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[Federal Register Volume 63, Number 102 (Thursday, May 28, 1998)]
[Rules and Regulations]
[Pages 29126-29133]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14154]

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DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Parts 162 and 178

[T.D. 98-49]
RIN 1515-AB98

Prior Disclosure

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

ACTION: Final rule.

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SUMMARY: This document amends the Customs Regulations governing ``prior 
disclosure'', including implementation of the Customs modernization 
provisions of the North American Free Trade Implementation Act (Mod 
Act) concerning prior disclosure by a person of a violation of law 
committed by that person involving the filing or attempted filing of a 
drawback claim, or an entry or introduction, or attempted entry or 
introduction of merchandise into the United States by fraud, gross 
negligence, or negligence. Pursuant to the ``prior disclosure'' 
provision of 19 U.S.C. 1592(c)(4) as amended by the Mod Act, and 19 
U.S.C. 1593a(c)(3), if a person commits a violation of 19 U.S.C. 1592 
or 19 U.S.C. 1593a and discloses the circumstances of the violation 
before, or without knowledge of, the commencement of a formal 
investigation of such violation, merchandise shall not be seized and 
any monetary penalty to be assessed shall be limited. ``Commencement of 
a formal investigation'' for purposes of 19 U.S.C. 1592 and 1593a is 
defined in these regulations. The document also amends the regulations 
to give Fines, Penalties and Forfeitures Officers discretion to defer 
Customs disclosure verification proceedings until the disclosing party 
has an opportunity to explain all the circumstances underlying the 
disclosed violation.

EFFECTIVE DATE: June 29, 1998.

FOR FURTHER INFORMATION CONTACT: Robert Pisani, Penalties Branch (202) 
927-2344.

SUPPLEMENTARY INFORMATION:

Background

    On December 8, 1993, the President signed the North American Free 
Trade Agreement Implementation Act (Pub. L. 103-182). The Customs 
modernization portion of this Act (Title VI), popularly known as the 
Customs Modernization Act, or ``the Mod Act'' became effective when it 
was signed. Section 621 of Title VI amended section 592 of the Tariff 
Act of 1930 (19 U.S.C. 1592) (hereinafter referred to as section 592), 
and section 622 of Title VI added new section 593a. On September 26, 
1996, Customs published in the Federal Register (61 FR 50459) a notice 
of proposed rulemaking to amend the Customs Regulations governing prior 
disclosure as it relates to sections 592 and 593a. Pursuant to the 
``prior disclosure'' provision of 19 U.S.C. 1592(c)(4) as amended by 
the Mod Act, and 19 U.S.C. 1593a(c)(3), if a person commits a violation 
of 19 U.S.C. 1592 or 19 U.S.C. 1593a and discloses the circumstances of 
the violation before, or without knowledge of, the commencement of a 
formal investigation of such violation, merchandise shall not be seized 
and any monetary penalty to be assessed shall be limited.
    It is noted that it is the policy of the Customs Service to 
encourage the submission of prior disclosures.
    The notice of proposed rulemaking invited public comments on the 
proposals, which would be considered before adoption of a final rule. 
The public comment period closed on November 25, 1996.

Analysis of Comments

    A total of thirty-seven commenters responded to the solicitation of 
comments during the public comment period. Many commenters applauded 
Customs efforts to re-organize and simplify the regulations involving 
prior disclosure. Ten of the commenters set forth specific 
recommendations to change the proposed amendments on a ``section by 
section'' basis. Five of these ten commenters made general comments 
which were not directly related to a specific section of the proposal. 
The remaining twenty-seven commenters set forth the single 
recommendation to amend the proposal to include a regulatory 
prohibition that would specify that a valid prior disclosure precludes 
the assessment of a liquidated damage claim for the disclosed 
violation.
    The specific ``section by section'' recommendations and/or 
suggestions, general recommendations and/or suggestions, and the 
Customs responses thereto, are set forth below.

Proposed Sec. 162.74(a)

    Comment: One commenter suggests that Sec. 162.74(a)(2) be amended 
to preclude ``oral'' prior disclosures. If adopted, the commenter 
recommends deleting all other references to oral prior disclosures in 
the proposal. No reason is articulated for suggesting this change.
    Customs Response: We can find no valid reason for precluding a 
party from making an oral prior disclosure. Of course, as with a party 
making a written prior disclosure, a party who elects to make an oral 
disclosure must meet the regulatory criteria governing ``disclosure of 
the circumstances of the violation'' before, or without knowledge of 
the commencement of a formal investigation of such violation, in order 
to obtain prior disclosure benefits.
    Comment: One commenter suggests that Customs change proposed 
Sec. 162.74(a)(2) to reflect that the ``appropriate Customs officer,'' 
rather than the Fines, Penalties and Forfeitures Officer, be the 
deciding official regarding whether the party had included 
substantially the information set forth in paragraph (b) of proposed 
Sec. 162.74. The commenter is of the opinion that the decision-making 
authority should be vested in a Customs officer not connected to a 
potential penalty action. For similar reasons, another commenter 
suggests that the port director should be the deciding official instead 
of the Fines, Penalties and Forfeitures Officer.
    Customs Response: We disagree. Inasmuch as the evaluation of 
information regarding the potential assessment of penalties under 19 
U.S.C. 1592 or 19 U.S.C. 1593a is within the province of the Fines, 
Penalties and Forfeitures Officer, we are of the opinion that the 
Fines, Penalties and

[[Page 29127]]

