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 NAFTA1 and international trade litigation (including antidumping and countervailing duty actions) under the Trump administration,2 as well as the top ten questions regarding the future of the CFIUS review process (available here). Future client alerts will deal comprehensively with all international trade and regulatory areas where significant change could occur under the new administration.
As the primary gatekeeper into the United States, Customs has a great many roles, including:
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.
Although President Trump did not focus on CBP explicitly, many of his international trade and immigration proposals run straight through CBP. These proposals include:
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.
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 1993.3 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.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.
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,5 entry of goods that are falsely classified,6 and entry of goods by means of false statements)7 and through non-Customs provisions as well (the use of federal provisions regarding the obstruction of justice,8 the federal conspiracy statute,9 money laundering,10 smuggling,11 and aiding and abetting).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.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.
The potential changes regarding Mexican and Chinese imports are so great that we have devoted entire client alerts to potential changes in NAFTA14 and to the likely explosion in AD/CVD and safeguard trade remedies.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:
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.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.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:
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:
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:
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.
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.
CBP is resource-challenged. Practitioners before CBP have horror stories of lost filings, requests for advisory opinions and protests that take years to resolve, and difficulties in achieving uniform rulings from port to port. Further, the port-by-port administration of CBP can make for great differences in the enforcement priorities, classification approach, and other issues encountered by individual importers. It is expected that the new Centers of Excellence program will take care of some of these issues, yet it will still be true that the issues of concern will vary by port.
Nonetheless, despite these uncertainties, we anticipate the following areas will see significant attention from CBP over the coming administration:
Informed compliance letters. A recent development is the issuance of “informed compliance” letters by CBP. These letters often are issued to major U.S. importers to encourage them to review their recent entries and determine if they have treated entries correctly where they acted as the importer of record. These letters often are sent to major importers who have not been audited in the past decade or that are viewed as being at a higher risk for violations.
The receipt of an informed compliance notification letter means CBP has reviewed the data of an importer of record and likely identified specific problems with its import transactions, putting the company at an increased risk of a comprehensive audit. According to CBP officials, the expectation is that companies that receive these letters will soon be the subject of a “focused assessment” or other type of CBP audit in the near future. The letters, thus, are a way of encouraging major importers to enhance their compliance and file voluntary self-disclosures in anticipation of the audit.
To provide further encouragement, CBP has indicated that companies that do not follow up with a voluntary self-disclosure can expect that any subsequently discovered violations will be subject to higher-than-normal penalties. The letters warn not only of potential monetary penalties, but also the prospect of seizure or forfeiture of imported merchandise.
While the letters do not change the operative level of care expected of all importers (who are required to exercise “reasonable care” in the execution of their Customs obligations), the letters serve as a warning shot that the company needs to get its Customs house in order and should start:
While the assessment should start with the issues identified in the letter, the review should be comprehensive. CBP auditors have the authority to examine any areas where compliance may be lacking. If issues are found, the company should consider whether the issues are systemic. If the entries are too numerous to make a quick evaluation, statistical sampling can be used to help evaluate the scope of potential issues and the potential risk exposure. Further, the review also should cover the company’s Customs compliance program and the rigor of its compliance measures and training, as these are evaluated by CBP in an audit. Any errors should be documented and a plan put in place to strengthen the company’s compliance procedures and internal controls to prevent their recurrence.
The company also should strongly consider filing a prior disclosure. This can be accomplished using an initial marker, which merely informs CBP that an investigation of potential compliance lapses is ongoing. This locks in voluntary disclosure credit while buying time to complete a thorough investigation and to provide a subsequent full report.
