Source: http://www.npllptradelaw.com/blog?offset=1471970771216
Timestamp: 2019-04-22 07:05:32+00:00

Document:
Having sought civil Customs penalties against an importer under Section 592 of the Tariff Act on grounds of fraud, the government could not, in suing to recover those penalties in the United States Court of International Trade, allege in the alternative that the violations occurred by means of gross-negligence or negligence, the Court recently held. The decision at least raises the possibility that the government may have outsmarted itself in pursuing the penalty.
The defendant in United States v. Toth, Slip Op. 06-61 (June 20, 2016) was charged with evading antidumping duties on imported crawfish tail meat by misclassifying it as langostino. Customs brought administrative proceedings against the defendant and his company under Section 592 of the Tariff Act of 1930, as amended [19 U.S.C. §1592], charging them with evading duties by means of fraud. After administrative proceedings failed to produce a result, the government brought suit to collect the Section 592 penalties, charging fraud, and in the alternative, alleging that the violations occurred by means of gross negligence, or simple negligence.
The defendants moved to dismiss the counts of the complaint claiming gross negligence and negligence, citing the Federal Circuit’s 2015 decision in United States v. Nitek Electronics, Inc. In Nitek, the Federal Circuit ruled, in a surprising but welcome decision for importers, that Customs was limited, in bringing suit, to pursuing penalties for the level of culpability charged administratively. Since the government had charged Toth with fraud administratively, and since Toth’s defense before the agency had been addressed to a fraud charge, Customs was limited to pursuing judicial relief based on the fraud allegations. The agency had not exhausted administrative remedies as to gross negligence or negligence claims.
The Court’s ruling in the Toth case left the government with a heavy burden to meet in order to collect a penalty.
Section 592 of the Tariff Act provides for the imposition of civil penalties on persons who, by means of fraud, gross negligence or negligence, enter or attempt to enter merchandise into the United States by means of false and material statements or acts, or by means of material omissions. The maximum penalty depends on the loss of revenue and the level of culpability. In cases of simple negligence, the maximum penalty is twice the loss of revenue; in gross negligence cases, four times the loss of revenue; and in cases of fraud, an amount equal to the domestic value of the merchandise concerned. In no case, however, may a Section 592 civil penalty exceed the domestic value of the merchandise.
In cases to collect a Section 592 penalty, the Court of International Trade does not simply enforce the agency’s claim. Instead, it makes findings de novo, on the basis of the record before the court, concerning whether the violation and claimed level of culpability has been proven, and what, if anything, the amount of the penalty should be.
In addition to a sliding scale of penalties, Section 592 also provides different allocations of the burden of proof in CIT cases to collect a penalty. Where simple negligence is alleged, the government need only establish the facts claimed to constitute the violation; the burden rests on the person charged to show that the violation did not result from negligence – a failure to use the level of care expected of a reasonably prudent person. In cases claiming gross negligence – a “wanton disregard” for one’s obligations under the Customs laws – the government has the burden of proving the violation, and the gross negligence by a preponderance of the evidence.
Fraud cases confront the government with the most difficult road to secure a penalty. Fraud claims must generally be pleaded “with particularity”, and the government bears the burden of proving the fraud through “clear and convincing evidence”.
Following the CIT’s Toth decision, the government now faces the hefty burden of pleading and proving fraud. It runs the risk that, if the evidence only shows a grossly negligent violation, it will walk away empty-handed. It might be unable to recover any penalties, nor establish the predicate for forcing to importer to repay any “withheld duties”.
Typically, the government’s motivation for charging fraud is to seek a higher penalty, especially in cases where the conduct is egregious, or undermines an important trade policy, such as enforcement of antidumping orders. But the “greater culpability = higher penalty” rationale does not always hold true in cases involving antidumping duties, which are frequently set at 100% ad valorem or higher. When a duty rate is 100%, for example, the greatest penalty which could be collected under Section 592 is one time the loss of revenue – less than the maximum penalty for cases arising out of simple negligence. So charging a greater level of culpability in such cases would not bring the government a higher penalty.
The government might therefore have outsmarted itself in the Toth case – charging a higher level of culpability and assuming a greater burden of proof than it might have needed to in order to secure the maximum penalty and recovery of withheld duties.
Perhaps the government will carry the day with its fraud charge in the Toth case. Had the government merely charged simple negligence, they might have been exposed to a defense of “it wasn’t negligence, it was intentional fraud”, but this seems unlikely. But facing a higher burden of proof – and with a claim of misclassification, which is often a matter of negligence – the government has exposed itself to the possibility that the defendant in Toth might walk away scot-free.
