issuing such prepenalty notice, 
the appropriate Customs field officer will make a tentative 
determination of the degree of culpability and the amount of the 
proposed claim. A prepenalty notice will not be issued if the claim 
does not exceed $1,000.
    (2) Issuance of Penalty Notice. After considering 
representations, if any, made by the person concerned pursuant to 
the notice issued under paragraph (C)(1), the appropriate Customs 
field officer will determine whether any violation described in 
section (A) has occurred. If a notice was issued under paragraph 
(C)(1) and the appropriate Customs field officer determines that 
there was no violation, Customs will promptly issue a written 
statement of the determination to the person to whom the notice was 
sent. If the appropriate Customs field officer determines that there 
was a violation, Customs will issue a written penalty claim to the 
person concerned. The written penalty claim will specify all changes 
in the information provided in the prepenalty notice issued under 
paragraph (C)(1). The person to whom the penalty notice is issued 
will have a reasonable opportunity under section 618 to make 
representations, both oral and written, seeking remission or 
mitigation of the monetary penalty. At the conclusion of any 
proceeding under section 618, Customs will provide to the person 
concerned a written statement which sets forth the final 
determination and the findings of fact and conclusions of law on 
which such determination is based.

(D) Maximum Penalties

    (1) Fraud. In the case of a fraudulent violation of section 
593A, the monetary penalty will be in an amount not to exceed 3 
times the actual or potential loss of revenue.
    (2) Negligence.
    (a) In General. In the case of a negligent violation of section 
593A, the monetary penalty will be in an amount not to exceed 20 
percent of the actual or potential loss of revenue for the first 
violation.
    (b) Repetitive Violations. For the first negligent violation 
that is repetitive (i.e., involves the same issue and the same 
violator), the penalty will be in an amount not to exceed 50 percent 
of the actual or potential loss of revenue. The penalty for a second 
and each subsequent repetitive negligent violation will be in an 
amount not to exceed the actual or potential loss of revenue.
    (3) Prior Disclosure.
    (a) In General. Subject to paragraph (D)(3)(b), if the person 
concerned discloses the circumstances of a violation of section 593A 
before, or without knowledge of the commencement of, a formal 
investigation of such violation, the monetary penalty assessed under 
this Appendix will not exceed:
    (i) In the case of fraud, an amount equal to the actual or 
potential revenue of which the United States is or may be deprived 
as a result of overpayment of the claim; or
    (ii) If the violation resulted from negligence, an amount equal 
to the interest computed on the basis of the prevailing rate of 
interest applied under 26 U.S.C. 6621 on the amount of actual 
revenue of which the United States is or may be deprived during the 
period that begins on the date of overpayment of the claim and ends 
on the date on which the person concerned tenders the amount of the 
overpayment.
    (b) Condition Affecting Penalty Limitations. The limitations in 
paragraph (D)(3)(a) on the amount of the monetary penalty to be 
assessed apply only if the person concerned tenders the amount of 
the overpayment made on the claim either at the time of the 
disclosure or within 30 days (or such longer period as Customs may 
provide) from the date of notice by Customs of its calculation of 
the amount of overpayment.
    (c) Burden of Proof. The person asserting lack of knowledge of 
the commencement of a formal investigation has the burden of proof 
in establishing such lack of knowledge.
    (d) Commencement of Investigation. For purposes of this 
Appendix, a formal investigation of a violation is considered to be 
commenced with regard to the disclosing party, and with regard to 
the disclosed information, on the date recorded in writing by 
Customs as the date on which facts and circumstances were discovered 
which caused Customs to believe that a possibility of a violation of 
section 593A existed.
    (e) Exclusivity. Penalty claims under section D will be the 
exclusive civil remedy for any drawback-related violation of section 
593A.

(E) Deprivation of Lawful Revenue

    Notwithstanding section 514, Tariff Act of 1930, as amended (19 
U.S.C. 1514), if the United States has been deprived of lawful 
duties and taxes resulting from a violation of section 593A, Customs 
will require that such duties and taxes be restored whether or not a 
monetary penalty is assessed.

