Part II of this article will appear in the June issue of The Metropolitan Corporate Counsel.
This is a two-part article about Customs and Border Protection's (Customs) increased interest in record-keeping penalties, and its failed efforts to find its first major court case to test its administrative record-keeping penalty authority. The first segment sets the stage, and the next piece tells the tale.
In 1993 Congress passed the Customs Modernization Act ("Mod Act") as part of the broader historic legislation that enacted the North American Free Trade Agreement ("NAFTA"). The Mod Act included a number of programs that were intended to bring the world of Customs into the electronic age. Recognizing that electronically filed entries, rather than paper entries, were the wave of the future, Congress in the Mod Act dropped the requirement that actual paper had to be submitted to Customs at the time of entry. But, significantly, the longstanding requirements that every importer must have certain documents in hand at the time of entry stayed in effect. The Mod Act only changed the process by which Customs could get this required documentation. Rather than receiving all the paper when the entry was filed, now Customs would ask for documents on a case by case basis. And, the Mod Act gave importers 30 days to provide documents that they were supposed to have on hand when they filed the entry.
An importer's failure to timely produce these "entry records" could result in substantial monetary penalties. If the failure to timely produce the records resulted from willful conduct, the penalty could be the lesser of $100,000 per "release" or 75% of the appraised value of the goods. If the failure to timely produce the records resulted from negligence, the penalty could be the lesser of $10,000 per "release" or 40% of the appraised value of the goods. 19 U.S.C. § 1509(g). In order to understand the magnitude of these penalties we note that one Customs entry could include multiple releases (especially on shipments from Canada and Mexico). Thus, there could be multiple penalties for one entry.
In addition to these potential penalty assessments, the law provides that Customs could retroactively deny duty-free treatment on the goods for record-keeping violations. There are mitigation guidelines to reduce possible penalties, but this process puts the importer at the mercy of Customs, unless it has the wherewithal to challenge these assessments in court. We are aware of a few administrative penalty assessments for record-keeping violations, but this is definitely an area that is fertile ground for Customs penalties. Customs has exhibited increasing interest in record-keeping penalty assessments in audits and other situations. We have located one Customs press release touting the assessment of a record-keeping penalty of $10 million against a West Coast importer of electronic goods which attests to the possible severity of these assessments. The list of large settlements will continue to grow.
The record-keeping penalties in the Mod Act were steep because Congress thought that the only records which could be subject to record-keeping penalties were documents which had been filed with Customs at time of entry before electronic filing has been put in place. Thus, there was a quid pro quo with importers. Importers could file entries electronically to expedite release of goods, but they had to continue to maintain the same entry records on hand that they used in their paper entries and to produce the records when requested. In this way, Customs could always verify that its release based on electronic data could be substantiated by hard proof (i.e., documents).
At this point, it is important to distinguish between records maintained by importers relating to import transactions that are maintained in the ordinary course of business, which we will call "import business records," and the "entry records" described in the Mod Act. Even before the Mod Act, Customs could request production of import business records under 19 U.S.C. § 1508. "Import business records" is a broader category than "entry records" referred to in the Mod Act, because "import business records" includes records which were not presented to Customs at the time of entry. Good examples of "import business records" that are not "entry records" would include purchase orders, confirmations, payment records, receiving records, and so on. So the penalties prescribed by Congress in the Mod Act relate solely to failure to produce "entry records" - records required by importers to have at hand at the time of entry that were previously filed with Customs as part of entry packages.
19 U.S.C. § 1510 provides administrative subpoena power to Customs to obtain any records ("import business records" or "entry records"). In the event that importers do not comply with the subpoena, Customs could file an action in a District Court to compel the importer to produce the records. The importer can contest the subpoena raising issues such as: (1) the request is burdensome; (2) Customs already has the records covered by the summons; or (3) Customs has no valid basis for its record demand (i.e., statute of limitations has run). See Wilson vs. United States 864 F.2d 1219 (5th Cir. 1989). If the District Court agrees with Customs and directs the importer to produce the records, and the importer fails to comply with the court order, then penalties or sanctions can be imposed by the District Court. The administrative record-keeping penalties available under 19 U.S.C. § 1509(g) for failure to produce "entry records" are separate and apart from 19 U.S.C. § 1510 court-imposed penalties for failure to produce either "import business records" or "entry records."