Apparently realizing this possibility, the government asked the Court to remand the Toth case to Customs, presumably so the agency could conduct administrative proceedings to charge a penalty at a lesser level of negligence or gross negligence. Saying the request “showed great chutzpah”, the court denied the request, pointing out that there was no final agency decision respecting negligence to remand.
Before the Federal Circuit’s Nitek decision, the government assumed it could sue for penalties, asserting the different levels of culpability in the alternative. That is no longer the case, and as a consequence, the stakes for the government to charge a violator carefully have increased dramatically.
Last year, U.S. Customs and Border Protection (CBP) caused quite a stir when it proposed amendments to Form 5106, the basic form typically filed by a Customhouse broker to provide basic information concerning an importer of record – name and address, type of entity and taxpayer ID/importer number. Stung by a number of identity thefts perpetrated with the use of CBP’s Automated Commercial System (ACS), CBP proposed a huge expansion of the information gathered on the CF 5106, requesting the names and titles of individuals within the company with knowledge of the company’s import operations and financial dealings – as well as these persons’ Social Security numbers or passport information.
Members of the trade community filed more than a score of comments with CBP, making it perfectly clear that under no circumstances did they want their individual identification information loaded into CBP’s notoriously insecure ACS system.
Now, CBP is back with another alteration of CF 5106, and is seeking public comments through August 27, 2015. But the proposed form still raises significant questions and problems.
Under the proposal, Customs Form 5106, would be renamed the Create/Update Importer Identity Form, and would still require greatly expanded information concerning importers, particularly corporate ones. The form still has a place for individuals Social Security Numbers or passport data, but Customs now says that providing this information is optional. But the importer would still need to provide the names of officers or employees having “importing and financial business knowledge of the company”.
The form 5106 would be required to be signed with a certification of accuracy, and an acknowledgment that submission of false information can subject the company to a felony under 28 U.S.C. §1001 for providing false statements to a government officials.
The requirement that an importer identify “officers” having “importing and financial business knowledge” of corporate operations is both vague and overbroad, because of the coupling of “importing” and “financial business” knowledge. In a large corporation, it is possible that an officer of the company may have a tangential knowledge of importing operations, but not an in-depth knowledge. At the same time, the officer may have extensive knowledge of the financial and business structure of the company. Linking “importing and financial business knowledge” together in this way is problematic.
Secondly, the document is required to be signed with a certification of truth, and that if the information is not accurate, the company could be liable for a felony under 28 U.S.C. §1001 (providing false statements to a government officer). There is clearly the concern that, if names of company officials are provided in the CF 5106 under the terms currently provided, they would become immediate “targets” in any Customs investigation of import violations, and could be used by Customs as leverage against the company.
Suppose, for example, an official says that he or she has knowledge of the “importing and financial business” of a company. Assume, further that one afternoon, a Customs official stopped by to quiz this person on a particular Customs issue the importer is being investigated for. If the official says (honestly) “I have no idea what you’re talking about”, would Customs take this as evidence that the importer made a false statement when it signed the CF 5106 and claimed the person had knowledge? The proposed terms of the certification language are simply too broad for comfort.
It also seems likely that any individuals identified in the proposed form would be subject to interviews, depositions and potentially to liability in the event Customs investigates or even audits the importer.
Of course, in a dynamic company, as people change positions, the importer would be compelled to update the CF 5106 form more frequently than it does today.
Other questions on the proposed CF 5106 also appear to be unnecessary. This includes, for example, the requirement to provide “principal banking information”(Box 3G). Since Customs does not have a statutory lien on the company’s assets, there is no need for divulging the location of financial assets. Similar, information concerning articles of incorporation (Boxes 3H and 3I) are readily searchable public records.
The requirement for an entry self--filer to furnish its filer code (Box 3D) could be confusing if a company will both self-file and file under various broker codes. The requirement that the filer provide information regarding “related businesses” (Box 3F) would be incredibly unwieldy for many large, publicly-traded companies, which may have hundreds of related entities, many of which may themselves file CF 5106, and would have to repeat the same information.
Customs is accepting public comments through August 26, 2015. We would be happy to prepare comments on behalf of interested parties.
H.R. 1295, The Trade Preferences Extension Act of 2015 (“the Act”), was introduced in the House on March 14, 2015, and extends the GSP, the African Growth and Opportunity Act (AGOA) and duty preferences for Haiti. The Act states that notwithstanding section 1514 (19 U.S.C. 1514) or any other provision of law, any entry of a covered article eligible for preferential treatment under title V of the Trade Act of 1974 that was made after July 31, 2013 and before the effective date of the Act which is July 29, 2015, shall be liquidated or reliquidated as though such entry occurred on the effective date of the Act.
