Ruling of the Week 2016.15: Customs Business

One of my least favorite areas of customs regulation has to do with the ability of related companies to provide compliance expertise through shared services. The problem arises because while a company can rely on its employees to conduct customs business on its own behalf, no one but a licensed customs broker can engage in customs business on behalf of a third party. That means that if you are an employee of Subsidiary Alpha of Acme Holdings Corp. you can't fully assist your sister company Subsidiary Beta with its customs compliance. That is true even though you may be the most qualified person in the entirely to the Acme Holdings extended family. While there is a space called "corporate compliance" in which the shared services model works just fine, managing the line of acceptable advice is difficult.

The reason for this is 19 USC § 641(b)(1), which requires a valid customs broker's license to undertake customs business on behalf of a third party. Customs business is defined as:

those activities involving transactions with CBP concerning the entry and admissibility of merchandise, its classification and valuation, the payment of duties, taxes, or other charges assessed or collected by CBP on merchandise by reason of its importation, and the refund, rebate, or drawback of those duties, taxes, or other charges. “Customs business” also includes the preparation, and activities relating to the preparation, of documents intended to be filed with CBP in furtherance of any other customs business activity, whether or not signed or field by the preparer. . .

19 CFR § 111.1.

This is relevant at the moment because of HQ H261011 (Jun. 3, 2016) in which the question presented to Customs was whether the use of a single bank account to pay duties on behalf of two related but separately incorporated subsidiaries constitutes customs business. Each entity would have a separate ACH account to sweep payments to Customs, but the funds would come from a consolidated account. Clearly, the banking arrangement involves transactions concerning the payment of duties, taxes, or other charges assessed by CBP. That makes this a non-frivolous question, even though it should be entirely obvious that the account from which the funds are drawn is not indicative of the practice of "customs business."

In prior rulings, CBP has held that a company cannot make payments to CBP on behalf of a sibling company without running afoul of the broker licensing requirement. According to Customs, the arrangement proposed in this case is different because each entity is continuing to pay its own funds on its own behalf. The proposal is internal to the company and not visible to Customs. Further, the subsequent accounting reconciliation between the companies is not a transaction with Customs and does not constitute customs business.

That is a good result and a valuable step. Customs should go further. I realize this may be contrary to the interests of some brokers out there, but keep in mind that it is also contrary to the interests of outside legal counsel. In-house corporate compliance is a reality. Customs' primary interest should be in ensuring that importers have access to the best available compliance resources. Companies may choose to increase those resources if they can be shared among related entities. Today, sharing customs business resources involves fairly complicated steps including employee sharing agreements, employee time management to avoid overlapping times of responsibility, creating licensed brokerage entities, and other schemes.

The problem is that Customs can't do anything about this on its own. The statute is there and Customs must apply it. It is easy enough to say something like "call your congressperson" as a means of encouraging a fix. But, politics being what it is these days, you may as well stand in your cul-de-sac and shout into a storm. Nevertheless, when the political storm clears, this is something that requires congressional attention in a way that continues to support the brokerage community.

One Protest Per Customer

I'm going to do this one quickly because I am busy and the case is straightforward, but still an important lesson.

In Design International Group v. United States, the Court of International Trade reaffirmed the rule that an importer may only file one protest contesting the liquidation of an entry. In the case, the importer made two entries of pencils. When Customs liquidated the entries, it allegedly miscalculated the quantity and, as a result, incorrectly assessed duty. The broker for the importer filed protests for each entry. That right there is one protest per entry. Customs denied both entries.

Subsequently, counsel for the importer filed a third protest challenging the denial of both prior protests. That is a second protest challenging the liquidation of each of the entries. When Customs and Border Protection denied that third protest, the importer filed suit in the Court of International Trade, using the third denied protest as the basis for jurisdiction.

What do you think? Discuss.

The issue here arises because of 19 USC 1514(c)(1)(d), which says:

Only one protest may be filed for each entry of merchandise, except that where the entry covers merchandise of different categories, a separate protest may be filed for each category. In addition, separate protests filed by different authorized persons with respect to any one category of merchandise . . . .

Under this law, a second protest is invalid unless an exception applies. An invalid protest does not give the Court of International Trade anything to review.

Here, the plaintiff argued that the exception applies. According to counsel, the first protest on each entry was filed by the customhouse broker, who is an authorized party. The third protest (which is really the second on each of the two prior entries) was filed by the lawyer, a different authorized party. Thus, the third protest was valid and its denial provides the Court with jurisdiction.