The Customs record-keeping statute added in the Mod Act (19 U.S.C. § 1509(e)) directed Customs to publish a list of entry records so that importers would have notice as to their record-keeping obligations. The list should have been limited to records which the importer had been required to have on hand and that were filed as part of the paper entry package for release of the goods (i.e., Customs entry (CF 7501)), commercial invoice, packing list, and bill of lading) filed with paper entries. Customs was required to review the entry regulations and compile a list of "entry records." Customs list was not supposed to include items that were not included in the entry regulations. But this is where the quid pro quo fell apart.
Customs promulgation of the regulations to implement the statute was a drawn-out affair. In 1994, Customs published a proposed list of "entry records" and solicited comments from the public. The list included not only documents required for release of goods which had been filed with paper entry packages, but a number of documents that Customs could request as part of its duty collection process. When the proposed list is viewed in light of the legislative history of the Mod Act, it is clear that this list is inconsistent with the intent of the statute, and it should be considered void to the extent it was broader than its Congressional mandate. A number of trade groups commented on the proposed rules, but Customs rejected their claims when it published its final entry records list in 1996 (T.D. 96-1). This list is known as the "(a)(1)(A) list" because it was prepared under the authority of 19 U.S.C. § 1509 (a)(1)(A).
On December 24, 1996, Customs advised the public that it was "undertaking a complete review of the (a)(1)(A) list and the underlying regulations," with the objective "to remove from the list any and all records and information requirements that are clearly unnecessary in today's environment." A comment period of thirty (30) days was provided. To date, eleven years later, Customs has not published the results of this review.
On April 23, 1997, Customs published a Notice of Proposed Rulemaking ("NPRM") in the Federal Register (62 Fed. Reg. 19,704) which proposed adding an "Appendix to Part 163 - Interim (a)(1)(a) List" to the Customs Regulations. The entry records list included a preface which said that the list was merely a compilation taken from other entry regulations, and to the extent it conflicted with the entry regulations, the (a)(1)(A) list would yield to the entry regulations. In this "Final Rule," Customs stated that it had not considered comments from interested parties as to the scope of the (a)(1)(A) list, because they "should be dealt with not in this document but rather in connection with the overall review of the (a)(1)(A) list referred to in the notice published in the Federal Register on December 24, 1996." The (a)(1)(A) list also included a number of vague terms without definitions. For example, the initial list included the term "NAFTA records," and the final list included the term "NAFTA certificates of origin ("NAFTA COs") and supporting records" without any further explanation. Interestingly, the NAFTA entry regulations never required NAFTA CO's to be submitted with the entry, and the supporting records to the NAFTA CO are specifically the record-keeping obligation of the NAFTA producer, not the NAFTA importer. Customs' position that NAFTA COs are not entry records and that they are the responsibility of the NAFTA producer was made clear in a number of Customs publications, the Customs website, and speeches given by Customs own record-keeping guru when the new record-keeping regulations were published. In fact, when NAFTA was being promulgated, Customs promised certain industry groups (although not in writing) that NAFTA importers would never be responsible for maintaining and producing NAFTA CO supporting documentation.
On March 31, 1999, Customs published in the Customs Bulletin proposed guidelines for assessing penalties "for failure to comply with a lawful demand for the production of an entry record" as a result of willful or negligent conduct. Final Guidelines for the Mitigation of Record-keeping Penalties were published on October 4, 2000. T.D. 00-63.
On November 2, 2000, the Chief, Penalties Branch, Office of Regulations and Rulings, Customs Headquarters, Washington, D.C. issued a Memorandum to "Port Directors," advising Customs officers that a demand for (a)(1)(A) documents, which could result in Section 1509(g) penalties, must "strictly adhere" to the "procedures set forth in Part 163 [Customs Regulations], which deal with notice to the record-keeper." The directive stated that the (a)(1)(A) demand should include: "(1) A cite to 1509 as the statutory authority to demand the documents (and Part 163 as the implementing regulations); (2) A detailed description of the documents demanded; (3) The time period in which to respond; (4) Recitation of the statutory maximum penalty assessments that may be assessed for noncompliance; (5) A point of contact" This directive, which remains in place today, ensured that importers faced with the possibility of signcificant record-keeping penalties would recognize the importance of fully complying with a valid demand by Customs for "(a)(1)(A)" records.
The record-keeping statute on its face provided limited authority to Customs to assess administrative record-keeping penalties against importers. The regulations that Customs created, however, were vague and subject to more than one interpretation. Moreover, there was no provision included in the regulations to challenge Customs interptations, and the regulations were not properly promulgated under the APA. As you would expect, this is a recipe for disaster. But the trade community could not forsee the future, and so the regulations went in to force and effect largely unchallenged.
Robert B. Silverman is a Partner in the firm Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP.