. R.H. Huey & G. Husisian: “U.S. Customs and the New Administration: Your Top Ten Questions Answered” (Part 1 of 2)
* Authors: Robert H. Huey, Esq., firstname.lastname@example.org
, 202-295-4043; and Gregory Husisian, Esq., email@example.com
, 202-945-6149. Both of Foley & Lardner LLP.
[Editor’s Note: This is the first part of an item concerning this subject; part two will be published in The Daily Bugle of Wednesday, 22 February 2017.]
During the campaign, U.S. Customs & Border Protection (CBP) was mostly mentioned by President Trump in the context of illegal immigration. Controlling the flow of people, however, is only one of the jobs of CBP, which is part of the Department of Homeland Security. CBP also regulates what goods come into the United States, while ensuring that the goods pay the appropriate tariff (basically, a form of tax paid as a percentage of the value of the goods entered). As both the gatekeeper to the United States as well as the second-largest source of U.S. government revenue, the agency is a key regulator for many importers.
Many of President Trump’s campaign proposals, while not explicitly directed at CBP, would either impact how it operates or would require implementation by the agency. Further, CBP continues to juggle its dual roles as gatekeeper to the United States with its long-standing role as a revenue collection agency. CBP also is tasked under new legislation with implementing the largest change in its method of operation in two decades, including a move from the port-centric model that has governed its operations to a more industry-focused model centered on Centers of Excellence and Expertise. Adapting to a new political agenda will require agency action when CBP already has its regulatory hands full.
To help navigate this uncertain future, this client alert presents the “Top Ten” questions that every company that imports goods into the United States should be thinking about. This client alert is part of a series of “Top Ten” articles on the future of key international trade and regulatory issues expected to change under the Trump administration. Previously issued client alerts discuss the future of NAFTA
[FN/1] and international trade litigation
(including antidumping and countervailing duty actions) under the Trump administration, as well as the top ten questions regarding the future of the CFIUS review process (available here
). [FN/2] Future client alerts will deal comprehensively with all international trade and regulatory areas where significant change could occur under the new administration.
The Top Ten CBP Questions Answered (or, Will the Customs Change With the Times?)
(1) “So what are the roles played by Customs?”
As the primary gatekeeper into the United States, Customs has a great many roles, including:
– Regulating who enters the United States
– Interdicting the flow of illegal goods into the United States
– Collecting tariffs
– Regulating exports
– Collecting statistical data regarding imports
– Enforcing directives of other agencies that impact the transit of goods into and out of the United States
For U.S. importers, CBP regulates each product entering the United States. Ever since passage of the Customs Modernization Act in 1993, CBP has operated on the twin principles of “informed compliance” and “shared responsibility,” thereby placing primary responsibility on the importer of record to make entries correctly, but as informed by Customs outreach and educational efforts. Failure to import goods properly can result in seized entries, lost import privileges, and civil and criminal penalties.
(2) “What has the new President promised?”
Although President Trump did not focus on CBP explicitly, many of his international trade and immigration proposals run straight through CBP. These proposals include:
– Changes to U.S. immigration laws and an increased focus on border security (CBP controls entry of persons into the United States).
– The revision or elimination of NAFTA (the terms under which NAFTA-country imports enter the United States are administered by CBP).
– Any crackdown on imports from Mexico and China in their roles as two of the three largest trading partners of the United States (tariff collection and how/whether entry occurs are controlled by CBP).
– The implementation of the expected increase in antidumping, countervailing duty, and safeguard actions in the new administration (although other agencies determine the duty levels, collection is managed by CBP).
Addressing President Trump’s frequent criticism of China as stealing U.S. intellectual property to advance its manufacturing interests would also require substantial efforts by CBP to block infringing goods from entry into the United States. Thus, the election of President Trump likely will have a major impact on how the gatekeeper to the territorial United States operates, impacting every company that imports goods.
(3) “Isn’t Customs law pretty static? Have there been any recent changes to Customs law?”