Forfeitures Officer is the appropriate Customs official to determine 
whether the criteria set forth in proposed Sec. 162.74(b) is met.
    Comment: One commenter suggests that proposed Sec. 162.74(a)(2) be 
amended to include language that indicates that a disclosing party is 
presumed to have no knowledge of the commencement of a formal 
investigation of the disclosed violation, unless Customs can rebut such 
presumption by virtue of one or more of the events set forth in 
proposed Sec. 162.74(i).
    Customs Response: Proposed Sec. 162.74(i) sets forth events which 
give rise to presumptions of knowledge of the commencement of a formal 
investigation of the disclosed violation(s). Inasmuch as circumstances 
may exist that demonstrate ``knowledge,'' but that are not included in 
the list of events set forth in proposed Sec. 162.74(i), we do not 
believe that adoption of this suggestion is warranted. Moreover, we 
believe creating such a presumption would conflict with 19 U.S.C. 1592 
and 1593a, which places the burden to demonstrate lack of knowledge on 
the disclosing party.
    Comment: One commenter recommends that the Fines, Penalties and 
Forfeitures Officer should not be listed in proposed Sec. 162.74(a)(2) 
as the sole officer to decide whether the disclosing party made a 
``disclosure of the circumstances of a violation'' (i.e., the criteria 
set forth in proposed Sec. 162.74(b)), and that any such decisions 
should be subject to review or appeal. Further, for the sake of 
grammatical continuity, the commenter recommends deletion of the word 
``that'' after the word ``satisfied'' in proposed Sec. 162.74(a)(2).
    Customs Response: For reasons discussed above, we are of the 
opinion that the Fines, Penalties and Forfeitures Officer is the 
appropriate Customs official to determine whether or not the party has 
met the criteria set forth in proposed Sec. 162.74(b). With respect to 
a right of review or appeal of such determinations, Customs notes that 
such rights already are ensured by virtue of the disclosing party's 
right to petition if Customs issues a prepenalty or penalty notice 
initiating or assessing regular penalties. Lastly, we note that we have 
adopted the commenter's grammatical recommendation.

Proposed Sec. 162.74(b)

    Comment: One commenter recommends that the word ``violator'' in 
proposed Sec. 162.74(b)(4) be changed to ``disclosing party.''
    Customs Response: The recommendation is adopted.
    Comment: One commenter suggests that proposed Sec. 162.74(b)(4) 
should be clarified to indicate that requests for extensions apply to 
all information specified in proposed Sec. 162.74(b).
    Customs Response: We disagree. The adoption of the suggestion is 
contrary to the principle of ``shared responsibility'' and would 
eliminate the obligation to initially provide any information regarding 
a claimed prior disclosure.
    Comment: One commenter suggests that Customs change proposed 
Sec. 162.74(b)(4) to reflect that extension requests should normally be 
granted by Customs except in certain specified circumstances.
    Customs Response: Customs believes that this change is not 
necessary. We note that the commenter did not specify circumstances 
that would warrant a denial of a request for an extension, and we 
believe that the creation of such circumstances would not be in the 
interests of either the disclosing party or the Customs Service.
    Comment: One commenter recommends that proposed Sec. 162.74(b)(4) 
be changed to specify that information provided to Customs pursuant to 
this provision may not be used to initiate or develop a criminal 
investigation or proceeding. The commenter suggests that use of such 
information to develop criminal cases impinges on the disclosing 
party's Constitutional 5th Amendment rights.
    Customs Response: Customs disagrees. In addition to the fact that a 
party elects to make a claimed prior disclosure, it should be noted 
that current law requires referral of suspected criminal violations to 
the concerned U.S. Attorney's office. Consequently, the decision to 
prosecute a suspected violation of criminal statutes rests with the 
concerned U.S. Attorney's office rather than the Customs Service.

Proposed Sec. 162.74(c)

    Comment: One commenter suggests a change in the language in this 
section to make it clearer that the disclosing party may decide to wait 
to tender the actual loss of duties until Customs advises the party of 
its calculation of the actual loss of duties. The commenter is of the 
opinion that the current language is ambiguous, and that some ports 
have insisted that lost duties be tendered at the time of disclosure. 
Further, the commenter recommends that the period for tendering an 
actual loss of duties after having been notified by Customs of such 
loss be extended from 30 days to 60 days, and that the party may 
request an extension of time to tender.
    Customs Response: We agree that the language suggested by the 
commenter regarding the timing of a tender is less ambiguous than the 
proposed language and have revised this section in accordance with the 
commenter's recommendation. On the other hand, we see no reason to 
change the 30 day period to tender an actual loss calculated by Customs 
to 60 days. We note that the proposed regulations do provide the Fines, 
Penalties and Forfeitures Officer with the authority to extend the 30 
day period if it is determined that there is good cause to do so.
    Comment: One commenter recommends adding a subsection to proposed 
Sec. 162.74(c) to provide for refund in the event that Customs 
determines that the amount tendered is not, in fact, an actual loss of 
duties. Three other commenters recommend that proposed Sec. 162.74(c) 
be revised to provide the disclosing party with a mechanism to 
challenge or protest Customs calculation of the actual loss of duties. 
Two of these three commenters suggest that the inability to challenge 
Customs actual loss calculation discourages prior disclosures.
    Customs Response: We agree that where legitimate disputes exist 
between a Customs field office and a disclosing party regarding the 
amount of the actual loss of duties due the government, there should be 
some mechanism for review at Customs Headquarters--provided that the 
Customs claimed loss of duty is substantial (i.e., exceeds $100,000); 
the disclosing party deposits the Customs claimed actual duty loss 
amount; greater than one year remains under the statute of limitations; 
and that the Headquarters review is limited solely to the basis for 
Customs determination of the actual duty loss. In addition, we note 
that granting such review is within the discretion of Customs 
Headquarters, and that such review is conditioned upon the disclosing 
party's compliance with all other provisions of the prior disclosure 
regulations. We also note that where Headquarters review is afforded, 
such review is not limited to the revenue loss claims raised by the 
Customs field office or disclosing party, but could involve an 
independent Headquarters determination. Lastly, although the 
Headquarters decision on such review may result in a partial or total 
refund of the deposited duty loss amount, the regulations indicate 
that, in any case where such review is afforded, the Headquarters 
decision is final and not subject to administrative or judicial appeal. 
In effect, the disclosing party who elects to request such Headquarters 
review should be aware that, if granted,

[[Page 29128]]

the party is waiving any right to contest Headquarters actual loss of 
duties determination--either administratively or judicially.

