Importers often overlook a vital defense to 19 USC § 1592 penalties: the Small Business Regulatory Enforcement Fairness Act of 1996. The defense is not well known because it was created way back during the Clinton Administration and because CBP does not like going out of its way to help importers avoid paying penalties. Even most customs attorneys (outside of our firm) do not know it exists, but that will probably not stop the sudden proliferation of articles similar to this one by copycat lawyers (you know who you are). CBP has not issuedregulations to guide importers who want to invoke the defense and its Mitigation Guidelines dedicate all of one sentence to explore its availability.
Whether a § 592 penalty is remitted or mitigated remains firmly at the discretion of CBP. This can be a problem when dealing with an unaccommodating CBP official, but the defense can be a winner. The defense is separate and independent from other grounds for remission and mitigation found in CBP's Mitigation Guidelines. This defense levels the playing field for small importers who qualify, so it has a nice Davis vs. Goliath character. The qualifications are found in CBP's short memo which I reproduce in its entirety below. You may be surprised how large a company can be to qualify as a small business entity. Most companies are allowed to have up to 500 employees. The defense is definitely not limited to Mom and Pops. While the qualifications seem straightforward, the rules are complex for companies who are affiliated or owned, managed, or operated by large companies or investors.
POLICY STATEMENT REGARDING VIOLATIONS OF
19 U.S.C. § 1592 BY SMALL ENTITIES
DEPARTMENT OF THE TREASURY
UNITED STATES CUSTOMS SERVICE
(T.D. 97 - 46)
62 F.R. 30378 (June 3, 1997)
AGENCY: U.S. Customs Service, Department of the Treasury.
ACTION: General Notice.
SUMMARY: On March 29, 1996, the President signed the Small Business Regulatory Enforcement Fairness Act of 1996. Section 223 of that law requires an agency to establish a policy or program which reduces, and under appropriate circumstances, waives civil penalties for violations of a statutory or regulatory requirement by a small entity. As a first step in implementing this law, we are setting forth in this document the circumstances and procedures whereby the assessment of a civil penalty under the provisions of 19 U.S.C. § 1592 will be waived for violations committed by small entities.
FOR FURTHER INFORMATION CONTACT: Alan Cohen, Penalties Branch, Office of Regulations and Rulings, 202-927-2344.
On March 29, 1996, the President signed the Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. 104-121, 101 Stat. 847. Section 223 of that law requires an agency to establish a policy or program which reduces, and under appropriate circumstances, waives civil penalties for violations of a statutory or regulatory requirement by a small entity.
CUSTOMS POLICY STATEMENT REGARDING VIOLATIONS OF
19 U.S.C. § 1592 BY SMALL ENTITIES
Section 592 of the Tariff Act of 1930 (19 U.S.C. § 1592) prohibits persons, by fraud, gross negligence or negligence, from entering or introducing, attempting to enter or introduce, or aiding and abetting the entry or introduction of merchandise into the commerce of the United States, by means of statements or acts that are material and false, or by means of omissions which are material. Under Customs discretionary authority pursuant to sections 592(b)(2) and 618, Tariff Act of 1930, as amended (19 U.S.C. §§ 1592(b)(2) and 1618), Customs has published national guidelines applicable to its statutory authority to assess civil penalties against persons who violate 19 U.S.C. § 1592. These guidelines provide for a reduction in the initial assessment of civil penalties, and a reduction in the penalties amount found to be ultimately due, because of the presence of specified mitigating factors.
In considering petitions filed pursuant to sections 592(b)(2) and 618, mitigating factors which apply to small entities include: (1) reasonable reliance on misleading or erroneous advice given by a Customs official; (2) cooperation with the investigation beyond that expected for an entity under investigation; (3) immediate remedial action, including the payment of the actual loss of duties prior to the issuance of a penalty notice and within 30 days of the determination of the duties owed; (4) inexperience in importing, provided the violation is not due to fraud or gross negligence; (5) prior good record, provided that the violation is not due to fraud; (6) the inability of the alleged violator to pay the penalty claim; (7) extraordinary expenses incurred by the violator in cooperating with the investigation or in undertaking immediate remedial action; and (8) actual knowledge by Customs of a violation not due to fraud, where Customs failed to inform the entity so that it could have taken earlier corrective action. This list of factors is not exclusive.