Congress enacted the Trade Facilitation and Trade Enforcement Act of 2015
(TFTEA) (signed into law on February 24, 2016), which represents the largest change in Customs rules since the Customs Mod Act in 1993. [FN/3] Among other changes, TFTEA improves intellectual property rights protection rules and establishes a new Intellectual Property Rights Coordination Center to consolidate oversight of IP-related Customs issues and to coordinate IP investigations to identify producers, smugglers, or distributors of infringing merchandise; expands substitution drawback of duties, while increasing the time periods for claiming drawback; and mandates increased cooperation among agencies and consultation with Congress on the progress made by the agency in implementing the law and improving CBP transparency, accountability, and coordination in enforcement efforts. CBP has published interim final regulations implementing a new structure that contains Centers of Excellence and Expertise, which moves certain responsibilities from port directors to a more industry-specific structure as a means of harmonizing treatment of imports at different ports. [FN/4]
TFTEA also includes the Enforce Act and Protect Act within Title IV, Section 421 of the TFTEA. The Enforce Act and Protect Act establishes a formal process for CBP to investigate allegations of evasion of anti-dumping and countervailing duty (AD/CVD) orders. As developed in detail below, these provisions offer an opportunity for U.S. companies to combat evasion of AD/CVD orders, while creating risks of investigation and penalties for importers of record.
(4) “What is the likely trend in penalties under the new administration? Is this another area where fines are expected to increase?”
As will be discussed in Foley’s forthcoming client alert regarding anticipated white collar developments in the new administration, penalties have sharply risen for many regulatory regimes. This is also true with regard to CBP penalties, which (while primarily civil) have more than doubled over the last three years (approaching $1 billion annually). It is our expectation that this increase will continue.
Further, the DOJ increasingly has brought actions seeking criminal penalties for Customs matters. The DOJ has done so both by using statutory provisions related to Customs matters (entering goods into the United States via fraud, gross negligence or negligence, [FN/5] entry of goods that are falsely classified, [FN/6] and entry of goods by means of false statements) [FN/7] and through non-Customs provisions as well (the use of federal provisions regarding the obstruction of justice, [FN/8] the federal conspiracy statute, [FN/9] money laundering, [FN/10] smuggling, [FN/11] and aiding and abetting). [FN/12] Further, as explored in detail below, the U.S. government increasingly has been relying on the False Claims Act (FCA) to address shortfalls in duty collections. [FN/13] The use of these non-Customs provisions is notable for supporting higher criminal penalties. For example, while each count of falsely classifying goods under 18 U.S.C. § 541 is punishable by up to two years in prison, violations of the smuggling provisions in 18 U.S.C. § 545, obstructions of justice pursuant to 18 U.S.C. § 1519, and money laundering pursuant to 18 U.S.C. § 1956 can be punished by up to twenty years in prison.
The net result is both increasingly broad tools to combat willful Customs violations and higher potential penalties. Notably, the U.S. government has become willing to pursue liability for individuals as well. It is our expectation that the increasing use of criminal penalties and hefty civil penalties, including for individuals, will continue under the new administration.
(5) “I heard a lot about imports from Mexico and China during the election. Are there likely to be changes at Customs with regard to these countries?”
The potential changes regarding Mexican and Chinese imports are so great that we have devoted entire client alerts to potential changes in NAFTA
[FN/14] and to the likely explosion in AD/CVD and safeguard trade remedies
. [FN/15] Further information regarding these topics are just a mouse click away.
In addition to these developments, we expect that CBP will also take the following changes that impact goods traded with these countries:
– Increasing border security, including potential changes to the C-TPAT (trusted importer) program (primarily impacting Mexico, but potentially imports from other countries as well).
– Potentially imposing some form of a border tax as a means of discouraging imports that compete with U.S. manufacturing and to take away any advantage offered to non-U.S. companies that allow the rebate of value-added taxes for exports.
– Increasing vigilance with regard to intellectual property, such as through the enforcement of an expected increase in section 337 actions.
– Increasing the rigor of the enforcement of intellectual property infringement, including through the measures described below.
– Increasing the enforcement of antidumping and countervailing duty orders, as detailed below.
– Increasing the enforcement of prohibitions on the importation of goods produced using forced (slave) labor.
– Increasing the scrutiny given to claims that goods meet NAFTA regional content requirements and are originating goods entitled to diminished NAFTA duty rates.
(6) “I believe I have been hurt by unfairly traded imports. Will CBP under the new administration have the tools to help me with these concerns?”
The ability to file antidumping, countervailing duty, safeguard, and other trade remedy actions to address imports perceived to be unfairly traded is addressed in a previously issued Foley client alert. [FN/16] These remedies, while powerful, are not the end of the story regarding how to fight unfair imports. Two other remedies, both available at CBP, also merit special discussion.