(F) Final Disposition of Penalty Cases When the Drawback Claimant 
Is Not a Certified Participant in the Drawback Compliance Program

    (1) In General. Customs will consider all information in the 
petition and all available evidence, taking into account any 
mitigating, aggravating, and extraordinary factors, in determining 
the final assessed penalty. All factors considered should be stated 
in the decision.
    (2) Penalty Disposition When There Has Been No Prior Disclosure.
    (a) Nonrepetitive Negligent Violation. The final penalty 
disposition will be in an amount ranging from a minimum of 10 
percent of the actual or potential loss of revenue to a maximum of 
20 percent of the actual or potential loss of revenue.
    (b) Repetitive Negligent Violation.
    (i) First Repetitive Negligent Violation. The final penalty 
disposition will be in an amount ranging from a minimum of 25 
percent of the actual or potential loss of revenue to a maximum of 
50 percent of the actual or potential loss of revenue.
    (ii) Second and Each Subsequent Repetitive Negligent Violation. 
The final penalty disposition will be in an amount ranging from a 
minimum of 50 percent of the actual or potential loss of revenue to 
a maximum of 100 percent of the actual or potential loss of revenue.
    (c) Fraudulent Violation. The final penalty disposition will be 
in an amount ranging from a minimum of 1.5 times the actual or 
potential loss of revenue to a maximum of 3 times the actual or 
potential loss of revenue.
    (3) Penalty Disposition When There Has Been a Prior Disclosure.
    (a) Negligent Violation. The final penalty disposition will be 
in an amount equal to the interest determined in accordance with 
paragraph (D)(3)(a)(ii).
    (b) Fraudulent Violation. The final penalty disposition will be 
in an amount equal to 100 percent of the actual or potential loss of 
revenue.
    (4) Mitigating Factors. The following factors will be considered 
in mitigation of the proposed or assessed penalty claim or final 
penalty amount, provided that the case record sufficiently 
establishes their existence. The list is not exclusive.
    (a) Contributory Customs Error. This factor includes misleading 
or erroneous advice given by a Customs official in writing to the 
alleged violator, but this factor may be applied in such a case only 
if it appears that the alleged violator reasonably relied upon the 
written information and the alleged violator fully and accurately 
informed

[[Page 3811]]

Customs of all relevant facts. The concept of comparative negligence 
may be utilized in determining the weight to be assigned to this 
factor. If the Customs error contributed to the violation, but the 
alleged violator is also culpable, the Customs error is to be 
considered as a mitigating factor. If it is determined that the 
Customs error was the sole cause of the violation, the proposed or 
assessed penalty is to be cancelled.
    (b) Cooperation With the Investigation. To obtain the benefits 
of this factor, the alleged violator must exhibit cooperation beyond 
that expected from a person under investigation for a Customs 
violation. An example of the cooperation contemplated includes 
assisting Customs officers to an unusual degree in auditing the 
books and records of the alleged 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 alleged violator may 
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.
    (c) Immediate Remedial Action. This factor includes the payment 
of the actual loss of revenue prior to the issuance of a penalty 
notice and within 30 days after Customs notifies the alleged 
violator of the actual loss of revenue attributable to the 
violation. In appropriate cases, where the alleged 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.
    (d) Prior Good Record. Prior good record is a factor only if the 
alleged violator is able to demonstrate a consistent pattern of 
filing drawback claims without violation of section 593A, or any 
other statute prohibiting the making or filing of a false statement 
or document in connection with a drawback claim. This factor will 
not be considered in alleged fraudulent violations of section 593A.
    (e) 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). In addition, the alleged violator must 
present information reflecting ownership and related domestic and 
foreign parties and must provide information reflecting its current 
financial condition, including books and records of account, bank 
statements, other tax records (for example, sales tax returns) and a 
list of assets with current values; if the alleged violator is a 
closely held corporation, similar current financial information must 
be provided on the shareholders, wherever they are located.
    (f) Customs Knowledge. This factor may be used in non-fraud 
cases (which also are not the subject of a criminal investigation) 
if it is determined that Customs had actual knowledge of a violation 
and failed, without justification, to inform the violator so that it 
could have taken earlier remedial action. This factor is not 
applicable when a substantial delay in the investigation is 
attributable to the alleged violator.
    (5) 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 final administrative 
penalty. 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 used 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.
    (a) Obstructing an investigation or audit.
    (b) Withholding evidence.
    (c) Providing misleading information concerning the violation.
    (d) Prior substantive violations of section 593A for which a 
final administrative finding of culpability has been made.
    (e) Failure to comply with a Customs summons or lawful demand 
for records.