The Act, as passed and signed by the President, reinstates GSP through December 31, 2017. U.S. Customs and Border Protection has recently provided for an application and automation process for retroactive renewal of GSP. If an ABI entry summary was filed with payment of estimated duties using the Special Program Indicator (SPI) for GSP (with the letter "A," "A+," or "A*") as a prefix to the tariff number, no further action by the filer is required; filings with the SPI "A," "A+," or "A*" will be treated as confirming requests for refunds. If an ABI entry summary was filed with payment of estimated duties without the use of the SPI "A," "A+," or "A*" as a prefix to the tariff number, a refund of duties deposited must be requested in writing as described below for non-ABI entry summaries.
3. The amount requested to be refunded for each line item and the total amount owed (not including interest) for all entry summaries.
Customs also noted that GSP reauthorization provides retroactive benefits only to goods from a country that is a beneficiary of the GSP program as of July 29, 2015. Retroactive application of GSP does not apply to countries such as Bangladesh and Russia that lost eligibility between July 31, 2013 and July 29, 2015.
We recommend that your company identify any records which might be necessary for Customs to locate or reconstruct subject entries so that retroactive refunds can be claimed at once through a letter application if needed. NPLLP would be happy to make these applications on your company’s behalf.
The CIT’s latest penalty decision is another headscratcher.
Call it the Mystery of the Missing Legal Doctrine – a whodunit worthy of Sherlock Holmes and John Watson. And we’re talking the contemporary Benedict Cumberbatch/Martin Freeman Holmes and Watson. This missing doctrine was in plain sight during the time of Conan Doyle’s Victorian Holmes, and even when Basil Rathbone portrayed the great detective on film during the 1940s. But the doctrine – still on the legal books, basically unchanged in 2015 – seems to be disappearing in 2015.
[Cue intro music and credits; the scene moves to the sandwich shop next to 221B Baker Street, while Holmes pores over a printout].
[Cue flashback sequence; Holmes voiceover].
“The case of United States v. Horizon Products International Inc. was before the Bailey. Horizon had imported hardwood flooring. Some of the flooring had an outer layer which qualified it for duty free treatment. Most of the flooring, however, had an outer layer which attracted an 8% duty rate. Horizon and its Customhouse broker had entered all of the goods under the duty free provision.
“Customs timely liquidated some of the entries with a duty increase, which Horizon paid. But the agency then billed Horizon for a substantial amount of duty in respect of entries that had already been liquidated and made final, and demanded Section 592 penalties as well. Horizon declined to pay those. The case proceeded to Court, the government bringing suit for penalties and withheld duties.
“The Government would like the court to infer that all the responsibility for the erroneous entries rests on the shoulders of Horizon, but the court could just as easily infer that the customs broker shares a portion (if not all) of the responsibility. Customs brokers, after all, have statutory and regulatory responsibilities to classify merchandise correctly. E.g., 19 C.F.R. § 111.29 (requiring customs brokers to “exercise due diligence . . . in preparing or assisting in the preparation and filing of records relating to any customs business matter”); see also 19 C.F.R. § 152.11 (“Merchandise shall be classified in accordance with the [HTSUS] . . . .”); 19 U.S.C. § 1641(d) (allowing Customs to penalize a broker who “has violated any provision of any law enforced by [Customs] or the rules or regulations issued under any such provision”); United States v. Santos, 36 CIT ___, ___, 883 F. Supp. 2d 1322, 1327-30 (2012) (sustaining as reasonable a § 1641 penalty on a motion for default judgment against broker who allegedly misclassified imported goods).
“Horizon had not admitted to negligence, and thus had not admitted to a violation of Section 592 of the Tariff Act! The Court is going to hold a trial to determine if Horizon was negligent. Yet, the Court has already held Horizon liable for the duties!"
SHOULD YOUR COMPANY INDEMNIFY ITS IMPORT MANAGER?
Recent court decisions have made an already scary importing environment even scarier. Companies may be well-advised to consider protecting their import personnel.
Your company’s long-serving import manager edges nervously into your office with an unusual request; she would like the company to provide her with an indemnity and hold harmless agreement. She also wants the company to agree to pay for her legal fees to defend Customs penalty claims.
“Is there a specific problem you’re concerned with?” you ask.
Well, yes. But that might not be the end of the story. By law, Customs duties are the personal debt of the “importer of record” of imported merchandise, who must be the “owner” or “purchaser” of the goods. In virtually all commercial transactions, the importer of record is a corporation. Moreover, the importer of record is tasked with the legal duty to exercise “reasonable care” to ensure that information appearing on Customs entries is not only factually accurate, but legally correct as well. Indeed, your corporation probably hired its import manager as part of its effort to exercise “reasonable care”, and protect the company from penalty and duty liability.