Proposed Sec. 162.74(d)

    Comment: One commenter recommends that proposed Sec. 162.74(d)(2) 
be revised to require that Customs furnish a receipt that indicates the 
time and date of Customs receipt of claimed prior disclosure documents 
delivered in person. The commenter suggests that it is somewhat 
anomalous to require a person delivering documents to Customs to 
request a receipt, and that as part of ``shared responsibility'' it 
seems more appropriate to provide that the person delivering the 
documents would be furnished a receipt.
    Customs Response: Customs agrees that the proposed regulation 
should be amended to reflect that a receipt will be furnished to the 
person delivering documents, but in keeping with the spirit of ``shared 
responsibility,'' we remain of the opinion that the receipt will be 
furnished upon request.
    Comment: One commenter claims that proposed Sec. 162.74(d)(3) is 
silent as to the specific time and date when a claimed oral prior 
disclosure becomes effective. The commenter provides revised language 
which indicates that orally provided information is ``deemed to have 
occurred at the time the oral communication is made.''
    Customs Response: We disagree with the premise of this 
recommendation. The proposed regulation does, in fact, provide that 
claimed oral prior disclosures are ``deemed to have occurred at the 
time Customs was provided with the information which substantially 
complies with the requirements set forth in paragraph (b) of this 
section.''

Proposed Sec. 162.74(e)

    Comment: Two commenters point out an apparent inconsistency between 
proposed Sec. 162.74(e)(2) and proposed Sec. 162.74(a)(1), in that the 
latter proposed section provides for making a claimed prior disclosure 
to a ``Customs officer,'' whereas the former proposed section provides 
for making a ``multi-port'' claimed prior disclosure to ``all concerned 
Fines, Penalties and Forfeitures Officers.'' One of the commenters 
suggests that Port Director be substituted for Fines, Penalties and 
Forfeitures Officer.
    Customs Response: We agree that there is an apparent inconsistency 
between the two proposed sections. Customs is revising proposed 
Sec. 162.74(e)(2) to reflect that although a ``multi-port'' claimed 
prior disclosure may be made to a Customs officer, unless the claimed 
prior disclosure is made directly to the concerned Fines, Penalties and 
Forfeitures Officer, it is incumbent upon the Customs officer to refer 
the claimed prior disclosure to the concerned Fines, Penalties and 
Forfeitures Officer so that consolidation of the matter can be arranged 
in accordance with internal procedures. We believe that a disclosing 
party should not be limited to providing the claimed prior disclosure 
to the concerned port director.

Proposed Sec. 162.74(f)

    Comment: One commenter recommends that the word ``violator'' in 
proposed Sec. 162.74(f) be changed to ``disclosing party.''
    Customs Response: The recommendation is adopted.
    Comment: One commenter recommends that the Fines, Penalties and 
Forfeitures Officer be eliminated in proposed Sec. 162.74(f) as the 
Customs official responsible for requests for the withholding of 
initiation of disclosure verification proceedings. No specific reason 
is suggested for this change.
    Customs Response: Inasmuch as the concerned Fines, Penalties and 
Forfeitures Officer is the Customs officer who is responsible for 
ascertaining the validity of the claimed prior disclosure, we see no 
reason to adopt the recommended change.
    Comment: One commenter suggests that proposed Sec. 162.74(f) be 
revised to include language indicating that requests to withhold 
initiation of disclosure verification proceedings of the claimed prior 
disclosure should be granted ``except for good cause.''
    Customs Response: The suggestion is not adopted. In the event that 
Customs learns of a serious abuse of discretion regarding such 
requests, Customs can take measures to eliminate the problem through 
either internal guidelines, regulatory revisions or whatever other 
action is deemed appropriate.
    Comment: One commenter suggests that proposed Sec. 162.74(f) be 
revised to provide the Fines, Penalties and Forfeitures Officer with 
the discretion to defer notification to the Office of Investigations of 
a claimed prior disclosure. The commenter is of the opinion that the 
deferral of notification should be predicated on a number of factors, 
such as the gravity of the disclosed violation, any pattern of non-
compliance, etc.
    Customs Response: The notification to the Office of Investigations 
of the claimed disclosure serves to prevent delay in the administrative 
disposition of the disclosure, in that the Office of Investigations can 
take immediate action to initiate or coordinate disclosure verification 
proceedings as well as ascertain whether or not Customs already had 
commenced a formal investigation of the claimed prior disclosure. 
Consequently, Customs is of the opinion that the proposed regulation 
remain unchanged.
    Comment: One commenter recommends that proposed Sec. 162.74(f) be 
changed to reflect that a disclosing party may also request that 
Customs audits be included in a request to withhold initiation of 
disclosure verification proceedings.
    Customs Response: Inasmuch as audits initiated solely to verify 
disclosures would often be considered part of the disclosure 
verification proceedings, Customs is of the opinion that the suggested 
change is unnecessary.
    Comment: One commenter suggests that Customs add to the end of the 
first sentence in proposed Sec. 162.74(f) ``and the Office of 
Investigations is requested to determine whether or not investigation 
is pending or contemplated.'' The commenter does not provide a reason 
for the suggested change.
    Customs Response: In view of the fact that internal procedures 
already exist regarding the handling of claimed prior disclosures by 
the Office of Investigations, Customs is of the opinion that the 
suggested change is unnecessary.