(G) Drawback Compliance Program Participants

    (1) In General. Special alternative procedures and penalty 
assessment standards apply in the case of negligent violations of 
section 593A committed by persons who are certified as participants 
in the Customs drawback compliance program and who are generally in 
compliance with the procedures and requirements of that program. 
Provisions regarding the operation of the drawback compliance 
program are set forth in part 191 of the Customs Regulations (19 CFR 
part 191).
    (2) Alternatives to Penalties. When a participant described in 
paragraph (G)(1) commits a violation of section 593A, in the absence 
of fraud or repeated violations and in lieu of a monetary penalty, 
Customs will issue a written notice of the violation (warning 
letter).
    (a) Contents of Notice. The notice will:
    (i) State that the person has violated section 593A;
    (ii) Explain the nature of the violation; and
    (iii) Warn the person that future violations of section 593A may 
result in the imposition of monetary penalties and that repetitive 
violations may result in removal of certification under the drawback 
compliance program until the person takes corrective action that is 
satisfactory to Customs.
    (b) Response to Notice. Within 30 days from the date of mailing 
of the written notice, the person must notify Customs in writing of 
the steps that have been taken to prevent a recurrence of the 
violation unless the person establishes to the satisfaction of 
Customs that no violation took place (see Sec. 162.73a(b)(2)(ii) of 
the Customs Regulations, 19 CFR 162.73a(b)(2)(ii)). If the person 
fails to provide the required notification in a timely manner, any 
penalty assessed for a repetitive violation under paragraph (G)(3) 
will not be subject to mitigation under this Appendix.
    (3) Repetitive Violations.
    (a) In General. A person who has been issued a written notice 
under paragraph (G)(2) and who subsequently commits a negligent 
violation that is repetitive (i.e., involves the same issue), and 
any other person who is a participant described in paragraph (G)(1) 
and who commits a repetitive negligent violation, is subject to one 
of the following monetary penalties:
    (i) An amount not to exceed 20 percent of the loss of revenue 
for the first repetitive violation that occurs within three years 
from the date of the violation of which it is repetitive;
    (ii) An amount not to exceed 50 percent of the loss of revenue 
for the second repetitive violation that occurs within three years 
from the date of the first of two violations of which it is 
repetitive ; and
    (iii) An amount not to exceed 100 percent of the loss of revenue 
for the third and each subsequent repetitive violation that occurs 
within three years from the date of the first of three or more 
violations of which it is repetitive.
    (b) Repetitive Violations Outside 3-Year Period. If a 
participant described in paragraph (G)(1) commits a negligent 
violation that is repetitive but that did not occur within 3 years 
of the violation of which it is repetitive, the new violation will 
be treated as a first violation for which a written notice will be 
issued in accordance with paragraph (G)(2), and each repetitive 
violation subsequent to that violation that occurs within any 3-year 
period described in paragraph (G)(3)(a) will result in the 
assessment of the applicable monetary penalty prescribed in that 
paragraph.
    (4) Final Penalty Disposition When There Has Been No Prior 
Disclosure.
    (a) In General. Customs will consider all information in the 
petition and all available evidence, taking into account any 
mitigating factors (see paragraph (F)(4)), aggravating factors (see 
paragraph (F)(5)), and extraordinary factors in determining the 
final assessed penalty. All factors considered should be stated in 
the decision.
    (b) First Repetitive Negligent Violation Within 3 Years of 
Violation Handled Under Paragraph (G)(2). The final penalty 
disposition will be in an amount ranging from a minimum of 10 
percent of the loss of revenue to a maximum of 20 percent of the 
loss of revenue.
    (c) Second Repetitive Negligent Violation Within 3 Years of 
Violation Handled Under Paragraph (G)(2) or (G)(3). The final 
penalty disposition will be in an amount ranging from a minimum of 
25 percent of the loss of revenue to a maximum of 50 percent of the 
loss of revenue.
    (d) Third and Each Subsequent Repetitive Negligent Violation 
Within 3 Years of Violation Handled Under Paragraph (G)(2) or

[[Page 3812]]

(G)(3). The final penalty disposition will be in an amount ranging 
from a minimum of 50 percent of the loss of revenue to a maximum of 
100 percent of the loss of revenue.
    (e) Fraudulent Violations. The final penalty disposition will be 
determined in the same manner as in the case of fraudulent 
violations committed by persons who are not participants in the 
drawback compliance program (see paragraph (F)(2)(c)).
    (5) Final Penalty Disposition When There Has Been A Prior 
Disclosure. The final penalty disposition will be determined in the 
same manner as in the case of persons who are not participants in 
the drawback compliance program (see paragraph (F)(3)).