So why does your import manager need a personal indemnity when she only works on corporate transactions? The answer lies in a recent, controversial decision of the United States Court of Appeals for the Federal Circuit – one which the U.S. Supreme Court recently declined to review.
The controversial en banc decision of the Federal Circuit in United States v. Trek Leather, Inc., held that employees and officers of corporate importer may be held liable, either individually or “jointly and severally” with their corporate employers, for penalties arising under Section 592 of the Tariff Act of 1930 [19 U.S.C. §1592] resulting from corporate negligence or gross negligence in importing transactions. No intent is required on the part of the employee or the corporation. Nor, the Federal Circuit held, was there any need to “pierce the corporate veil” before proceeding against the individual.
Since Customs penalties under Section 592 are among the harshest provided in American law – with penalties being set at multiples of the duties allegedly withheld from the government or even the value of the merchandise itself – the Trek Leather case has been keeping import managers awake at night for some time now.
Trek Leather could be the poster child for the old saying “bad facts make made law”. It started simply enough, as an undeclared “assists” case, before metamorphosing into a procedural mess. Trek Leather, a New York corporation, ordered mens’ suits from a foreign manufacturer. It provided the manufacture, free of charge, with the fabric used to make the suits. By law, the value of the fabric “assist” thus provided was required to be included in the dutiable value of the imported suits. Trek failed to do this, declaring to Customs only the charges shown on the “cut, make & trim” (CMT) invoice from the manufacturer, thereby understating the amount of duties owed to the government.
Customs charged both Trek Leather and its President, Harish Shadadpuri, with violating Section 592 of the Tariff Act by entering goods by means of false statements or material omissions. The defendants were charged with violating the law, in the alternative, by negligence, gross negligence and intentional fraud. Before the Court of International Trade, Trek Leather agreed to be held liable for gross negligence; Shadadpuri did not. The Court, however, held both company and individual liable “jointly and severally” for hundreds of thousands of dollars in gross negligence penalties.
Shadapuri appealed, arguing that since Trek Leather was the corporate importer, the government could not hold him liable as an owner of officer without first “piercing the corporate veil”, which the CIT had not done. A divided 2-1 panel of the Federal Circuit agreed, dismissing the charges against Shadapuri.
Not so fast, said the full Federal Circuit. The Court vacated the panel’s decision, and indicated that it would hear the appeal en banc (with all active Circuit judges participating), without a hearing. The court solicited briefs on three issues – none of which, as it turned out, featured at all ‘’ in the decision the en banc court finally issued.
In its en banc decision, the Federal Circuit artfully ducked the issues of “piercing the corporate veil”,by deciding the case on a basis nobody had suggested or argued. It held that, while Trek Leather had “entered” the goods by means of false statements or material omissions, Shadadpuri was separately and individually liable for “introducing” the merchandise by means of false statements. The act constituting the unlawful “introduction”? He had provided Trek’s Customhouse broker with the negligently incomplete invoices.
According to the Federal Circuit, the answer is “yes”. And since was decided, the government has filed at least one penalty suit against a corporate importer, indicating that, while it investigated two of the company’s officers, it is – for now – electing not to name them as defendants, but reserves the right to do so.
Setting aside the questionable wisdom of holding corporate employees individually liable for negligence committed in a corporate tax return (Customs entry) filed by the corporation and involving corporate property, the Trek Leather/Shadadpuri decision puts both corporations and employees in a difficult position. A corporate import manager or Customs compliance director knows all the strengths and weaknesses of a company’s import activities. It is not difficult to imagine a situation where the government might use the thread of a personal assessment against a corporate employee as an incentive for the employee to testify against its employer. An employee who is uncertain whether the corporation will support her, financially and otherwise, might be more tempted to testify against her employer.
Another trend which makes the world of importing a scary place is the dramatic increase in “whistleblower” litigation involving Customs and trade issues. Corporate insiders and outsiders have been filing qui tam cases under the “reverse false claims” provisions of the Federal False Claims Act, charging companies with evading Customs duties – both ordinary and special (antidumping and countervailing) duties.
In some cases, the claims are filed by competitors – for example a claim against Toyo Ink Corporation, alleging that the company had evaded antidumping duties on imports of a dye chemical, resulted in a $45 million settlement – with over $7 million of that recovery going to the whistleblower. In other cases, corporate insiders have initiated these cases. For example, in 2014, the former import manager of Colorado-based Otter Products LLC., upset that the company refused to disclose to Customs some dutiable “assists”, initiated a whistleblower case that the company settled for approximately $4 million. In another recent case, a company called Customs Fraud Investigations, Inc. – apparently formed solely to hunt out Customs violations – failed in an effort to have Victaulic, Inc., penalized for the alleged failure to mark imported pipe fittings. But no doubt, the importer’s costs of defending the case were substantial.