In compliance with the mandate of the Small Business Regulatory Enforcement Fairness Act of 1996, the Customs Service is implementing a procedure whereby, under appropriate circumstances, the issuance of a penalty notice under 19 U.S.C. § 1592(b)(2) will be waived for businesses qualifying as small business entities. Specifically, an alleged violator which has been issued a prepenalty notice under 19 U.S.C. § 1592(b)(1) may assert in its response to the prepenalty notice that it is a small business entity, as defined in section 221(1) of the Small Business Regulatory Enforcement Fairness Act of 1996, and in 5 U.S.C. § 601, and that all of the following circumstances are present: (1) the small entity has taken corrective action within a reasonable correction period, including the payment of all duties, fees and taxes owed as a result of the violation within 30 days of the determination of the amount owed; (2) the small entity has not been subject to other enforcement actions by Customs; (3) the violation did not involve criminal or willful conduct, and did not involve fraud or gross negligence; (4) the violation did not pose a serious health, safety or environmental threat, and (5) the violation occurred despite the small entity's good faith effort to comply with the law.
The alleged violator will have the burden of establishing, to the satisfaction of the Customs officer issuing the prepenalty notice, that it qualifies as a small entity as defined in section 221(3) of the Small Business Regulatory Enforcement Fairness Act of 1996, and that all five of the above circumstances are present. In establishing that it qualifies as a small entity, the alleged violator should provide evidence that it is independently owned and operated; that is, there are no related parties (domestic or foreign) as defined in 19 U.S.C. § 1401a(g)(1), that would disqualify the business as a small business entity. Furthermore, the alleged violator must establish that it is not dominant in its field of operation. Finally, the alleged violator must provide evidence, including tax returns for the previous three years and a current financial statement from an independent auditor, of its annual average gross receipts over the past three years, and its average number of employees over the previous twelve months.
Each claim by an alleged violator that it qualifies as a small business entity will be considered on a case by case basis. In considering such claims, the Customs Service will consult the size standards set by the Small Business Administration, 13 C.F.R. § 121.201, for guidance in determining whether the alleged violator qualifies as a small business. If the alleged violator's claims for a waiver of the penalty under the Small Business Regulatory Enforcement Fairness Act of 1996 are not accepted and a penalty notice is issued, or if the alleged violator fails to assert a claim for a waiver of the penalty under this Act when the prepenalty notice is issue, the alleged violator may pursue its claim for a waiver of the penalty in a petition filed pursuant to 19 U.S.C. § 1592(b)(2).
This policies set forth in this notice are issued pursuant to the discretionary authority granted to the Secretary of the Treasury under 19 U.S.C. § 1618 to remit and mitigate penalties, and do not limit the government's right to initiate a civil enforcement action under 19 U.S.C. § 1592(e), nor do they limit the penalty amount which the government may seek in such an enforcement act, nor do they confer upon the alleged violator any substantive rights in such an enforcement action.
DATED: May 21, 1997 Acting Commissioner of Customs Samuel H. Banks
Don't invite vampires into your home. It's a maxim that is surprisingly relevant to importers and exporters. Vampires may be just observing otherworldly etiquette or may be afraid of some sort of sanction (although it's hard to imagine what would scare the undead, other than being forced to watch Jersey Shore reruns). Unless you invite a vampire into your house, for whatever the reasons, the vampire cannot enter to do whatever vampires do.
What do vampires do? Not to paint with too wide a brush, but vampires tend to run in monster mode most of the time. Scuttlebutt has it that there are movies and books targeted at wide-eyed teenage girls that portray vampires in a sympathetic light, but it's doubtful that parents anywhere would allow their daughters to date a vampire, especially not one who sparkles.
And what do federal enforcement authorities do? Well, they enforce. They are always in enforcement mode. To invite them in to your place of business may open you up to all sorts of liability. It is generally not the smart thing to do.
Now don't misunderstand. This is not to suggest that anyone should obstruct or impede federal authorities from doing their job. You should never do that. However, you may want to avoid doing their job for them.
Beware enforcement officials bearing gifts. The government talks trade facilitation, but acts enforcement. If a cop were to drop by your home and asked you to come in. You'd ask why, and the cop would say, "we're doing community outreach and we just want to tell you what is legal or not legal. While we're here, you wouldn't mind if we looked through your computer, would you?"
You laugh, but US Customs and Border Protection (CBP) uses a similar approach in Significant Importer Reviews, a cryptic program of suspect provenance and design. CBP claims that Significant Importer Reviews are informal, friendly outreach visits that allow importers of a certain size and volume and CBP to know each other without risk to either. The problem is that these outreach efforts can easily devolve into fishing expeditions. The other problem is that there are no formal guidelines or regulations regarding this program to restrain CBP from overreaching. Indeed, CBP has not reduced any of the program goals or guidelines to writing, a red flag to importers if there ever was one.
