Customs Record Production Requests Can Result In Multimillion Dollar Penalties - Part II

Sunday, June 1, 2008 - 01:00


This is the second part of an article about Customs' increasing interest in administrative record-keeping penalty assessments. Some Customs officials believed that it was easier to make these types of cases than to prove underlying violations of the Customs laws. It's the old story, if you can't prove that the importer committed the offense (because your entire theory was all wet in the first place), then try to get them on obstruction charges. But this time the good guys won. In the first piece we set the stage by explaining the record-keeping obligations of an importer. Customs has two different means of enforcing these obligations. It can issue a summons and enforce the summons through district court action - which can lead to penalties only if the importer disregards the district court decision ordering document production. Or Customs can commence an administrative penalty proceeding - but that process is limited to a very narrow category of documents called "entry documents."

The Ford Record-keeping Case

On January 10, 2001, Customs served an Administrative Summons on Ford Motor Company("Ford") requesting documents relating to the origin of all of the parts used in the goods imported by Ford in 1996 from a supplier in Mexico. The summons requested production within thirty (30) days of service of the summons. The goods had been entered duty-free under NAFTA, but Customs did not ask for the NAFTA Certificates of Origin for the imported goods. It is significant that the request did not relate to Ford's records for the imported goods, but rather related to the Mexican producer's records of origin as to the parts used to make the imported goods. Customs thought that Ford would not be able to produce these records - which is pretty amazing in that Ford's NAFTA system and record support system had already been audited five times in 1996 and 1997, and Ford had passed each audit with flying colors.

The summons stated that failure to produce the records would result in an action to enforce the summons in the federal district court, and that failure to produce the records after a court hearing could result in penalties. On February 5, 2001, within thirty (30) days of service of the summons, Ford's in-house counsel objected in writing to the summons on various grounds: (1) Ford believed that Customs had no basis for the document request because of the prior audits that had been conducted; (2) Ford had no obligation to maintain or produce these records because they were the records of the Mexican producer; and, (3) the record request was contrary to the NAFTA verification regulations which required that this record request should have been directed to the exporter rather than Ford.

On April 27, 2001, Customs again advised Ford that failure to produce the records would result in district court action to enforce the summons under 19 U.S.C. § 1510. Ford was concerned that if it acquiesed to Customs' request, it would be accepting responsibility for producing foreign producer records which would be a very onerous responsibility for a NAFTA importer. While Ford could produce the records sought by the summons, it was worried that production was going to create more of a problem than challenging Customs' position in this matter. Ford's in-house counsel and Customs continued to discuss alternative less burdensome means of providing the information to Customs, but Customs would not be satisfied. Ford believed that it would be entitled to a district court hearing as to the validity of the summons before it would have to produce the records. (See United States vs. Wilson , 864 F.2d 1219 (5th Cir. 1989)).

Somewhere along the line, Customs abandoned its threat to commence an action in the district court to enforce the summons and decided to go the adminstrative penalty route. At that point Ford had no choice but to fight the administrative penalty assessment. In January 2002, Customs issued a record-keeping penalty against Ford for $42 million (based on the fact that there were multiple "releases" for each of the approximately 500 entries which had been filed). Ford filed petitions setting out a number of reasons as to why no penalty should be issued. The main reason was that the records sought in the summons were not "entry records" because they had never been required to be filed (nor were they like the records that had to be filed) as part of the Customs entry package in the pre-electronic entry age. If the records sought were not entry records, then an administrative penalty could not be assessed - Customs would have had to go to the district court to enforce its summons. Customs was magnanimous and reduced the penalty by half to $21 million. Ford did not pay the penalty.

We worked with local counsel in Detroit and we commenced a declaratory judgment action in the district court in Michigan to try to get the legal issues decided without the need for discovery, and without the specter of a penalty hanging over Ford's head. Customs sued Ford in the federal district court in El Paso (the port of entry for the goods) for $42 million. Customs quickly filed a motion in Michigan to have the declaratory judgment case dismissed or transferred to Texas, and the Michigan court agreed to the transfer.