Customs-related whistleblower cases will not stop soon. Virtually every industry which has petitioned for the imposition of antidumping or countervailing duty duties has a heartfelt belief that Customs is not collecting the proper amount of such duties. Many domestic companies believe that their importing competitors are evading duties or engaged in other unlawful actions. Whistleblower suits have been filed, all under seal, at least initially. The government has the choice to prosecute each case itself, or to decline to take the case, and let the relator unseal its complaint and prosecute the case itself. In either case, the relator – the whistleblower – receives a share of any amounts recovered.
This brings us back to your corporate import manager or Customs compliance director, who needs to operate in this strange and scary new environment. He or she is privy to all of the company’s Customs and trade secrets and risks, and now has reason to be concerned about personal liability for corporate Customs penalties. If the employee has the benefit of a corporate indemnity, he or she is less likely to be subject to Customs threats. And he or she is less likely to become the whistleblower many companies fear.
Importing companies who elect to provide key employees with indemnity against Section 592 penalties and withheld duty claims will need to give careful consideration to the terms of any such indemnity. Will it cover only penalties and duties, or will it cover the employee’s legal costs? The possibility of “joint and several” liability places companies and their importing employees in a position of potential conflict of interest should Customs initiate a Section 592 investigation. What duties of cooperation will be placed on the employee? If the corporation is found guilty of an intentional violation of Section 592, will it cover the employee if the employee is found to have “aided and abetted” such violation? [In light of the Trek Leather decision, there would seem little need for Customs to pursue “aiding and abetting” claims if it can hold employees directly liable for violating the “introduction” provisions of Section 592].
An indemnity must also be structured in such a way that the corporation retains the right to terminate the employee if she is not performing her duties correctly. A corporation can only act through its agents and employees, and there will certainly be cases where a claim that Section 592 was violated by means of negligence or gross negligence will be based on improper or incorrect behavior by particular corporate employees.
Some in-house Customs compliance employees are also licensed Customhouse brokers. Where the conduct of these employees come under scrutiny, there may be additional concerns that Customs will take action to suspend or revoke the employee’s license – another issue which indemnity agreements need to address.
And of course, a corporation’s retained outside Customs brokers also have a duty to exercise “reasonable care” with respect to a client’s imports. Brokers submit corporate documents to Customs all the time, without being able to verify the accuracy of the documents beforehand. They are just as subject to a Section 592 assessment as is the importer or the importer’s in-house import manager. Brokers using the National Customs Brokers and Forwarders Association of America (NCBFAA) standard terms and conditions of service have already placed indemnity clauses in their contracts.
Customs officials may publicly promise restraint in bringing Section 592 cases against corporate employees or agents, but they are better judged by the statements the agency made to the courts in the Trek Leather/Shadapuri litigation, where the agency took the position that individual liability is direct, not subject to corporate veil-piercing and absolute.
Corporate employees working in import operations are increasingly subject to external pressures and liability concerns. Their employers ignore these conditions at their peril. The next few years are likely to see a significant redefinition of employer-employee and principal-agent relations in these circumstances.
On June 29, 2015, Congress and President Obama reinstated the Generalized System of Preferences (GSP), which provides duty-free treatment for selected goods from “beneficiary developing countries.” The GSP had previously expired on July 31, 2013.
The new legislation provides for retroactive refunds of duties paid on GSP-eligible goods for the two years the program had lapsed.
H.R. 1295, the Trade Preferences Extension Act of 2015 (“the Act”), renews GSP through December 31, 2017 and also extends the African Growth and Opportunity Act (AGOA) and duty preferences for Haiti.
The Act states that notwithstanding section 1514 (19 U.S.C. 1514) or any other provision of law, any entry of a covered article eligible for preferential treatment under title V of the Trade Act of 1974 that was made after July 31, 2013 and before the effective date of the Act which is July 29, 2015, shall be liquidated or reliquidated as though such entry occurred on the effective date of the Act. The enactment date for purposes of the Act is June 29, 2015 and the effective date is 30 days after which is July 29, 2015.
As of this date, Customs has not issued a directive or procedure for making such refund claims. In previous administrative messages, (CSMS 14-326 and 14-286) Customs has indicated that importers could continue to use Special Program Indicator (SPI) “A” to claim GSP on their entries, so that in the event of a retroactive renewal, CBP could process refunds automatically. However, it is not yet known what procedure will be used for refund claims. We will alert clients when the new procedure is known.
The law provides that refunds of duty deposits will be paid, without interest, within 90 days after liquidation or reliquidation of GSP-eligible entries, so an entry-by-entry liquidation or reliquidation scheme is clearly contemplated.