Proposed Sec. 162.74(g)

    Comment: Two commenters indicate that, based upon Congressional 
discussions involving the Customs Modernization Act, proposed 
Sec. 162.74(g) should include language to require that records of a 
``commencement of a formal investigation'' be maintained in the Office 
of Investigations, Customs Headquarters or some other central unit. One 
of these two commenters also suggests that the regulation specify the 
official who is charged with recording the ``commencement'' 
information. Also, this commenter suggests that the words ``with regard 
to the disclosing party'' be added after the word ``commenced'' in the 
first sentence of the proposed section. A third commenter recommends 
that this section be revised to indicate that only Customs agents from 
the Office of Investigations can commence formal investigations for 
prior disclosure purposes. Three other commenters recommend that the 
proposed section be revised to require that a formal

[[Page 29129]]

investigations control number be assigned to the written commencement 
document or otherwise require the Office of Investigations to open an 
investigation. Lastly, one other commenter suggests revisions to the 
proposed section which specify the form and nature of the 
``commencement'' document.
    Customs Response: Customs is of the opinion that proposed 
Sec. 162.74(g) fully comports with the Customs Modernization Act's 
statutory language and intent regarding the definition of the term 
``commencement of a formal investigation.'' The proposed language 
requires that the Customs Service evidence the commencement by a 
writing, as well as specifies that the disclosing party will receive 
written evidence of such a ``commencement'' in any required notice 
issued to the party pursuant to 19 U.S.C. 1592 or 1593a, in the event 
the claimed prior disclosure is denied. We do not agree that the law 
mandates that agents of the Office of Investigations are the only 
Customs officials capable of commencing a formal investigation for the 
purposes of prior disclosure. Further, in Customs view, additional 
requirements involving custody of such records, or record forms/
formats, record maintenance or case control numbers are not properly 
the province of regulation, but rather, concern internal procedures 
developed by the agency. We do agree with the suggestion to include the 
phrase ``with regard to the disclosing party'' after the word 
``commenced'' in the first sentence, and have revised the proposed 
section to reflect adoption of this recommendation.
    Comment: One commenter states that proposed Sec. 162.74(g) should 
indicate that a Customs Form 28 (Request for Information) and Customs 
Form 29 (Notice of Action) cannot be considered written evidence of a 
``commencement of a formal investigation.'' The commenter is of the 
opinion that these documents will have a ``chilling'' effect on the 
prior disclosure provisions if they are permitted to be construed as 
``formal commencement'' documents, in that they, for the most part, 
merely request information or propose rate or value advances.
    Customs Response: As indicated above, Customs is of the opinion 
that dictating the form of the ``commencement'' writing is not properly 
the province of regulation. We do agree that Customs Forms 28 and 29 
which merely request information or propose rate or value advances 
could not be considered ``commencement'' documents for prior disclosure 
purposes unless they articulate that a possibility of a violation 
existed.
    Comment: One commenter recommends deleting the phrase ``denied 
prior disclosure treatment on the basis of the commencement of a formal 
investigation of the disclosed violation'' in the second sentence of 
proposed Sec. 162.74(g). The commenter points out that ``commencement 
of a formal investigation is merely one fact bearing on the ultimate 
resolution of the matter.''
    Customs Response: Customs agrees with the commenter that 
``commencement of a formal investigation of the disclosed violation'' 
is one of several issues concerning the disposition of the claimed 
prior disclosure (e.g., a disclosing party may be unable to obtain 
prior disclosure benefits if the party fails to ``disclose the 
circumstances of the violation'' in accordance with Sec. 162.74(b)--and 
this may occur in cases where Customs had not commenced a formal 
investigation). Nevertheless, this provision of proposed Sec. 162.74(g) 
addresses those instances where the denial of the prior disclosure is 
predicated on the commencement of the formal investigation of the 
disclosed violation. In such cases, the regulation requires a copy of a 
writing evidencing the commencement of a formal investigation of the 
disclosed violation. Accordingly, the recommendation is not adopted.
    Comment: One commenter recommends that proposed Sec. 162.74(g) be 
revised to indicate that any required notice issued pursuant to 19 
U.S.C. 1592 or 1593a should specify the event listed in proposed 
Sec. 162.74(i) that provided the disclosing party with knowledge of the 
commencement of a formal investigation of the disclosed violation. The 
commenter believes that inclusion of such a provision would eliminate 
disputes regarding the issue of knowledge of the commencement.
    Customs Response: We disagree. Customs notes that the purpose 
underlying proposed Sec. 162.74(g) is to provide a definition of the 
``commencement of a formal investigation'' for prior disclosure 
purposes. We note that notices issued to the disclosing party pursuant 
to 19 U.S.C. 1592 or 1593a may commence a formal investigation of the 
disclosed violation and may be issued prior to the claimed disclosure. 
It should also be noted that the law establishes the burden to 
demonstrate lack of knowledge of the commencement of the formal 
investigation upon the disclosing party.
    Comment: One commenter suggests that proposed Sec. 162.74(g) be 
revised to require that the disclosing party be notified of the 
acceptance or denial of the claimed prior disclosure as soon as Customs 
makes that decision, and that documentary evidence of the 
``commencement of a formal investigation'' should be furnished to the 
disclosing party well in advance of the initiation of penalty 
proceedings.
    Customs Response: Customs believes that the statutory and 
regulatory procedures already in place are sufficient to advise parties 
of the validity of a claimed prior disclosure. Also, it is well 
established that an invalid prior disclosure may subject the disclosing 
party to penalties.

Proposed Sec. 162.74(h)

    Comment: One commenter recommends that proposed Sec. 162.74(h) be 
revised to clarify that once an investigation begins with respect to a 
disclosed violation, the disclosing party still may obtain prior 
disclosure treatment for other violations not covered by the commenced 
formal investigation.
    Customs Response: Customs does not believe that clarification is 
necessary. The proposed section makes clear that additional disclosed 
violations not covered in the disclosing party's original prior 
disclosure may receive prior disclosure benefits, provided that such 
additional disclosures were made before ``the date recorded in writing 
by the Customs Service as the date on which facts and circumstances 
were discovered or information was received which caused the Customs 
Service to believe that a possibility of such additional violations 
existed.''