The Court rejected this argument. In doing so, it referenced a number of cases invoking the "one protest rule." All these cases repeat that only the first protest received is valid. The Court also noted that allowing a protest of the denial of a protest could lead to the absurd result of a never-ending series of protests of the denial of protests. Consequently, the Court dismissed the action for lack of subject matter jurisdiction.

There Court is, I think, correct. But, I think I can help explain the result by articulating what I perceive to be the unstated premise in the opinion. That premise is that a protest filed by a broker for the importer and a second protest filed by a lawyer for the importer ARE BOTH FOR THE IMPORTER. See that? Brokers and lawyers are agents for the importers, not separate "authorized persons."

The exception in the statute is there to permit, for example, the surety, who has a financial interest in the liquidation, to protest the liquidation. Other authorized parties include the person paying the duties and any person seeking delivery.

Separate and apart from the importer, the statute permits "any authorized agent of" the importer to file a protest. Does that mean that each agent is a separate authorized person? Maybe. The statute can be read that way. But, that reading permits an importer to file a series of protests through a series of different authorized agents. That also seems like an absurd result. The more likely reading, based on zero research and five minutes of thought, is that each agent stands in the shoes of the importer for this purpose and the importer is limited to a single protest either on its own or through agents.

Do you agree with that analysis?

Duped "Importer" Liable for Customs Fraud

There have been several recent cases at the Court of International Trade that merit discussion. Two, in particular, are primarily of interest to lawyers. They show the truth of the old adage that bad facts make bad law.

The first is United States v. Jeanette Pacheco. In this case, the United States of America is pursuing Ms. Pacheco to the tune of $2.6 million for her "role" in a customs fraud scheme. The "scheme" went like this: A licensed customs broker named Dionicio Bustamante approached Pacheco in a nightclub. He offered her a way to make some fast cash and gave her $200 to sign a customs power of attorney. It is not clear that Pacheco had any additional contact with Bustamante thereafter.

After that, Bustamante began making entry of dried peppers, declaring the value to be $0.11 per kilogram. It turns out that a legally correct value was $3.75 per kilogram. When Customs and Border Protection queried Pacheco about the value, she failed to respond. To complicate matters, the FDA declared the peppers adulterated, refused entry, and demanded redelivery. Pacheco failed to redeliver the peppers to Customs and Border Protection. That resulted in a liquidated damages claim of $184 thousand.

CBP issued penalty and pre-penalty notices to Pacheco. Eventually, the government sued her to collect the penalty and she failed to respond. In this decision, the Court of International Trade imposed a default judgment on Pacheco.

Pacheco's failure to appear in Court acts as an admission of liability. But, the Court of International Trade must still determine the amount of the penalty to be imposed. In doing so, the Court noted that "by providing her identity to Bustamente for $200 so that he could conduct customs business on his own behalf, Pacheco aided and abetted his fraud upon Customs." That emphasis is mine. The Court also noted that as the principal in the relationship, Pacheco can be held liable for the acts of the agent, meaning the broker Bustamente.

Given that, the Court looked at the circumstances to determine the amount of the penalty to be imposed. The Court found some aggravating factors including failing to respond to a request for records and the fact that the importations threatened the public health and safety. Also, although it is not clear when it happened, it appears that Pacheco lied to Customs about whether the peppers were hers. On all of these facts, the Court imposed a penalty in the full amount requested by Customs: $2,651,312.

I hate this case. Not because it is wrong, but because it is probably right. Pacheco did so many things wrong here that she basically sealed her fate. But, there is another story that can be told. It appears that Pacheco made the very stupid choice of signing a power of attorney without any understanding of what that means. She did so for a quick $200, which ended up costing her (at least on paper) $2.6 million.

But, was she really the principal in this transaction? She was legally, because she signed the POA allowing Bustamante to make entry on her behalf. But, it also does not appear that she had any knowledge of the importations, she did not decide to undervalue the goods, she did not know the goods were adulterated. When she "lied" to Customs that the goods were not hers, I suspect she had no idea that the goods were being imported in her name. The peppers probably were not hers as far as she was concerned. As far as I can tell, she did not order them, did not pay for them, and did not take delivery of them.

