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Trade is the engine that drives the global economy, and importing is a crucial business function for many companies. Yet importers in the United States that rely so heavily on free and fair trade may not be exercising the care required to ensure that declarations on their customs documents are true and correct. A case in point: Ford Motor Co. In July, the U.S. Court of International Trade imposed penalties worth $20 million on the automaker after concluding that Ford had been negligent-in one area grossly so-in accounting for the value of its imported parts and equipment with customs officials. The U.S. Bureau of Customs and Border Protection (CBP) is the unified border agency within the Department of Homeland Security. CBP employs more than 41,000 people responsible for customs and immigration inspection and enforcement, merchandise imports at ports of entry, the Animal and Plant Health Inspection Service and the U.S. Border Patrol. CBP regularly reviews U.S. imports and audits U.S. importers to determine whether their procedures, entries and record-keeping systems conform to all rules and regulations. Noncompliance identified during a government examination can result in additional duty assessments, large monetary penalties, negative publicity, damaged good will and the denial of import privileges. Deficiencies may arise with respect to product valuation, tariff classification, country of origin, markings, special trade programs, record keeping or adherence to anti-dumping or countervailing duty laws. Also, due to the threat of terrorism through trade, CBP expects importers to implement improved and transparent security practices throughout the supply chain, in concert with other trade obligations. Civil, criminal penalties Importers to the United States must be aware of potential infractions and types of penalties, and take steps to avoid violations, since the costs can be staggering, both civilly and criminally. As a recent example, CBP advised Congress late last year that the U.S. is missing $224 million in anti-dumping duties assessed against Chinese products imported under anti-dumping orders. Congress has been pressuring CBP to vigorously enforce U.S. anti-dumping orders, and CBP is closely watching imports of potentially dumped Chinese products. In 1999, for example, a federal judge sentenced a California employee of a garlic importer to 18 months in jail and imposed $7,500 in penalties for undervaluing or incorrectly labeling the country of origin of 98 shipments of Chinese garlic to avoid more than $9 million in duties. A case involving the false labeling of Chinese crayfish as fresh Louisiana crayfish brought the defendant four months in jail followed by four months in home detention plus $19,000 in fines and penalties. In terms of civil penalties, the statute says that if there is a fraudulent violation, the penalty may equal the merchandise’s domestic value. A violation is deemed fraudulent if it results from a deliberate act or acts (of commission or omission) with intent to defraud the government or to otherwise violate the laws of the United States, as established by clear and convincing evidence. Even if fraud cannot be shown, the violation may be considered negligent or grossly negligent. Penalties for offenses with such lesser degrees of culpability are still severe. In cases of gross negligence, penalties can amount to the lesser of the domestic value of the merchandise or four times the lawful duties, taxes and fees of which the United States is deprived-or, if the violation did not affect the assessment of duties, 40% of the dutiable value of the merchandise. A negligent violation is punishable by a civil penalty amounting to the lesser of the domestic value of the merchandise or two times the lawful duties, taxes and fees of which the United States is deprived. If the violation did not affect the assessment of duties, the penalty can be 20% of the dutiable value of the merchandise. Goods also may be forfeited under certain circumstances. Where Ford fell down So what happened to Ford? Two CBP investigations of the Big Three American automakers targeted the values these companies had used to declare goods imported to the United States. As detailed in two separate decisions this past summer by the Court of International Trade (U.S. v. Ford Motor Co., No. 02-00106, slip op. 05-86, July 20, 2005; and U.S. v. Ford Motor Co., No. 02-00116, slip op. 05-87, July 21, 2005), each of which exceeded 50 pages, numerous customs violations were identified at Ford involving import valuation practices for vehicles and components. The key fact that differentiated the Ford situation from other cases in which CBP has assessed large penalties is that Ford had a robust customs and trade department and a sophisticated import program in place throughout the period under investigation. Nonetheless, neither CBP nor the Court of International Trade found this compelling enough to mitigate the penalty ultimately levied. Ford has appealed the sanctions to the U.S. Court of Appeals for the Federal Circuit. Nos. 05-1584, 05-1593 (Fed. Cir. filed Sept. 22 and 23, 2005). In Ford’s defense, the events that led to the penalties happened many years ago, and Ford has since taken corrective action. Further, the transactions at issue were complex, including provisional pricing, lump sum payments and provision of tooling and other assists to suppliers. But this still did not help Ford with customs authorities or the court. For example, provisional pricing involves goods that, when imported, have indeterminate final prices; the values are not knowable until some time after importation. Customs regulations require an eventual true-up and a declaration of actual cost so that the proper duty may be assessed, and Ford allegedly neglected to do so. Lump sum payments occurred here between related parties, involved merchandise Ford had imported and included volume discounts, retroactive price adjustments and the like-all of which Ford was said to have neglected to timely report to CBP. And assists involved items used to manufacture goods overseas that were provided to the supplier free of charge or at a reduced cost. CBP said these costs, too, were not properly or timely reported to CBP and resulted in Ford’s underpayment of duties. Ford and its legal counsel defended the company’s actions largely by asserting a “reasonable care” defense. Under the Customs Modernization and Informed Compliance Act, Pub. L. No. 103-182, 107 Stat. 2057 (1993)-sometimes called the Mod Act-legal responsibility has been shifted from CBP to the importer to accurately declare value, tariff classification and other information necessary to assess the correct duty rate applicable to entered merchandise. A prominent feature of the Mod Act is a relationship between customs authorities and importers characterized by informed compliance, and an important component of informed compliance is the shared