Proposed Sec. 162.74(i)

    Comment: Five commenters recommend that proposed Sec. 162.74(i) be 
revised to require that for the ``presumption of knowledge'' to be 
effective any Customs notification of the disclosed violation to the 
disclosing party that precedes the claimed prior disclosure must be 
evidenced by a ``writing.'' Four of the five commenters maintain that 
such a requirement will avoid unnecessary conflict or misunderstandings 
concerning the content or circumstances of an oral notification by 
Customs. Two of the five commenters are of the opinion that a written 
notification requirement also should require a return receipt. In 
addition, two of the five commenters recommend that proposed 
Sec. 162.74(i) be revised to ensure that ``general inquiries'' (e.g., 
Customs Forms 28 and 29) are not used as evidence of prior knowledge of 
the commencement of a formal investigation of the disclosed

[[Page 29130]]

violation. One of these two commenters suggests inclusion of the phrase 
``so informed the person of that reasonable belief,'' immediately 
following the statutory citations in proposed Sec. 162.74(i)(1)(i) in 
order to clarify that ``general inquiries'' would not constitute a 
presumption of knowledge.
    Customs Response: Customs notes that although the Customs 
Modernization Act prior disclosure changes added the requirement that a 
``commencement of a formal investigation'' must be evidenced by a 
writing, the Modernization Act changes did not impose such a writing 
requirement regarding ``knowledge of the commencement of a formal 
investigation'' involving Customs notification to the disclosing party. 
Customs believes that the language of the proposed regulatory section 
makes clear that ``general inquiries'' or mere ``contact'' with a 
Customs officer prior to the submission of the claimed prior disclosure 
is insufficient to create a ``presumption of knowledge'' of the 
commencement of a formal investigation of the disclosed violation. In 
those instances where oral notification pursuant to proposed 
Sec. 162.74(i) renders the presumption operative, the concerned Customs 
official must meet other criteria--such as informing the person of the 
type of or circumstances of the disclosed violation.
    Customs is of the opinion that its position regarding ``presumption 
of knowledge'' is consistent with the underlying Modernization Act 
theme of ``shared responsibility''--if a party receives oral 
notification from a Customs officer of the type of or circumstances of 
the violation(s) at issue before making the claimed prior disclosure, 
Customs believes that prior disclosure benefits should not accrue--
unless, of course, the party is able to rebut the presumption of 
knowledge as provided for under the proposed regulatory provision. 
Also, it should be noted that even if one or more of the events have 
taken place as set forth in the proposed Sec. 162.74(i), a party still 
may wish to submit a claimed disclosure--either because the party 
believes it can rebut the presumption of knowledge, or because the 
party seeks to obtain substantial mitigation in an ensuing penalty 
proceeding (despite the fact that the information provided to Customs 
does not qualify for disclosure benefits).
    Comment: One commenter suggests changing proposed Sec. 162.74(i) so 
that it cannot be read to permit denial of prior disclosure benefits in 
those instances where one of the events or notifications under the 
proposed regulatory section takes place, but no formal investigation 
has been commenced. Another commenter recommends that Customs should 
eliminate the language in the proposed section which places the burden 
of proving ``lack of knowledge'' on the disclosing party.
    Customs Response: Customs believes the proposed section is clear. 
The second sentence of proposed Sec. 162.74(i) sets forth the 
requirement that the commencement of a formal investigation must occur 
before there can be a presumption of knowledge. Consequently, Customs 
sees no need to adopt the first commenter's suggestion. With respect to 
the burden of proving lack of knowledge, we reject the commenter's 
suggestion to eliminate this burden inasmuch as both concerned 
statutory provisions (i.e., 19 U.S.C. 1592(c)(4) and 19 U.S.C. 
1593a(c)(3)(c)) establish the burden of proving lack of knowledge.

General Comments

    Comment: One commenter recommends that prior disclosure benefits 
should extend to violations of the customs laws other than violations 
of 19 U.S.C. 1592 or 1593a.
    Customs Response: Customs notes that the proposed regulations are 
being promulgated based upon the statutory authority establishing 
``prior disclosure'' for violations of 19 U.S.C. 1592 and 1593a. 
Currently, such statutory authority for permitting ``prior disclosure'' 
of other violations of the customs laws does not exist. Nevertheless, 
it should be noted that in some instances, a party who discloses a 
violation of the customs laws (other than 19 U.S.C. 1592 or 1593a) may 
be entitled to substantial mitigation in the administrative disposition 
of the offense under existing Customs guidelines for such violations.
    Comment: Twenty-six commenters recommend that the proposed 
amendments be revised to prohibit an assessment of liquidated damages 
for a violation revealed in a 19 U.S.C. 1592 or 1593a prior disclosure. 
The vast majority of these commenters are of the opinion that it is 
unfair for the Customs Service to assess liquidated damages against a 
Foreign-Trade Zone (FTZ) operator for breach of the FTZ operator's bond 
based on information obtained from a prior disclosure submitted by an 
operator. These commenters believe that inasmuch as most valid prior 
disclosures by FTZ operators involve a tender of all lost revenue, 
Customs is made whole and that the subsequent assessment of liquidated 
damages should not be allowed. The FTZ commenters are of the opinion 
that the proposed regulations unfairly discriminate against FTZ 
operators, and serve to deter such parties from submitting prior 
disclosures.
    Customs Response: Customs notes that unlike the assessment of civil 
penalties, the assessment of liquidated damages for a breach of bond 
terms is based upon the contractual agreement with the bondholder. 
Accordingly, although Customs may, under existing guidelines, reduce 
liquidated damage amounts in administrative proceedings--particularly 
in those cases where a valid prior disclosure is submitted, the agency 
does not believe the suggestion should be adopted.
    Comment: One commenter suggests that the proposed regulations 
include a statement that indicates that the submission of valid prior 
disclosures is encouraged.
    Customs Response: Customs notes that the commenter's suggested 
statement is not provided for by statute, but rather is a recommended 
statement of agency policy. Inasmuch as it is the policy of the Customs 
Service to encourage the submission of prior disclosures in accordance 
with the proposed regulatory requirements, we have added such a 
sentence to the preamble of this document.
    Comment: One commenter is of the opinion that the annual reporting 
burden set forth in the section under Paperwork Reduction Act heading 
is understated. The commenter believes that it also would be helpful 
for the estimated number of respondents shown to be based on the actual 
number of prior disclosures filed annually in the last several years.
    Customs Response: Customs notes that the figures set forth in the 
notice of proposed rulemaking are Customs best estimates of both the 
annual reporting burden, estimated annual number of respondents and 
estimated average annual burden per respondent. Inasmuch as a prior 
disclosure may involve one Customs entry with one line item, or several 
thousand Customs entries involving hundreds of line items, it is 
virtually impossible to predict either the frequency at which 
disclosures will be made, or the amount of time necessary to complete a 
disclosure. It should also be noted that the simplicity or complexity 
of the ``disclosed violation,'' as well as the number of line items at 
issue may involve a completion time that is either substantially more 
or less than the ``one hour for each Customs entry'' set forth in the 
notice of proposed rulemaking. In view of these considerations and the 
voluntary nature of the prior disclosure