I'm not even sure she was the principal. In agency law, the agent works for the principal. Here, the agent was working entirely for himself (or so it appears). He duped her into signing the document and then used her identity to make fraudulent imports. I don't see why that is not a mitigating circumstance. My assumption is that Bustamante is the subject of his own penalty case and may even be subject to criminal prosecution. I don't know what happened to him.

This is a bad set of facts. Obviously, Pacheco should never have signed the POA. She should have responded to CBP. She should have responded to the penalty notices. She should have thrown Bustamante under the first bus she could find. But, despite all those mistakes, what we seem to have is identity theft with the victim now on the hook for $2.6 million. While that is probably legally correct, that seems wrong.

Ruling of the Week 2015.25: No Refund for CPSC Restricted Goods

[UPDATE: I changed the title of this post to more accurately reflect the content, and to not look like an idiot.]

Like a lot of other lawyers who do administrative law, I have lately been thinking about Customs and Border Protection's efforts to wrangle its partner government agencies into using the Automated Commercial Environment to submit data to Customs. If you have been dealing with Customs for the last year or so, you have probably seen this image.

What is happening is the mandatory use of Customs' ACE system for electronic filing of data for other agencies. Previously, this data might have gone to Customs on paper or in a different electronic system. If this works, it will be great. If you are an importer, make sure your broker is up to speed and has invested in the software and training necessary to keep up with these changes.

One of the agencies that is moving toward ACE implementation is the Consumer Products Safety Commission. CPSC regulates and enforces product safety. Products that do not satisfy existing CPSC standards or are shown to be unsafe can be deemed inadmissible. Customs' role is to ensure that importers have the necessary documentation to prove that the products meet any applicable safety standards (e.g., lead content, choking hazards, etc.).

Which brings me to the Ruling of the week: HQ H239257 (Jul. 25, 2013). The importer entered some lighters, which Customs released. However, the CPSC asked Customs to issue a Notice of Redelivery because the importer had failed to file a pre-importation report with CPSC. In this case, the importer actually redelivered the goods to Customs and subsequently exported them to Canada. [Side note to Canada: Be on the lookout for potentially dangerous lighters from America.]

After exporting the goods, the importer asked Customs for a refund of the duties it paid. Note, this is not a drawback claim. The importer just wants its money back and pointed to 19 USC 1558. Under that statute, duties cannot be refunded after the release except for certain circumstances. Relevant to this situation, Customs can refund duties paid "[w]hen prohibited articles have been regularly entered in good faith and are subsequently exported or destroyed pursuant to a law of the United States and under such regulations as the Secretary of the Treasury may prescribe." (I added the emphasis.)

The problem is that when federal agencies interpret their regulations, they sometimes give very specific and technical meanings to terms. Here, the rub is the word "prohibited." The lighters could have been entered into the United States had the importer properly documented them with the CPSC. Consequently, the lighters were not "prohibited," they were merely "restricted." Prohibited merchandise cannot lawfully be imported under any circumstances. Restricted merchandise, on the other hand, can be imported when the importer proves it has satisfied the legal requirements for entry.

Because the lighters could have been imported into the United States if the importer satisfied CPSC requirements, they were merely restricted and not prohibited. As such, CBP refused to refund the duty deposits.

So, when will Section 1558 apply? What is truly prohibited merchandise? Here is CBP's helpful page for travelers. As you might imagine, illegal narcotics and child pornography are both prohibited merchandise. But, it is unlikely that the importer will have declared those goods to Customs and paid duty. Under certain circumstances, Absinthe is prohibited (keep that thujone level down, please) as are unsafe toys and items made of dog and cat fur. There are others including lottery materials from any other country.

One industry that I suspect might qualify for refunds under this provision is the makers and importers of smokers' wares that have been needlessly and cruelly labeled drug paraphernalia [probably NSFW by many standards], which is prohibited merchandise.

Ruling of the Week 2015.5: Inadvertent Identity Hijacking

Usually, I am happy and proud to work with my counterparts at Customs and Border Protection. The good people there tend to do their jobs in an intelligent and professional manner. But then there is HQ H157616 (Sept. 22, 2014). [Update: It appears there is an error in the numbering of this Ruling. My prior link went to a different ruling. Try this one instead.]

The facts here are simple. A customs broker filed an entry listing Lifestyle Enterprise Inc. as the importer of record. The subsequent Entry Summary also listed Lifestyle as the IOR and used Lifestyle's importer number. This was an error. Lifestyle was the domestic buyer and was supposed to be the consignee, not the importer. The seller, a company called Starcorp Furniture Inc. was supported to be the importer. The broker had no power of attorney authorizing it to act on behalf of Lifestyle. These facts seem to be undisputed.