Forced labor in China. In 2016, Customs issued nationwide orders instructing U.S. ports to detain certain products produced by forced labor in China. The authority for these orders is found in 19 U.S.C. § 1307 (known as section 307), which authorizes CBP to issue orders prohibiting importation of merchandise mined, produced, or manufactured, wholly or in part, by forced labor. Although section 307 has been in place for years, the TFTEA enhanced the efficacy of the provision by removing certain restrictions on when the provision could be applied, thereby removing a loophole which provided that the provision only could be applied if the “consumptive demand” for those goods in the United States exceeded domestic production. Under the revised law, any interested party (including competitors and public interest groups) may request that CBP investigate whether an import was produced using forced labor in another country. If the investigation proves the charges, then any products found to be made in whole or in part using forced labor are subject to exclusion or seizure.
CBP has been making the blockage of goods produced by forced labor a priority, as shown by CBP outreach on the program19 and frequent press releases announcing detention orders for violations.20 Given the prominent role that criticisms of China played in the campaign, we expect this focus will increase, making it imperative that companies that import from China put in place enhanced due diligence and supply chain compliance measures, as described below.
Trade security issues. Since September 11, the enhancement of border security has been a priority of CBP, not only for immigration and visits to the United States, but also with regard to the movement of goods. We expect these efforts will accelerate under the new administration, as part of the anticipated Trump administration national security initiative. This likely will mean changes in the frequency of searches of incoming cargo, potentially impacting the time of clearance, especially at busy ports. It may also mean changes in the operation of, or eligibility to use, the C-TPAT program, a voluntary program that allows certified importers, carriers, consolidators, licensed Customs brokers, and manufacturers to enjoy expedited processing and transit times at the border, reduced number of CBP examinations, and other benefits of being a trusted CBP partner.21
We also anticipate that the money being spent on the Mérida Initiative, which was designed to help Mexico increase its border security in the broad sense of disrupting Mexican criminal activity and enhancing Mexican police capabilities, will be refocused on the issue of creating enhanced inspections of goods flowing between the two countries.
Revenue collection issues. Although post 9/11 border security concerns have somewhat eclipsed what was long considered the main role of Customs — the collection of tariffs on entries — tariff collection still remains a core function of CBP. In particular, we are seeing a renewed emphasis by CBP on the issues of:
Importers should review the way in which these issues are handled to ensure they are occurring in a compliant fashion.
All importers should evaluate whether they need to enhance their compliance measures in the following ways:
As noted above, CBP is emphasizing the combatting of goods that benefited from forced labor (adult and children alike). With enhanced section 307 giving CBP the tools to block more imports, companies should be pro-active in monitoring and auditing suppliers for lapses that could lead to costly detentions by CBP. Measures to consider implementing include the following:
Miscellaneous items. Finally, importers should look into the following housekeeping issues, which can lead to compliance lapses and, potentially, costly penalties:
The TFTEA contains certain provisions that can aid importers. Among these are the increase of the de minimis entry threshold from $200 to $800, which increases eligibility for duty-free entries without the requirements of a formal entry; the expansion of the American Goods Returned program (HTS 9801.00.10) to certain goods that are not of U.S. origin, but were at one time in the United States; duty-free treatment for certain goods from Nepal; and enhanced duty drawback rules (available beginning in February of 2018).
Companies also should consider whether they can benefit from ways to process or import goods outside the Customs territory of the United States or otherwise without needing to pay duties, such as through the use of Free Trade Zones, the use of Customs bonded warehouses, or through use of Temporary Importation under Bond procedures. Although the exact circumstances where such measures would apply requires individual consideration, a Customs expert may be able to identify significant money-saving opportunities.
Finally, importers of record should realize that audits of imports can result in the discovery of areas of missed opportunities under free trade agreements. Chapters 89 and 99, the potential use of FTZs, TIBs, customs bonded warehouses, and other areas where there may be money-saving opportunities. An importer can perform reviews of entry data to capture opportunities of duty overpayment. If these exist, importers may be able to file requests for refunds using section 520d claims or post-summary corrections.