In Texas we worked with different local counsel and we concentrated on the penalty case because we wanted to establish that Customs' original basis for the investigation had been flawed, that Customs had not followed its own procedures, and that Customs was wrong on the law. The penalty case provided a vehicle to attack the case on a number of fronts that would not have been available in the declaratory judgment action. We filed a Rule 12(b)(6) Motion to Dismisss on the simple grounds that the documents requested were not entry records, but the court denied the motion because Customs had put the term "supporting records" in its (a)(1)(A) list of entry records. The district court in Texas relied on the text of the (a)(1)(A) entry record list compiled by Customs to support its decision. It was not going to dismiss this case at this early stage of the litigation, notwithstanding the fact that the Customs list of (a)(1)(A) records was contrary to the legislative history of the record-keeping statute, Customs' own NAFTA regulations, and other Customs' record publications which revealed that Customs itself had previously taken the position that the records sought from Ford were not "entry records." Customs law is pretty arcane, and the government definitely received the benefit of the doubt on Ford's Motion to Dismiss.

Ford developed a number of defenses to the penalty assessment: (1) Customs record-keeping program was void because Customs had failed to follow the Administrative Procedure Act when it published the regulations; (2) Customs had not followed its own record-keeping procedures in issuing the summons and the penalty to Ford; (3) Customs had selected the administrative summons procedure to request the records, so penalties could only be imposed under 19 U.S.C. § 1510 after Ford did not comply with a district court order to produce the records; (4) Customs' (a)(1)(A) list was void to the extent that it included records that were not required for entry; (5) The records requested in the summons were not entry records; (6) The (a)(1)(A) list conflicted with NAFTA and the NAFTA entry regulations that made maintenance of the subject records the obligation of the NAFTA producer; (7) Customs' use of vague terms in the (a)(1)(A) list combined with the fact that Customs had published conflicting information confirmed that Customs did not provide adequate notice to importers as to the NAFTA entry records to be maintained; (8) Ford contested the summons based on advice of counsel, which was based on a reasonable interpretation of the law, so Ford's conduct was not negligent or willful; (9) No record-keeping penalties could be assessed until after Ford had a court hearing to consider Ford's objections to the record request; (10) Customs could not apply its record-keeping penalty program retroactively; and (11)The assessment of a $42 million penalty for failure to produce records in light of Ford's good faith objection to the summons violated the eighth amendment's prohibition against excessive fines We believed that each of these defenses had merit, and that the case would be dismissed, or the penalties minimized, if any of these defenses were adopted by the Court.

The Resolution

On the day on which motions for summary judgments were due, the U.S. Department of Justice decided to abandon its claims with prejudice because it had "changed its view as to how it was going to enforce its NAFTA record-keeping obligations." No further explanation was provided, nor, to this day, have we been given a more detailed explanation. Did the DOJ finally realize that this case was not the test case that they were looking for to flex Customs' record-keeping penalty authority? Which of our defenses changed the tide? Ford's list of defenses was staggering, but to this day we don't know why the DOJ relented.

Moral Of The Story

The sad truth of the matter is that in creating the (a)(1)(A) list, Customs has abused the record-keeping penalty authority given to it by Congress. The collective memory of Customs was vacant, and its promises to the automotive industry and to NAFTA importers were conveniently forgotten when this case kicked into high gear. Customs proceeded with its penalty claim even though the (a)(1)(A) claim was contrary to its own NAFTA entry regulations, the (a)(1)(A) list terms in issue were vague, and Customs' litigation position was contrary to its own publications. If Ford had not had the grit and the means to defend itself, Customs would have bullied Ford to produce records that it had no obligation to produce. This could have created a very bad precedent for Ford and other NAFTA importers. If the (a)(1)(A) list is vague and subject to more than one interpretation, then Customs should not be allowed to retroactively interpret this list, and to assess a penalty notwithstanding the importer's reasonable interpretation. The whole point of creating the (a)(1)(A) list is to provide clear and unambiguous notice to importers as to their record-keeping obligations before goods are entered. The hammer of massive penalties cannot be left with Customs if it does not police itself, and it denies constitutional guarantees to the importers it regulates. Importers can't be held responsible for massive record-keeping penalties merely because they have the temerity to challenge a Customs record-keeping request.

This issue most likely will lie dormant for awhile. Customs will continue to use its authority to bully small importers who can't afford to fight Customs' demands that they produce documents. Some importers will provide the documents requested; others will pay mitigated penalties for failure to comply. However, if appropriate limits are not placed on Customs' authority, this issue undoubtedly will rise up again in the future when Customs picks on another company like Ford - who is willing to challenge Customs' demands so that the importing community will finally be free of Customs' bullying tactics.

Robert B. Silverman is a Partner in the firm Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP.

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