The Acts also amends GSP to allow the designation of certain cotton articles as eligible articles, but only if made in “least developed developing countries” (LDDCs). The affected provisions are HTSUS Subheadings 5201.00.18, 5201.00.28, 5201.00.38, 5202.99.30, or 5203.00.30, as GSP eligible, but only if made in “least developed developing countries” (LDDCs).
Moreover, the law authorizes the President to designate certain luggage and travel articles as GSP-eligible, specifically items classified under HTSUS Subheadings 4202.11.00, 4202.12.40, 4202.21.60, 4202.21.90, 4202.22.15, 4202.22.45, 4202.31.60, 4202.32.40, 4202.32.80, 4202.92.15, 4202.92.20, 4202.92.45, or 4202.99.90, and articles classifiable under statistical reporting number 4202.12.2020, 4202.12.2050, 4202.12.8030, 4202.12.8070, 4202.22.8050, 4202.32.9550, 4202.32.9560, 4202.91.0030, 4202.91.0090, 4202.92.3020, 4202.92.3031, 4202.92.3091, 4202.92.9026, or 4202.92.9060. As of this writing, no such designations have been made.
As a consequence of reinstatement of the GSP, the United States Trade Representative (USTR) will need to undertake an expedited review of “competitive need limitation” removals and waivers for the GSP, with results due by October 1, 2015. The competitive need limit provides for articles to lose GSP eligibility when certain import volumes are reached. The President has power to waive these limitations, and allow products to continue as GSP eligible, under certain conditions.
USTR will also undertake its statutory annual review of GSP, accepting petitions to designate new articles as eligible, or remove articles from eligibility. The final results of this review will be due on July 1, 2016.
Pending receipt of Customs’ instructions on how retroactive refunds should be applied for, companies will want to identify any records which might be necessary for Customs to locate or reconstruct subject entries so that retroactive refunds can be claimed once the GSP re-authorization takes effect. Our firm will be happy to make these applications on your company’s behalf.
 The law also reauthorizes Trade Adjustment Assistance programs, and makes technical changes to the antidumping and countervailing duty laws.
 This means that Customs will not accept duty free entries for GSP-eligible items until July 29, 2015.
Numerous importers have recently raised questions concerning Customs’ initiative regarding the establishment of Centers of Excellence and Expertise (CEEs) to handle transactions in discrete industry-defined areas of responsibilities. This memorandum provides background information on CEEs and their current operational status.
CEEs are an attempt by Customs to centralize decision-making, on an industry-specific basis, regardless of the ports of entry at which imports are made. The intent is to harmonize and centralize decisions concerning the admissibility, classification, appraisement and regulation of goods on an “industry-specific” basis, rather than on a “port-by-port” basis, as has historically been the case.
For now, the CEE program is supposedly voluntary and account-based, and is being implemented on a “test” basis. Assuming the test is successful, however, Customs intends to make the CEEs a model for future processing of commercial transactions by large accounts, and, possibly, all importers.
Historically, the Tariff Act of 1930 has distributed decisionmaking to local Customs officials at the port of entry where goods are imported. Entry documents must be filed at the port where the goods arrived, or are being entered for consumption. Port officials control decisions relating to release of the merchandise, as well as determining the classification, appraisement, and rate and amount of duty owing on individual entries of goods at the port of entry.
Similarly, protests against liquidation of merchandise are filed with, and typically decided by, Customs officials at the individual port(s) of entry. Import Specialist teams at dozens of service ports divide responsibility for the classification and appraisement of various categories of goods (and often exhibit different levels of expertise in the commodities for which they are responsible).
Although the Constitution mandates that duties be assessed uniformly throughout the United States, the result of the “port-specific” processing system has been anything but. It is not uncommon for identical or similar goods, being imported through different ports of entry, to be classified or appraised differently, or for Import Specialists to make inconsistent decisions at the time entries are liquidated, or when protests are submitted.
The automation of Customs processes has provided an opportunity to for the agency to de-couple entry processing from geography. Remote location filing has largely eliminated the need for importers to retain Customs brokers in each port where they make entry, and electronic platforms allow Customs to distribute work among officials in various locations.
Agriculture & Prepared Products, coordinated from Miami, specializes in agriculture, aquaculture, animal products, vegetable products, prepared foods, beverages, alcohol, tobacco or similar industries.
Apparel, Footwear & Textiles, coordinated from San Francisco, specializes in wearing apparel, footwear, textile mill, textile mill products, or similar industries.
Automotive & Aerospace, coordinated from Detroit, specializes in automotive, aerospace, or other transportation equipment and related parts industries.
Base Metals, coordinated from Chicago, specializes in steel, steel mill products, ferrous and nonferrous metal, or similar industries.
Consumer Products & Mass Merchandising, coordinated from Atlanta, specializes in household goods, consumer products, or similar industries and mass merchandisers of products typically sold for home use.
Electronics, coordinated from Los Angeles, specializes in information technology, integrated circuits, automated data processing equipment, and consumer electronics.
Industrial & Manufacturing Materials, coordinated from Buffalo, specializes in plastics, polymers, rubber, leather, wood, paper, stone, glass, precious stones and precious metals, or similar industries.
Machinery, coordinated from Laredo, specializes in tools, machine tools, production equipment, instruments, or similar industries.
Petroleum, Natural Gas & Minerals, coordinated from Houston, specializes in petroleum, natural gas, petroleum related products, minerals, and mining industries.
Pharmaceuticals, Health & Chemicals, coordinated from New York, specializes in pharmaceuticals, health-related equipment, and products of the chemical and allied industries.
For now, participation in the CEE program is voluntary, and is done on an account basis. Each importer can associate only with one CEE. Thus, for example, if a petroleum importer were associated with the Petroleum, Gas and Minerals CEE in Houston, but imported t-shirts, the post-entry work associated with the t-shirts would be handled by the Petroleum, Gas & Minerals CEE.
There are no laws or regulations governing the operation of CEEs. For the time being, the work of the CEEs is probably exempt from rulemaking, since it involves Customs’ internal allocation of work among its employees. However, if CEEs become the principal mode for Customs operations, changes to the Tariff Act and implementing regulations are likely to be required.
Customs is phasing in the operation of CEEs over time. At present, CEE participants continue to file entries at individual ports of entry, and release decisions are made by local Customs officials at the ports. Post-entry work, such as the liquidation of entries, and issuance of Form 28 requests for information and Form 29 Notices of Action, is being handled by the industry-specific CEEs.
Over time, entry and post-entry work will likely be migrated to CEEs. If the project is successful, it will likely become the principal model for Customs’ handling of commercial transactions.
In this regard, two recent developments affect CEEs, particularly three of them -- Electronics in Los Angeles, Pharmaceuticals and Chemicals in New York, and Petroleum and Minerals in Houston.
On September 11, 2014, CBP Commissioner Kerlikowske issued a Delegation Order [Exhibit A] which gave the directors of the CEEs the same powers as Port Directors of Customs, with certain exceptions. The CEE Directors and Port Directors will exercise this authority concurrently. While decisions relating to the control, movement, examination and release of merchandise will remain with the Port Director at the port where goods were imported, authority for post-entry functions – such as issuing demands for redelivery, handling post-entry processing, decisions regarding country of origin marking, stamping, packing, classification and appraisement of merchandise, and the processing of petitions, protests, post-entry amendments, recordkeeping matters, financial matters and the like.
On January 28, 2015, Customs announced its “Phase I accelerated rollout” under which the CEE Directors of the Electronics, Pharmaceuticals and Petroleum CEEs were given the trade authority over subject entries previously handled by port directors at various ports listed in Exhibit B.
IV. CEEs: WHO’S DOING WHAT?
Bear in mind that these processes apply for now, only to companies which have started CEE accounts and are participating voluntarily in the program.
That being said, we have noted cases where post-entry work for companies not enrolled in the CEE program is being handled by CEE teams. Decisions are rendered through the ports, so that there is no visibility of this to the importer.
Transactions for industries which do not have CEEs, and for non-participating companies, will continue to be handled by the ports where the entries are filed.
Please do not hesitate to contact us if there are any questions concerning CEEs or their operation.
Liberal treatment of communications with Customs as constituting a “protest” may be a thing of the past, for in Ovan International Limited v. United States, Slip. Op. 15-17 (February 23, 2015), the CIT held that, in order to be considered a valid protest, a document must be labeled as such, and must contain all the information required by the Customs laws and regulations.
At a Georgetown Law School conference last week, Customs Headquarters officials gleefully embraced the new decision and indicated that they will begin applying it aggressively.
Historically, the courts have ruled that protests do not require detailed precision, but merely need to advise Customs of the nature of the importer’s objection, such that the Customs officer can undertake an inquiry and correct any errors made in liquidation of an entry.
Importers wishing to protest a Customs decision will need to pay special attention to ensure that protests are complete and valid, and should consider using only the Customs and Border Protection (CBP) Form 19 Protest, or its electronic equivalent.
One Entry, One Article, One Claim – What Wasn’t Clear?