Outreach efforts from enforcement authorities can harm exporters as well as importers, of course. Take, for example, Powerline Components Industries, a company that is currently featured by the U.S. Bureau of Industry and Security on its website (which is not a good thing). Powerline shipped diesel engines to Syria without the requisite license. The question for export enforcement authorities was whether the violation was intentional because if it was, then the penalty could be stiffer. Just about the time it was about to ship, enforcement officers paid a friendly outreach visit to the exporter during which the officers described the nightmares that befall violators of US sanctions laws. With that warning, Powerline knew or should have known that the export was illegal, i.e., it had the requisite intent. Enforcement authorities had little trouble forcing the company to pay a hefty penalty.
A vampire could not have done better.
US CBP often asks importers to sign a statute of limitations waiver (usually two years) in penalty and liquidated damages cases, or when the importer is filing a prior disclosure. CBP is trying to preserve its rights to sue the importer before the statute of limitations runs out. Once the deadline comes and goes, the Government will not able to sue unless there is some sort of equitable tolling.
Should importers sign these waivers?
CBP tends to make vague but alluring promises (which never seem to be get reduced to writing) about how signing a waiver will help convince the agency about the importer’s intention to cooperate. It is the “we’ll play nice if you play nice” strategy. CBP has a couple of regulatory tools to coerce importers into signing statute of limitations waivers, including speeding up its decision on the penalty. If there is less than one year left and the importer has not signed a waiver, CBP can reduce the deadline from thirty days down to seven days for an importer to respond to a pre-penalty notice, and the period can in reality be shorter if CBP sends the notice by mail, which it is allowed to do. CBP can also deny an importer’s ability to file a supplemental petition.
It seems that most consultants and customs attorneys (no one in our firm) go out of their way to appease CBP, including having customers/clients automatically sign waivers. Perhaps this is out of fear of litigation. While we do not hold an absolute view, our firm considers CBP’s waiver requests with suspicion and we do not automatically advise that our clients sign waivers.
It does not make sense that CBP takes more than five years or six to decide whether to sue or not. The statutes of limitations are generous under customs law when compared to most other areas of law. In addition, memories fade and evidence dissipates with time, making it harder to prosecute a penalty case and sometimes even to defend against one. By signing a statute of limitations waiver, the importer is drawing out the administrative proceedings and litigation, which, of course, can be very expensive in the long run and can prevent the importer from moving forward.
CBP’s promise to “play nice” if the importer signs a statute of limitations waiver often rings hollow. By definition, CBP stopped playing nice when it issued a penalty or liquidated damages notice, thus forcing the importer into a defensive posture. The only way that CBP can start playing nice again is if it drops its penalty case (the agency almost never admits error) or greatly mitigates the penalty/liquidated damages claim. Waivers should be irrelevant to mitigation. CBP’s Mitigation Guidelines do not, and probably could not, condition mitigation on the importer signing of a statute of limitations waiver. CBP cannot also refuse to consider any substantive arguments or claims the importer timely offers. CBP cannot say, “we won’t listen to you if you don’t sign this statute of limitations waiver.” See United States v. Jean Roberts of Cal., Inc., 30 C.I.T. 2027 (2006) (“The demand by Customs that defendant waive the applicable statute of limitations for a two-year period in return for any consideration of these two claims for relief was neither justified under the applicable statute and regulations nor consistent with principles of equity and fairness”).
Thus, whether to sign a statute of limitations waiver is a question that is more complicated than traditionally perceived. It is, as always, fact and context specific, an option to be weighed in the course of seeking to settle an administrative case or a lawsuit to the importer’s benefit. What are the risks, who holds the advantage, and who is likely to blink? These questions are always present as parties contemplate litigation. An importer may prefer not to sign a waiver to force CBP’s hand, perhaps thinking that the agency will accept a tender that is smaller than it desires. The importer may bet on the reluctance by the US Department of Justice, the agency that must sue in the Court of International Trade to collect the penalty or liquidated damages claim, to expend prosecutorial and political capital on a piddly customs penalty case when the world offers so many more sexy and prominent opportunities. Even if it is sued, the importer may be confident that it will win before the Court of International Trade, the dispassionate tribunal that must review all the facts and law anew.
If you are an importer or are involved in the importing business, you know that Post-entry Amendments (PEAs) are used to correct import data errors with US Customs and Border Protection (CBP). From my perspective, PEAs are risky. Customs (not CBP, but Customs, as it was known at the time) launched the PEA program eleven years ago. It was a test program then and it remains a test program today. It was to last for one year, but Customs extended the program several times. Not only is it a test program, it is voluntary and CBP (the new Customs) has not issued any PEA regulations. Yes, I know. CBP has issued countless notices and instructions, but these are not the same as regulations.