[[Page 29131]]

provisions, Customs is of the opinion that its estimates comport with 
the regulatory requirements of the Paperwork Reduction Act.
    Comment: One commenter believes that it would be helpful to 
acknowledge in this document that there may be instances where the 
disclosing party requires several months--or even longer--to submit all 
of the required information to complete its disclosure of the 
circumstances of the violation.
    Customs Response: Customs acknowledges that in certain cases a 
claimed prior disclosure may involve numerous transactions, multiple 
ports, and/or complex issues and information--all of which require 
adequate research and compilation time. The agency is of the opinion 
that the proposed regulations accommodate such prior disclosures by 
virtue of the ability of the party to request extensions of time to 
research and compile such information.
    Comment: One commenter recommends that the proposed regulations 
include a provision that either establishes a procedure for appealing a 
denial of a claimed prior disclosure, or references such a procedure 
found elsewhere in the Customs Regulations. The commenter is of the 
opinion that such a provision or statement would serve to avoid 
unnecessary litigation.
    Customs Response: Customs notes that, ordinarily, the denial of a 
prior disclosure is manifested by Customs initiation of administrative 
penalty proceedings at ordinary penalty amounts under either 19 U.S.C. 
1592 or 1593a. Inasmuch as the disclosing party may avail itself of 
administrative petitioning rights in such cases (including the right to 
petition Customs denial of prior disclosure treatment), Customs 
believes it is unnecessary to enact a separate or additional appeal 
procedure.
    Comment: Four commenters are of the opinion that Customs should 
reinstate the ``minor violations'' section of the regulations governing 
prior disclosure (former Sec. 162.74(j)). The commenters believe that 
the proposed regulations should state that minor, non-fraudulent 
violations should not be subject to penalty, and one commenter believes 
that such infractions should not be referred to the Office of 
Investigations. Another commenter believes that the deletion of former 
Sec. 162.74(j) will discourage prior disclosure of minor violations.
    Customs Response: Customs notes that despite the deletion of former 
Sec. 162.74(j), the agency does not anticipate any change of practice 
with respect to minor violations. It should be noted that inasmuch as 
``minor violations'' already are addressed in Customs revised penalty 
guidelines (19 CFR Part 171, Appendix B), former Sec. 162.74(j) is 
unnecessary.

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. This document also includes an 
appropriate update of the list of information collection approvals 
contained in Sec. 178.2 of the Customs Regulations (19 CFR Sec. 178.2).

Regulatory Flexibility Act

    Insofar as this amendment closely follows legislative direction, 
pursuant to the provisions of the Regulatory Flexibility Act (5 U.S.C. 
601, et seq.), it is certified that the amendment will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, it is not subject to the regulatory analysis or other 
requirements of 5 U.S.C. 603 and 604.

Executive Order 12866

    This amendment does not meet the criteria for a ``significant 
regulatory action'' as specified in E.O. 12866.

Paperwork Reduction Act

    The collection of information contained in this final regulation 
was submitted to the Office of Management and Budget (OMB) in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) 
and approved under OMB control number 1515-0212. An agency may not 
conduct or sponsor, and a person is not required to respond to a 
collection of information unless the collection of information displays 
a valid control number assigned by OMB.
    The collection of information in this final rule is in Sec. 162.74. 
This information is required in connection with prior disclosure by a 
person of a violation of law committed by that person involving the 
filing or attempted filing of a drawback claim, or an entry or 
introduction, or attempted entry or introduction of merchandise into 
the United States by fraud, gross negligence or negligence. This 
information will be used by Customs to determine if the party discloses 
the circumstances of a violation before, or without knowledge of, the 
commencement of a formal investigation of such violation, so that 
merchandise would not be seized and any monetary penalty to be assessed 
would be limited. The collection of information is required to obtain a 
benefit. The likely respondents are business organizations including 
importers, exporters, and manufacturers.
    The estimated average burden associated with the collection of 
information in this final rule is 1 hour per respondent or recordkeeper 
for each Customs entry involved in prior disclosure. Comments 
concerning the accuracy of this burden estimate and suggestions for 
reducing this burden should be directed to the U.S. Customs Service, 
Paperwork Management Branch, 1300 Pennsylvania Avenue, N.W., 
Washington, D.C. 20229, and to the OMB, Attention: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, D.C. 20503.
    Drafting Information: The principal author of this document was 
Keith B. Rudich, Regulations Branch, Office of Regulations and Rulings, 
U.S. Customs Service. However, personnel from other offices 
participated in its development.