responsibility between CBP and importers. This means CBP will communicate its requirements to the importer, and the importer must exercise reasonable care to assure that the government is provided accurate and timely data pertaining to importations. The Mod Act also increased the maximum civil and criminal penalties for negligent or fraudulent failure to comply with the CBP requirements. Reasonable care also requires importers to possess sophisticated record-keeping systems and maintain detailed policies and procedures to identify and address any deficiencies. Ford in effect claimed its errors were ones of omission, not commission, and that the existence of a sophisticated customs compliance program, policies and procedures demonstrated reasonable care sufficient to avoid penalties. Ford possessed a customs compliance department, compliance program, import manual and compliance hotline, and held seminars and meetings to address the company’s compliance with CBP’s rules and regulations. Ford and CBP had been in contact about many of the errors, and Ford claimed it had properly disclosed them. Since no cover-up was alleged, the company argued, an amnesty was warranted under the CBP’s prior-disclosure mechanism. Ford was prepared to pay outstanding duties owed, but argued against the imposition of penalties, saying it did what any reasonable importer would have done under similar circumstances. Customs officials disagreed. What the judge said In his rulings in the two cases against Ford, Senior Judge Nicholas Tsoucalas of the Court of International Trade acknowledged the company’s compliance efforts, but concluded these were not sufficient mitigating factors. Customs officials contended, and Tsoucalas affirmed, that Ford’s errors were negligent and, for the provisional pricing oversights, grossly negligent. In response to the fact that Ford possessed all the bells and whistles of a robust customs compliance program, the court said: “The mere existence of such mechanisms, however, does not completely prevent Customs from establishing that Ford was grossly negligent. Customs may meet its burden by demonstrating that Ford disregarded or was indifferent to the internal compliance measures it put into place.” The key fact, according to CBP and the court, was that Ford did not make a good-faith effort to abide by its own internal compliance measures or statutory obligations or promptly respond to CBP requests for information. The evidence established, the court held, that Ford “failed to follow its own policies . . . [and] failed to exercise reasonable care in carrying out its own compliance measures.” Noting that Ford possessed a customs manual, the court said: “The manual instructed Ford employees to place a ‘provisional’ disclaimer when the value of the merchandise is not completely or correctly shown. The evidence established that Ford employees did not follow the compliance manual . . . .The Court concludes that Ford’s inexplicable failure to follow its own compliance measures and its statutory obligations was the result of Ford’s negligence.” Compliance personnel, the court held, did not monitor and reconcile values, did not abide by established procedures and relied on the company’s customs brokers-who allegedly were given inaccurate data by Ford-far too greatly. As such, Ford failed the reasonable-care test, the court concluded, since implementation and follow-through procedures were lacking. CBP and the court cited numerous examples of breakdowns in communication among Ford’s internal departments. Correct customs reporting in a company with operations as complex as Ford’s requires clear lines of communication among all departments that might affect the value or entry of imported goods, such as tax, transportation, receiving, engineering, purchasing, finance, accounting, production and the like. Ford’s customs manual did contain procedures for these employees to coordinate their activities, but the company allegedly did not follow up and monitor its employees’ activities after goods were imported, which led directly to violations involving assists and lump sum payments. Ford’s attempts to mitigate penalties based on its seemingly robust customs compliance program were fruitless: “The Court . . . concludes that Ford’s penalty does not warrant mitigation,” Tsoucalas wrote. “The severity of Ford’s culpability and the resulting violation of its statutory obligations were substantial. The significant public interest in the enforcement of Customs’ regulations also weigh in favor of the imposition of a heavy penalty.” In addition to the value of the duties lost, the court noted the “depletion of government resources in investigation and enforcement” of Ford’s violations. “The value of vindicating agency authority” was cited as crucial, as was the deterrent effect to others from committing similar violations. Significantly, customs penalties are not necessarily hard and fast. In fact, most are mitigated down substantially if certain factors can be shown. Fourteen such mitigating factors were cited in the case, but none were found sufficient to warrant significant mitigation. These may include a good-faith effort to comply with the law, degree of culpability, any history of violations, the gravity of the violations, harm to the public and the like. Framing such a defense is where customs counsel can be helpful. The Ford case demonstrates that importers in the United States may possess a strong framework of internal controls for CBP compliance and sophisticated compliance programs, yet lack the care or follow-through required to adequately implement the program-or, for that matter, realize all the lawful savings to which they are entitled. Importers must implement control mechanisms and ensure they are employed correctly. Post-entry procedures to review import transactions must be effective and timely. The company’s departments must communicate with each other, and the tasks of those responsible for monitoring customs activities must be clear. Additionally, high-level management should focus attention on Customs matters, especially those as complex as Ford’s, since errors can be destructive in terms of monetary costs, damaged good will, lost customers, criminal liability and denial of import privileges. Likewise, management must perform frequent reviews and issue written statements of corporate governance principles that specifically cover customs matters. The Ford case starkly illustrates the consequences for companies that possess customs compliance programs but lack follow-through or integration with company departments. Let the importer beware. Matthew G. Shaw is a partner and licensed customs broker in the global customs and trade practice of Garvey Schubert Barer in New York. He concentrates on U.S. customs planning for importers and exporters, and represents multinational corporations and international traders of all sizes. He can be reached at [email protected].

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