Carriage House Motor Cars, the owner of a 1958 Rolls Royce Silver Sea Cloud automobile, exported the vehicle to Europe for sale at an auction. When the vehicle failed to sell, the company re-imported the vehicle, claiming duty-free entry under Harmonized Tariff Schedule (HTS) subheading 9801.00.25. After seeking information from the vehicle importer and its broker, Customs on February 22, 2013 liquidated the entry, classifying the car under HTS Subheading 8703.23.00, and assessing duties at the rate of 2.5% ad valorem.
On April 9, 2013—46 days after liquidation – Carriage House submitted to Customs an Affidavit of its owner, together with a number of exhibits, clearly contesting the assessment of duty. When Customs did not respond to this filing (surprise!), the importer filed a protest on CBP form 19, albeit 189 days after liquidation. This protest was denied as untimely.
Before the CIT, the importer alleged that its April 9, 2013 Affidavit and exhibits should be treated as a “protest”. In this regard, the importer noted that the Courts have long employed a rule of liberally construing filings as protests, requiring “only that the protest be distinct and specific enough to show that the objection was taken… was at the time of filing the protest in the mind of the importer and sufficient to notify the collector of its true nature and character to the end that he might then ascertain the precise facts and have adequate opportunity to correct mistakes and cure defects”. [citing United States v. M. Rice & Co., 257 U.S. 536, 539-40 (1922)]. There was one car, one Customs entry, one issue – how could Customs not understand that the duty assessment was being protested?
But the CIT had other ideas.
The CIT, per Senior Judge R. Kenton Musgrave, held that compliance with the Customs laws and regulations regarding protests was mandatory for a written submission to be treated as a valid protest.
The Court then went on to note the detailed requirements for protests established by Section 174.13(a) of the Customs Regulations, which require among other things, that a protest be captioned as such, provide the name and address of the protesting party, the importer number, the date of entry and liquidation of the entry, the existence of prior protests, and a declaration as to whether the merchandise has been the subject of a drawback claim [regulation reproduced below].
Thus, despite the fact that only one entry, one article of commerce, one importer and one claim was at stake, and the fact that the Affidavit undoubtedly communicated to Customs the nature of the importer’s contention, the Court held that because this filing did not meet all regulatory requirements for protests, it could not be entertained as such. The Court dismissed the lawsuit for lack of jurisdiction.
The lesson for importers is that the age of raising protests by means of letters, memos, and other submissions that do not meet the formal requirements of the Customs laws and regulations is over. To have a submission treated as a valid protest, all of the numerous regulatory requirements must be satisfied.
Customs Form 19, whether in paper form or electronic, contains fields for all of the required information. If this form is used, the only possible issues could be the clarity with which the claim is stated. Trade practitioners should counsel their clients to set creativity aside when challenging decisions and just “use the form”.
§ 174.13 Contents of protest.
(9) A declaration, to the best of the protestant's knowledge, as to whether the entry is the subject of drawback, or whether the entry has been referenced on a certificate of delivery or certificate of manufacture and delivery so as to enable a party to make such entry the subject of drawback (see §§181.50(b) and 191.81(b) of this chapter).
In Best Key Textiles Co. v. United States, No. 2014-1327 (February 3, 2015), the recipient of a ruling concerning the tariff classification of metalized yarn challenged Customs decision to revoke the ruling as being Arbitrary, capricious, an abuse of discretion, and not otherwise in accordance with law, in violation of the Administrative Procedure Act. The plaintiff contended that it had lost $200 million in customer orders as a result of the revocation, and asked the court to review both the substance of the ruling and the process by which it was revoked. The ruling recipient could not file a protest on the classification of its yarn, since the revocation ruling assigned it a lower rate of duty than applied to metalized yarn. The plaintiff=s damage was not in the payment of Customs duties, but in the loss of business, it contended.
After initially dismissing the case for lack of subject matter jurisdiction, the CIT reconsidered and reinstated the case, and upheld the revocation ruling. Best Key appealed to the Federal Circuit.
In its decision, the Federal Circuit ignored the merits of the plaintiffs claim altogether, and told the CIT to reinstate its earlier ruling dismissing the action for lack of subject matter jurisdiction. The plaintiff was not trying to vindicate its own rights, the appellate court said, but the rights of its customers who would be assessed with higher duties on garments made with the yarn. The plaintiff's remedy, the Court held, would be to go into the garment business, import garments and pay the higher duty, and then slog through the traditional protest procedure B a years-long undertaking which, in any event, would not lead to review of the contested ruling. The plaintiff did not have a case which could be heard under the CIT's 28 U.S.C. '1581(I) residual jurisdiction which, the Court indicated, must be strictly construed.The decision should be alarming to the trade community, since it suggests that Customs rulings, and their revocation or modification, are not judicially reviewable or perhaps reviewable only in the Federal District Courts.

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