Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations 3803

through 3063 inclusive; certificated in any

category.

Note 1: This AD applies to each airplane

identified in the preceding applicability

provision, regardless of whether it has been

modified, altered, or repaired in the area

subject to the requirements of this AD. For

airplanes that have been modified, altered, or

repaired so that the performance of the

requirements of this AD is affected, the

owner/operator must request approval for an

alternative method of compliance in

accordance with paragraph (c) of this AD.

The request should include an assessment of

the effect of the modification, alteration, or

repair on the unsafe condition addressed by

this AD; and, if the unsafe condition has not

been eliminated, the request should include

specific proposed actions to address it.

Compliance: Required as indicated, unless

accomplished previously.

To prevent fatigue cracking of the rod ends

on the leading edge slat actuators, which

could result in uncommanded deployment of

the wing leading edge slat and consequent

reduced controllability of the airplane,

accomplish the following:

Replacement

(a) Within 24 months after the effective

date of this AD: Replace the leading edge slat

actuator with an actuator that has a new rod

end, or replace the rod end on the existing

slat actuator with a new rod end, at slat

positions 1, 2, 5, and 6; in accordance with

the Accomplishment Instructions in Boeing

Alert Service Bulletin 737–27A1211, dated

November 19, 1998, or Revision 1, dated

December 9, 1999.

Spares

(b) As of the effective date of this AD, no

person shall install any part having a part

number identified in the ‘‘Existing Part

Number’’ column of Section 2.E. of Boeing

Alert Service Bulletin 737–27A1211, dated

November 19, 1998, on any airplane.

Alternative Methods of Compliance

(c) An alternative method of compliance or

adjustment of the compliance time that

provides an acceptable level of safety may be

used if approved by the Manager, Seattle

Aircraft Certification Office (ACO), FAA,

Transport Airplane Directorate. Operators

shall submit their requests through an

appropriate FAA Principal Maintenance

Inspector, who may add comments and then

send it to the Manager, Seattle ACO.

Note 2: Information concerning the

existence of approved alternative methods of

compliance with this AD, if any, may be

obtained from the Seattle ACO.

Special Flight Permits

(d) Special flight permits may be issued in

accordance with sections 21.197 and 21.199

of the Federal Aviation Regulations (14 CFR

21.197 and 21.199) to operate the airplane to

a location where the requirements of this AD

can be accomplished.

Incorporation by Reference

(e) The actions shall be done in accordance

with Boeing Alert Service Bulletin 737–

27A1211, dated November 19, 1998; or

Boeing Alert Service Bulletin 737–27A1211,

Revision 1, dated December 9, 1999. This

incorporation by reference was approved by

the Director of the Federal Register in

accordance with 5 U.S.C. 552(a) and 1 CFR

part 51. Copies may be obtained from Boeing

Commercial Airplane Group, P.O. Box 3707,

Seattle, Washington 98124–2207. Copies may

be inspected at the FAA, Transport Airplane

Directorate, 1601 Lind Avenue, SW., Renton,

Washington; or at the Office of the Federal

Register, 800 North Capitol Street, NW., suite

700, Washington, DC.

(f) This amendment becomes effective on

February 29, 2000.

Issued in Renton, Washington, on January

18, 2000.

Donald L. Riggin,

Acting Manager, Transport Airplane

Directorate, Aircraft Certification Service.

[FR Doc. 00–1596 Filed 1–24–00; 8:45 am]

BILLING CODE 4910–13–U

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.

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

3804 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations

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

§ 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

§ 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

§ 191.2(i) in the definition of ‘‘loss of

revenue’’ in the introductory text of

proposed § 162.71(b), in the definition

of ‘‘actual loss of revenue’’ in proposed

§ 162.71(b)(1) and in the definition of

‘‘potential loss of revenue’’ in proposed

§ 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 § 191.2(i) within the

drawback regulations. Customs also

agrees that the best approach would be

to insert a cross-reference to § 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

§ 162.71(b) which, as set forth below,

has been modified accordingly.

On a related matter, Customs notes

that the current § 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 § 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 § 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

§ 162.73a(b)(2)(ii), within 30 days from

the date of mailing of the warning letter

under § 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, § 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 § 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

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations 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 § 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 § 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.

3806 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations

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 § 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 § 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 theftconnected 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

§ 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

§ 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

§ 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.

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations 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, laborintensive 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 nonserious 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.

3808 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations

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 § 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:

§ 162.71 Definitions.

* * * * *

(a) Loss of duties under section 592.

* * *

(b) Loss of revenue under section

593A. When used in § 162.73a, the term

‘‘loss of revenue’’ means the amount of

drawback (see § 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 §§ 162.73a, 162.74, 162.77a and

162.79b, the term ‘‘actual loss of

revenue’’ means the amount of

drawback (see § 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 § 162.77a, the term ‘‘potential

loss of revenue’’ means the amount of

drawback (see § 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

§ 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 § 162.73a is added to read

as follows:

§ 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 § 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 § 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

§ 162.74, whether or not such person

has been certified as a participant in the

drawback compliance program under

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations 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 § 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 § 162.77a is added to read

as follows:

§ 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

§ 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 ‘‘§ 162.76(b)(1)

or § 162.77(b)(1)’’ and adding, in their

place, ‘‘§ 162.76(b)(1), § 162.77(b)(1) or

§ 162.77a(b)(1) and (b)(2)’’.

7. Section 162.79b is revised to read

as follows:

§ 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:

§ 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

3810 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations

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 § 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

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations 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 § 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

3812 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Rules and Regulations

(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.

* * * * *

§§ 191.191–191.195 also issued under 19

U.S.C. 1593a.

2. In § 191.194, paragraphs (e) and (f)

are revised to read as follows:

§ 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 § 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

DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8866]

RIN 1545–AV48

Equity Options With Flexible Terms;

Special Rules and Definitions

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations providing guidance on the

application of the rules governing

qualified covered calls. The new rules

address concerns that were created by

the introduction of new financial

instruments after the enactment of the

qualified covered call rules. The final

regulations will provide guidance to

taxpayers writing qualified covered

calls.

EFFECTIVE DATE: These regulations are

effective January 25, 2000.

FOR FURTHER INFORMATION CONTACT:

Pamela Lew of the Office of Assistant

Chief Counsel (Financial Institutions

and Products), (202) 622–3950 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On June 25, 1998, the IRS published

in the Federal Register proposed

regulations (REG–104641–97, 63 FR

34616) addressing whether strike prices

available for equity options with flexible

terms affect the definition of a qualified

covered call (QCC) under section

1092(c)(4) for equity options with

standardized terms. No requests to

speak at a public hearing were received,

and no public hearing was held.

Two written comments were received.

These comments focused on whether

equity options with flexible terms

should be eligible for QCC treatment.

After considering these comments, the

IRS and Treasury have decided to