List of Subjects

19 CFR Part 162

    Customs duties and inspection, Law enforcement, Seizures and 
forfeitures.

19 CFR Part 178

    Administrative practice and procedure, Exports, Imports, Reporting 
and recordkeeping requirements.

Amendment to the Regulations

    In accordance with the preamble, Parts 162 and 178 of the Customs 
Regulations (19 CFR Parts 162 and 178) are amended as set forth below:

PART 162--RECORDKEEPING, INSPECTION, SEARCH AND SEIZURE

    1. The general authority citation for Part 162 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1624.

* * * * *
    2. Section 162.71 is amended by removing paragraph (e).
    3. Section 162.74 is revised to read as follows:

Sec. 162.74  Prior disclosure.

    (a) In general.--(1) A prior disclosure is made if the person 
concerned discloses the circumstances of a violation (as defined in 
paragraph (b) of this section) of 19 U.S.C. 1592 or 19 U.S.C. 1593a, 
either orally or in writing to a Customs officer before, or without 
knowledge of, the commencement of a

[[Page 29132]]

formal investigation of that violation, and makes a tender of any 
actual loss of duties in accordance with paragraph (c) of this section. 
A Customs officer who receives such a tender in connection with a prior 
disclosure shall ensure that the tender is deposited with the concerned 
local Customs entry officer.
    (2) A person shall be accorded the full benefits of prior 
disclosure treatment if that person provides information orally or in 
writing to Customs with respect to a violation of 19 U.S.C. 1592 or 19 
U.S.C. 1593a if the concerned Fines, Penalties and Forfeitures Officer 
is satisfied the information was provided before, or without knowledge 
of, the commencement of a formal investigation, and the information 
provided includes substantially the information specified in paragraph 
(b) of this section. In the case of an oral disclosure, the disclosing 
party shall confirm the oral disclosure by providing a written record 
of the information conveyed to Customs in the oral disclosure to the 
concerned Fines, Penalties and Forfeitures Officer within 10 days of 
the date of the oral disclosure. The concerned Fines, Penalties and 
Forfeiture Officer may, upon request of the disclosing party which 
establishes a showing of good cause, waive the oral disclosure written 
confirmation requirement. Failure to provide the written confirmation 
of the oral disclosure or obtain a waiver of the requirement may result 
in denial of the oral prior disclosure.
    (b) Disclosure of the circumstances of a violation. The term 
``discloses the circumstances of a violation'' means the act of 
providing to Customs a statement orally or in writing that:
    (1) Identifies the class or kind of merchandise involved in the 
violation;
    (2) Identifies the importation or drawback claim included in the 
disclosure by entry number, drawback claim number, or by indicating 
each concerned Customs port of entry and the approximate dates of entry 
or dates of drawback claims;
    (3) Specifies the material false statements, omissions or acts 
including an explanation as to how and when they occurred; and
    (4) Sets forth, to the best of the disclosing party's knowledge, 
the true and accurate information or data that should have been 
provided in the entry or drawback claim documents, and states that the 
disclosing party will provide any information or data unknown at the 
time of disclosure within 30 days of the initial disclosure date. 
Extensions of the 30-day period may be requested by the disclosing 
party from the concerned Fines, Penalties and Forfeitures Officer to 
enable the party to obtain the information or data.
    (c) Tender of actual loss of duties. A person who discloses the 
circumstances of the violation shall tender any actual loss of duties. 
The disclosing party may choose to make the tender either at the time 
of the claimed prior disclosure, or within 30 days after Customs 
notifies the person in writing of his or her calculation of the actual 
loss of duties. The Fines, Penalties and Forfeitures Officer may extend 
the 30-day period if there is good cause to do so. The disclosing party 
may request that the basis for determining Customs asserted actual duty 
loss be reviewed by Headquarters, provided that the actual duty loss 
demanded by Customs exceeds $100,000 and is deposited with Customs, 
more than one year remains under the statute of limitations involving 
the shipments covered by the claimed disclosure, and the disclosing 
party has complied with all other prior disclosure regulatory 
provisions. A grant of review is within the discretion of Customs 
Headquarters in consultation with the appropriate field office, and 
such Headquarters review shall be limited to determining issues of 
correct tariff classification, correct rate of duty, elements of 
dutiable value, and correct application of any special rules (GSP, CBI, 
HTS 9802, etc.). The concerned Fines, Penalties and Forfeitures Officer 
shall forward appropriate review requests to the Chief, Penalties 
Branch, Customs Headquarters, Office of Regulations and Rulings. After 
Headquarters renders its decision, the concerned Fines, Penalties and 
Forfeitures Officer will be notified and the concerned Customs port 
will recalculate the loss, if necessary, and notify the disclosing 
party of any actual duty loss increases. Any increases must be 
deposited within 30 days, unless the local Customs office authorizes a 
longer period. Any reductions of the Customs calculated actual loss of 
duty shall be refunded to the disclosing party. Such Headquarters 
review decisions are final and not subject to appeal. Further, 
disclosing parties requesting and obtaining such a review waive their 
right to contest either administratively or judicially the actual loss 
of duties finally calculated by Customs under this procedure. Failure 
to tender the actual loss of duties finally calculated by Customs shall 
result in denial of the prior disclosure.
    (d) Effective time and date of prior disclosure.--(1) If the 
documents that provide the disclosing information are sent by 
registered or certified mail, return-receipt requested, and are 
received by Customs, the disclosure shall be deemed to have been made 
at the time of mailing.
    (2) If the documents are sent by other methods, including in-person 
delivery, the disclosure shall be deemed to have been made at the time 
of receipt by Customs. If the documents are delivered in person, the 
person delivering the documents will, upon request, be furnished a 
receipt from Customs stating the time and date of receipt.
    (3) The provision of information that is not in writing but that 
qualifies for prior disclosure treatment pursuant to paragraph (a)(2) 
of this section shall be deemed to have occurred at the time that 
Customs was provided with information that substantially complies with 
the requirements set forth in paragraph (b) of this section.
    (e) Addressing and filing prior disclosure.--(1) A written prior 
disclosure should be addressed to the Commissioner of Customs, have 
conspicuously printed on the face of the envelope the words ``prior 
disclosure,'' and be presented to a Customs officer at the Customs port 
of entry of the disclosed violation.
    (2) In the case of a prior disclosure involving violations at 
multiple ports of entry, the disclosing party may orally disclose or 
provide copies of the disclosure to all concerned Fines, Penalties and 
Forfeitures Officers. In accordance with internal Customs procedures, 
the officers will then seek consolidation of the disposition and 
handling of the disclosure. In the event that the claimed ``multi-
port'' disclosure is made to a Customs officer other than the concerned 
Fines, Penalties and Forfeitures Officer, the disclosing party must 
identify all ports involved to enable the concerned Customs officer to 
refer the disclosure to the concerned Fines, Penalties and Forfeitures 
Officer for consolidation of the proceedings.
    (f) Verification of disclosure. Upon receipt of a prior disclosure, 
the Customs officer shall notify Customs Office of Investigations of 
the disclosure. In the event the claimed prior disclosure is made to a 
Customs officer other than the concerned Fines, Penalties and 
Forfeitures Officer, it is incumbent upon the Customs officer to 
provide a copy of the disclosure to the concerned Fines Penalties and 
Forfeitures Officer. The disclosing party may request, in the oral or 
written prior disclosure, that the concerned Fines, Penalties and 
Forfeitures Officer request that the Office of Investigations withhold 
the initiation of disclosure verification proceedings until after the 
party has provided the information or data within the time limits 
specified in