Fighting evasion of AD/CVD orders. CBP always has possessed the ability to investigate the potential evasion of antidumping and countervailing duty orders. Yet the system clearly was not working: a General Accounting Office
study titled “Antidumping and Countervailing Duties: CBP Action Needed to Reduce Duty Processing Errors and Mitigate Nonpayment Risk” found that between 2001 and 2014 CBP failed to collect $2.3 billion in AD/CVD duties. [FN/17]
Further, the perception has long existed that certain importers (often from China, but from other countries as well) are gaming the system by misdeclaring the country of origin of goods, transshipping the goods to hide the country of origin, misclassifying goods as non-subject merchandise when it actually fell under the scope of an order, and other tactics designed to avoid paying antidumping and countervailing duties. Further, the process of CBP’s investigation often was viewed as being opaque, giving no insight to interested parties regarding the conduct or outcome of any investigation. With CBP not being subject to any deadlines, and with its results not being subject to judicial review, companies believing they were being victimized by the circumvention of antidumping and countervailing duty orders pressed Congress for change.
The result was the enactment of the TFTEA and the issuance of regulations establishing a formal process for investigations into possible AD/CVD evasion. Interim regulations (effective as of August 22, 2016, but still subject to change in the final regulations) now allow private parties to make AD/CVD evasion allegations and participate in CBP’s investigation, which now must be completed on a set deadline. Under the new procedures, CBP can investigate:
– Transshipping merchandise through third countries for purposes of changing the country of origin, even where the merchandise was not substantially transformed in the third country.
– Falsely or incorrectly reporting shipping and entry documentation or engaging in false sales to underpay duties.
– Falsely labeling or reporting the merchandise’s physical characteristics, or misclassifying it as non-subject merchandise. [FN/18]
CBP must determine whether to initiate an investigation within 15 business days of receiving an allegation that entries, made within one year of the allegation, have been evading antidumping or countervailing duties. Suspension of liquidation of entries can occur within 90 days of initiation, if CBP determines there is a reasonable suspicion of evasion. The full investigation occurs over 300 days (360 for complicated cases) and includes the right of parties on both sides of the issue to provide factual information, rebut information put on the record, and submit written briefing.
Where evasion is found, CBP can take action to remedy the evasion, including by:
– Identifying the applicable duty assessment rate or cash deposit rate.
– Extending the period for liquidating the unliquidated entries of covered merchandise that entered before the initiation of the investigation.
– Requiring importers of covered merchandise to post enhanced cash deposits and assess duties on the covered merchandise.
– Taking such additional enforcement measures as CBP deems appropriate.
CBP can refer the matter to U.S. Immigration and Customs Enforcement (ICE) for possible civil or criminal investigation.
If an interested party disagrees with CBP’s determination, the party may request an internal review by the CBP commissioner, followed by a potential appeal to the U.S. Court of International Trade (CIT), which will determine whether CBP followed the proper procedures, whether its actions are consistent with the statutory and regulatory procedures, and whether its determination was arbitrary, capricious, or an abuse of discretion. CBP has stated, however, that judicial review is unavailable for any decision to not initiate an investigation – a position that eventually will be challenged in court.
While these new procedures offer enhanced protections for companies that believe they are being victimized by AD/CVD evasion, they also could prove problematic for importers, who could be accused of duty evasion. Some of the steps that importers can take to minimize the risk include:
– Requesting that foreign suppliers act as importers of record.
– Putting in place contractual provisions regarding the responsibility for paying any duties.
– Carefully evaluating the classification of goods imported, not just against the presumed HTS classification, but also against the physical descriptions of potentially applicable subject merchandise covered by antidumping and countervailing duty orders.
– Verifying that import records are accurate.
– Keeping all appropriate import documentation, including any information relating to the physical attributes of all entries.
Importers should also promptly respond to any CBP Form 29 Notice of Action regarding an increase in duties owed, as the underpayment of duties can be quite substantial when antidumping and countervailing duty tariffs are involved.
Intellectual property protections. Another area where CBP can be used to fight unfairly traded imports is with regard to trademarks and copyrights. Many U.S. companies are unaware that it is possible to register these IP protections with CBP at a low cost, which covers a twenty-year term. Registration requires that the brand owner provide information regarding how authorized shipments generally occur, including the place of manufacture, the name and address of each foreign entity authorized or licensed to use the trademark, a brief description regarding the authorized use, and information regarding affiliates authorized to use the mark abroad.
Once registration occurs, CBP will flag shipments of counterfeit products that fall outside the expected import profile. This has the twin advantages of allowing ready entry for authorized goods while allowing CBP to hold goods that appear to be unauthorized, until such time as CBP can contact the owner of the recorded intellectual property to confirm whether the entry is authorized. Unauthorized goods are destroyed by CBP or released to the authorized owner of the intellectual property for an additional fee. Through this process the authorized owner not only can bar infringing goods, but can also gain valuable information regarding which retailers and distributors are selling counterfeit goods.
(7) “What about the False Claims Act (FCA)? Is it also a tool that is likely to see increasing use in the next few years?”
Another tool that can be used to fight the underpayment of duties is the FCA. Since the passage of the 1986 amendments to the law, the FCA (codified at 31 U.S.C. §§ 3729 33) has become a vigorous tool to fight lost government revenue, as shown by the fact that in 2014 the DOJ recovered nearly $6 billion from FCA cases. Each successful prosecution of an FCA claim enables the potential collection of treble damages, plus penalties and an additional fine of up to $11,000 per false claim.
The FCA provides a mechanism whereby individuals can file lawsuits regarding claims that persons and companies have defrauded governmental programs. Since the law includes a qui tam provision that allows persons who are not affiliated with the government (relators) to bring cases on behalf of the U.S. government, and to receive a portion of any recovered damages, activity under the FCA largely is driven by private actors bringing cases, with the DOJ becoming involved thereafter.
The FCA increasingly is being used in the Customs area. The Third Circuit Court of Appeals, among other courts, has confirmed the FCA appropriately can be used for the knowing evasion of Customs duties. For example, in United States v. Toyo Ink Manufacturing, the president of a domestic producer of a violet pigment brought an FCA action against a Japanese competitor, alleging the evasion of antidumping and countervailing duties through false claims that Japan and Mexico were the countries of origin, when China and India (two countries under orders) were appropriate. Toyo settled the matter, agreeing to pay $45 million, plus interest, without admitting fault, resulting in a payment to the original relator of almost $8 million (as well as a likely commercial benefit to the U.S. business). In addition to securing favorable outcomes like this, the use of the FCA process also potentially brings Customs issues to the attention of CBP, which can assess its own penalties for the same conduct. For these reasons, the use of FCA claims for Customs violations is expected to continue to rise with the new administration, making FCA claims a regular part of Customs enforcement.
[FN/1] See Gregory Husisian and Robert Huey, “NAFTA and the New Trump Administration: Your Top Ten Questions Answered,” available at here .
[FN/2] See Gregory Husisian and Robert Huey, “International Trade Litigation and the New Trump Administration: Your Top Ten Questions Answered,” available at here
[FN/3] See H.R. 644,114th Cong. (2016), available at here
[FN/4] See U.S. Customs and Border Protection, Regulatory Implementation of the Centers of Excellence and Expertise, 81 Fed. Reg. 92,978 (Dec. 20, 2016).
[FN/5] 19 U.S.C. § 1592 (2011).
[FN/6] 18 U.S.C. § 541 (1994).
[FN/7] 18 U.S.C. § 542 (1996).
[FN/8] 18 U.S.C. § 1519 (2002) (“Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, … any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States … or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.”).
[FN/9] 18 U.S.C. § 371 (1994).
[FN/10] 18 U.S.C. § 1956 (2016), 18 U.S.C. § 1957 (2012).
[FN/11] 18 U.S.C. § 545 (2006).
[FN/12] 18 U.S.C. § 2 (1951).
[FN/13] 31 U.S.C. §§ 3729-33 (2009-2010).
[FN/14] See Gregory Husisian and Robert Huey, “NAFTA and the New Trump Administration: Your Top Ten Questions Answered,” available at here
[FN/15] See Gregory Husisian and Robert Huey, “International Trade Litigation and the New Trump Administration: Your Top Ten Questions Answered,” available at here
[FN/17] See U.S. Gov’t Accountability Off., GAO-08751, Antidumping and Countervailing Duties: CBP Action Needed to Reduce Processing Errors and Mitigate Nonpayment Risk (2016), available at here
[FN/18] See U.S. Customs and Boarder Protection, “Investigation of Claims of Evasion of Antidumping and Countervailing Duties,” 81 Fed. Reg. 56,477 (Aug. 22, 2016).