(H) 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 593A may be waived for 
businesses qualifying as small business entities. Procedures that 
were established for small business entities regarding violations of 
19 U.S.C. 1592 in Treasury Decision 97-46 published in the Federal 
Register (62 FR 30378) are also applicable for small entities 
regarding violations of section 593A.

PART 191--DRAWBACK

    1. The authority citation for part 191 continues to read in part as 
follows:

    Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1202 (General Note 20, 
Harmonized Tariff Schedule of the United States), 1313, 1624.
* * * * *
    Secs. 191.191-191.195 also issued under 19 U.S.C. 1593a.
    2. In Sec. 191.194, paragraphs (e) and (f) are revised to read as 
follows:


Sec. 191.194  Action on application to participate in compliance 
program.

* * * * *
    (e) Certification removal--(1) Grounds for removal. The 
certification for participation in the drawback compliance program by a 
party may be removed when any of the following conditions are 
discovered:
    (i) The certification privilege was obtained through fraud or 
mistake of fact;
    (ii) The program participant is no longer in compliance with the 
Customs laws and regulations, including the requirements set forth in 
Sec. 191.192;
    (iii) The program participant repeatedly files false drawback 
claims or false or misleading documentation or other information 
relating to such claims; or
    (iv) The program participant is convicted of any felony or has 
committed acts which would constitute a misdemeanor or felony involving 
theft, smuggling, or any theft-connected crime.
    (2) Removal procedure. If Customs determines that the certification 
of a program participant should be removed, the applicable drawback 
office will serve the program participant with written notice of the 
removal. Such notice will inform the program participant of the grounds 
for the removal and will advise the program participant of its right to 
file an appeal of the removal in accordance with paragraph (f) of this 
section.
    (3) Effect of removal. The removal of certification will be 
effective immediately in cases of willfulness on the part of the 
program participant or when required by public health, interest, or 
safety. In all other cases, the removal of certification will be 
effective when the program participant has received notice under 
paragraph (e)(2) of this section and either no appeal has been filed 
within the time limit prescribed in paragraph (f)(2) of this section or 
all appeal procedures have been concluded by a decision that upholds 
the removal action. Removal of certification may subject the affected 
person to penalties.
    (f) Appeal of certification denial or removal--(1) Appeal of 
certification denial. A party may challenge a denial of an application 
for certification as a participant in the drawback compliance program 
by filing a written appeal, within 30 days of issuance of the notice of 
denial, with the applicable drawback office. A denial of an appeal may 
itself be appealed to Customs Headquarters, Office of Field Operations, 
Office of Trade Programs, within 30 days after issuance of the 
applicable drawback office's appeal decision. Customs Headquarters will 
review the appeal and will respond with a written decision within 30 
days after receipt of the appeal unless circumstances require a delay 
in issuance of the decision. If the decision cannot be issued within 
the 30-day period, Customs Headquarters will advise the appellant of 
the reasons for the delay and of any further actions which will be 
carried out to complete the appeal review and of the anticipated date 
for issuance of the appeal decision.
    (2) Appeal of certification removal. A party who has received a 
Customs notice of removal of certification for participation in the 
drawback compliance program may challenge the removal by filing a 
written appeal, within 30 days after issuance of the notice of removal, 
with the applicable drawback office. A denial of an appeal may itself 
be appealed to Customs Headquarters, Office of Field Operations, Office 
of Trade Programs, within 30 days after issuance of the applicable 
drawback office's appeal decision. Customs Headquarters will consider 
the allegations upon which the removal was based and the responses made 
to those allegations by the appellant and will render a written 
decision on the appeal within 30 days after receipt of the appeal.

    Approved: January 19, 2000.
Raymond W. Kelly,
Commissioner of Customs.
John P. Simpson,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 00-1681 Filed 1-24-00; 8:45 am]
BILLING CODE 4820-02-P