The PEA program is thus not a real program and importers are free to ignore it.
My last sentence is a bit of a farce, isn't it? Importers are pretty much expected to participate, and they are doing so in growing numbers with never a thought as to the risks involved. Why worry? You file and pay electronically. CBP is happy and importers are happy.
For all I know, there is an iPhone/Android app on the horizon.
You may ask, who, except a persnickety Luddite, would have a problem when an otherwise cumbersome bureaucracy uses technology to cut through red tape? Me. While I may not exactly qualify as a Luddite (a group not known to blog), I confess that I am alarmed by government programs that lack safeguards.
PEAs are not the only CBP program that is both alluring and risky.
Take C-TPAT, for example. It is a voluntary program from CBP of roughly the same age as PEAs, which means it’s been around for quite a bit. And yet, there are no reported court cases interpreting C-TPAT. If you helped as many companies with C-TPAT as I have, you know that the lack of case law cannot be attributed to elegant program design or user-friendliness. CBP is not Apple. More likely, the lack of litigation means that aggrieved parties find no statute or regulation to invoke in their defense. CBP has huge discretion in deciding who to let in, at what level, and who to kick out. What happens when CBP makes a mistake? Sure, the program has an appeal process, but the ultimate arbiter is C-TPAT itself.
I have a problem when federal programs assume that all the mistakes will be made only by citizens. I also grow suspicious when a government program, like PEAs, never seems to grow past the “test” phase. Dr. Phil might diagnose CBP as having commitment issues.
CBP can penalize you if it does not like your PEAs? CBP warned people of this potential when it launched the PEA test program eleven years ago. In its Federal Register notice, CBP said,
"The test is open to all importers who elect to follow the procedures set forth in this document for correcting already filed entry summaries prior to liquidation. However, a participant making and amending entries under these procedures will be subject to the usual penalties, liquidated damages, and other administrative sanctions for any Customs law violations."
Will CBP penalize you? If so, when? Always. Never. Sometimes. Who knows.
The unbridled potential for penalties is why I prefer prior disclosures over PEAs, at least when an importer owes duties in any substantial amount. Prior disclosures protect you against penalties and against overreaching by CBP. More precisely, an importer is likely to see any penalty greatly reduced when it files a properly drafted and timely prior disclosure. You may challenge CBP all the way to the Court of International Trade and beyond if necessary. PEAs offer no protection and no such opportunity. You are left to CBP’s whims.
At this point, some people will say something like: If you have nothing to hide, you should not mind PEAs.
Here is my reply: To a carpenter wielding a hammer, everything looks like a nail.
In case this metaphor went over your head, the nail is the importer filing PEAs and the carpenter is CBP. Wham! I am not suggesting that CBP has an evil intent. I am saying that it is an enforcement agency, built to collect duties and penalties. It carries out this mandate automatically and instinctively (if it didn’t, taxpayers wouldn’t be getting their money’s worth). CBP and importers often disagree on what qualifies as a penalty or duty, and importers often win out through or because of the court system. Even in there is no litigation, the threat of litigation keeps CBP honest. The agency knows that it can be corrected by a superior, impartial authority, which explains why CBP loves when importers hire lawyers.
In case that last statement went over your heard, I was being snarky. No government agency anywhere on earth likes to deal with attorneys, which explains and justifies the worth and merit of my fine profession. It also explains why ours is the only profession mentioned in the US Constitution.
But I digress.
CBP should not complain when importers file prior disclosures instead of PEAs, and the agency should never, ever penalize an importer for doing so. In its informed compliance publication on prior disclosures, CBP breathlessly exclaims: "The official policy of CBP is to encourage the submission of valid prior disclosures!" Did you notice the exclamation mark? It’s no minor flourish. I can’t recall CBP or other government agency ever using an exclamation point. It is as much out of character as an emoticon (like (:^)) and reflects CBP's official enthusiasm for prior disclosures. CBP does not stop there. It recognizes that the filing of voluntary disclosures is a mitigating factor for an importer facing a penalty. CBP also dangles an enhanced voluntary disclosure procedure to entice importers to enlist in the Importer Self-Assessment (ISA) program.
Unlike PEAs, voluntary prior disclosures are not a test program. They are codified in real, made-in-the-USA regulations and statutes.
Sometimes CBP says things like, "we do not penalize an importer for filing PEAs." The funny thing is that CBP never reduces this promise to writing or regulation. It certainly has never withdrawn its threat to penalize importers when they file PEAs. Until the agency takes these steps, prior disclosures are often a better, safer option.
Prior disclosures rock!!!! :-)
Principal and a founding member of GRVR Attorneys.