[[Page 29133]]

paragraph (b)(4) of this section. It is within the discretion of the 
concerned Fines, Penalties and Forfeitures Officer to grant or deny 
such requests.
    (g) Commencement of a formal investigation. A formal investigation 
of a violation is considered to be commenced with regard to the 
disclosing party on the date recorded in writing by the Customs Service 
as the date on which facts and circumstances were discovered or 
information was received that caused the Customs Service to believe 
that a possibility of a violation existed. In the event that a party 
affirmatively asserts a prior disclosure (i.e., identified or labeled 
as a prior disclosure) and is denied prior disclosure treatment on the 
basis that Customs had commenced a formal investigation of the 
disclosed violation, and Customs initiates a penalty action against the 
disclosing party involving the disclosed violation, a copy of a 
``writing'' evidencing the commencement of a formal investigation of 
the disclosed violation shall be attached to any required prepenalty 
notice issued to the disclosing party pursuant to 19 U.S.C. 1592 or 19 
U.S.C. 1593a.
    (h) Scope of the disclosure and expansion of a formal 
investigation. A formal investigation is deemed to have commenced as to 
additional violations not included or specified by the disclosing party 
in the party's original prior disclosure on the date recorded in 
writing by the Customs Service as the date on which facts and 
circumstances were discovered or information was received that caused 
the Customs Service to believe that a possibility of such additional 
violations existed. Additional violations not disclosed or covered 
within the scope of the party's prior disclosure that are discovered by 
Customs as a result of an investigation and/or verification of the 
prior disclosure shall not be entitled to treatment under the prior 
disclosure provisions.
    (i) Knowledge of the commencement of a formal investigation.--(1) A 
disclosing party who claims lack of knowledge of the commencement of a 
formal investigation has the burden to prove that lack of knowledge. A 
person shall be presumed to have had knowledge of the commencement of a 
formal investigation of a violation if before the claimed prior 
disclosure of the violation a formal investigation has been commenced 
and:
    (i) Customs, having reasonable cause to believe that there has been 
a violation of 19 U.S.C. 1592 or 19 U.S.C. 1593a, so informed the 
person of the type of or circumstances of the disclosed violation; or
    (ii) A Customs Special Agent, having properly identified himself or 
herself and the nature of his or her inquiry, had, either orally or in 
writing, made an inquiry of the person concerning the type of or 
circumstances of the disclosed violation; or
    (iii) A Customs Special Agent, having properly identified himself 
or herself and the nature of his or her inquiry, requested specific 
books and/or records of the person relating to the disclosed violation; 
or
    (iv) Customs issues a prepenalty or penalty notice to the 
disclosing party pursuant to 19 U.S.C. 1592 or 19 U.S.C. 1593a relating 
to the type of or circumstances of the disclosed violation; or
    (v) The merchandise that is the subject of the disclosure was 
seized; or
    (vi) In the case of violations involving merchandise accompanying 
persons entering the United States or commercial merchandise inspected 
in connection with entry, the person has received oral or written 
notification of Customs finding of a violation.
    (2) The presumption of knowledge may be rebutted by evidence that, 
notwithstanding the foregoing notice, inquiry or request, the person 
did not have knowledge that an investigation had commenced with respect 
to the disclosed information.

PART 178--APPROVAL OF INFORMATION COLLECTION REQUIREMENTS

    1. The authority citation for part 178 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 19 U.S.C. 1624; 44 U.S.C. 3501 et seq.

    2. Section 178.2 is amended by adding a new listing to the table in 
numerical order to read as follows:

Sec. 178.2  Listing of OMB control numbers.

------------------------------------------------------------------------
                                                            OMB control 
       19 CFR section                 Description               No.     
------------------------------------------------------------------------
                                                                        
                  *        *        *        *        *                 
Sec.  162.74................  Prior disclosure..........       1515-0212
                                                                        
                  *        *        *        *        *                 
------------------------------------------------------------------------

Samuel H. Banks,
Acting Commissioner of Customs.

    Approved: May 12, 1998.
John P. Simpson,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 98-14154 Filed 5-27-98; 8:45 am]
BILLING CODE 4820-02-P
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