Also undisputed is that the merchandise involved was wooden bedroom furniture from China. If you are a trade professional, you just said "Oh, crap" or something more colorful. Wooden bedroom furniture from China is subject to antidumping duties of 216%. That is a difficult cost variance for the domestic purchaser to absorb.

Five years after the entry (which was suspended due to the dumping case), Customs issued a Notice of Action stating that it would liquidate the entry and assess antidumping duties against Lifestyle. After liquidation, Lifestyle filed a timely protest saying, essentially, "Hey, we were not supposed to be the importer and the broker had no right to name us as such! Leave us alone."

The ruling is short and to the point. Lifestyle was the purchaser of the merchandise and, therefore, had the right to make entry. In other words, it could have been the importer. Implied by that is the premise that Customs had no way to know that Lifestyle was not properly named as the importer. Furthermore, Lifestyle had five years in which to correct the entry prior to liquidation. Instead, it took no action until it received the Notice of Action from Customs and Border Protection.

On those facts, Customs said it cannot resolve the dispute between the parties as to which of the two companies was supposed to be the importer of record. As far as CBP is concerned, either is an appropriate importer and Lifestyle was listed as such on the documents. Customs, therefore, liquidated the entry properly.

That is a tidy answer for Customs but creates a terrible mess for the parties based on what is without question an entry that was filed illegally. Without a power of attorney, the broker had no right to bind Lifestyle to be the importer of record. While Lifestyle clearly has a cause of action against the broker, it still needs to pay this assessment, even if just to get into the Court of International Trade.

Why is Starcorp off the hook here? We don't know a lot of the background, some of which might be very important to the outcome. But, it seems clear that Starcorp could have been the IOR. It has a POA with the broker and most likely a bond with a surety. We know that Customs could pursue an enforcement case against Starcorp to collect these unpaid antidumping duties because, while it did not make entry, it "introduced" the merchandise into the U.S. See, Everything ever written about Trek Leather. So CBP was not without recourse against Starcorp, the party that anticipated having the liability.

It is possible that Starcorp has abandoned the U.S. and has no assets. Also, it would appear that because Starcorp was not listed as the importer, there would be no claim against the surety.

What about the broker? It illegally filed an entry without a proper Power of Attorney. It might be subject to a penalty as well. The amount of that penalty is probably capped at $30,000, which is certainly much less than the amount of the dumping duties, but that is apparently what Congress wants.

This is not really a case where two companies were equally able to act as importer of record through the customs broker that filed the entry. Only Starcorp designated the broker. Since brokers are required to have written powers of attorney, there should be no basis on which to argue that apparent authority is enough to bind Lifestyle to be the importer. This is not a situation in which CBP cannot differentiate between two equally possible importers. Lifestyle could not have made this entry and it seems unduly harsh to hold it responsible for actions it never authorized. Rather than be a culpable party, Lifestyle is the victim of what is probably inadvertent or negligent identity hijacking.

What does this tell importers? It is a stark reminder of the importance of monitoring your entry activity. If your company has a customs importer of record number, periodically monitor the entry activity to identify entries incorrectly made on your behalf. Look for brokers you did not authorize, ports you don't typically use, manufacturer ID numbers that don't seem familiar, and other indicators of unauthorized activity. remember to cancel POA's with brokers you no longer need. If you find anything like amiss, act quickly. Lifestyle compounded its problem by sitting on its opportunity to correct the entry (or have the broker correct it).

Learn from that mistake.

No License, No Brokerage

United States v. Freight Forwarder International, Inc. is another recent decision I can dispose of quickly.

Here's the deal. A freight forwarder that employs a licensed customs broker but does not hold a corporate license cannot legally engage in customs business. 19 USC 1641(b)(5) and 19 CFR 111.4. In this case, the defendant paid customs duties to Customs and Border Protection on behalf of importers and invoiced the importer. That is transacting customs business. CBP sought a penalty of $10,000 and the defendant failed to respond.

What follows in the reported decision is the Court of International Trade essentially ticking off the boxes showing that the United States has taken the necessary administrative and litigation steps necessary to collect a default judgment. Not surprisingly, the United States Department of Justice did just that and the Court entered a default judgment of $10,000 against the defendant.