As shown, the landscape under the new administration is uncertain. Missteps by importers can lead to costly seizures and penalties. Fortunately, there are a great many steps that importers can take to sharply reduce their risk of a Customs audit or inquiry, or to secure a good outcome if an audit, in fact, does occur. The compliance advice outlined above is a good starting point for any importer, but a Customs specialist will be able to design a program that is tailored to the company’s individual products, import patterns, and business profile.
* * *
The international climate for U.S.-based multinational companies and non-U.S. based companies that sell into the United States has never been more uncertain. This client alert is the fourth of a series of articles that is being prepared to help companies navigate the uncertain international trade and regulatory environment. Already published “Ten Question” articles related to the transition to a new administration cover NAFTA, international trade (antidumping and countervailing duty) actions, and likely changes in how the Committee of Foreign Investment in the United States (CFIUS) evaluates investment in the United States. Future client alerts will cover the Office of Foreign Asset Controls (OFAC economic sanctions) and Export Controls, the Foreign Corrupt Practices Act, the future of white collar enforcement, regulatory concerns pertinent to Private Equity firms, and cybersecurity. If you would like to be added to the mailing list for these alerts, please contact the chair of the Foley & Lardner LLP Export Controls and National Security practice, at email@example.com or +1 202.945.6149.
1 See Gregory Husisian and Robert Huey, “NAFTA and the New Trump Administration: Your Top Ten Questions Answered,” https://www.foley.com/nafta-and-the-new-trump-administration-12-01-2016/.
2 See Gregory Husisian and Robert Huey, “International Trade Litigation and the New Trump Administration: Your Top Ten Questions Answered,” https://www.foley.com/international-trade-litigation-and-the-new-trump-administration-your-top-ten-questions-answered-01-06-2017/.
3 See H.R. 644,114th Cong. (2016), https://www.gpo.gov/fdsys/pkg/BILLS-114hr644enr/pdf/BILLS-114hr644enr.pdf.
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).
5 19 U.S.C. § 1592 (2011).
6 18 U.S.C. § 541 (1994).
7 18 U.S.C. § 542 (1996).
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.”).
9 18 U.S.C. § 371 (1994).
10 18 U.S.C. § 1956 (2016), 18 U.S.C. § 1957 (2012).
11 18 U.S.C. § 545 (2006).
12 18 U.S.C. § 2 (1951).
13 31 U.S.C. §§ 3729-33 (2009-2010).
14 See Gregory Husisian and Robert Huey, “NAFTA and the New Trump Administration: Your Top Ten Questions Answered,” https://www.foley.com/nafta-and-the-new-trump-administration-12-01-2016/.
15 See Gregory Husisian and Robert Huey, “International Trade Litigation and the New Trump Administration: Your Top Ten Questions Answered,” https://www.foley.com/international-trade-litigation-and-the-new-trump-administration-your-top-ten-questions-answered-01-06-2017/.
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), http://www.gao.gov/assets/680/678419.pdf.
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).
19 See CBP, “Forced Labor” (2017), https://www.cbp.gov/trade/trade-community/programs-outreach/convict-importations.
20 See CBP, “CBP Commissioner Issues Detention Order on Stevia Produced in China with Forced Labor,” (2016), https://www.cbp.gov/newsroom/national-media-release/cbp-commissioner-issues-detention-order-stevia-produced-china-forced; CBP, CBP Commissioner Issues Detention Order on Potassium Products Produced in China with Forced Labor (2016), https://www.cbp.gov/newsroom/national-media-release/cbp-commissioner-issues-detention-order-potassium-products-produced (2016); CBP, CBP Commissioner Issues Detention Order on Chemical, Fiber Products Produced by Forced Labor in China (2016), https://www.cbp.gov/newsroom/national-media-release/cbp-commissioner-issues-detention-order-chemical-fiber-products.
21 See CBP, “C-TPAT: Customs-Trade Partnership Against Terrorism” (2016), https://www.cbp.gov/border-security/ports-entry/cargo-security/c-tpat-Customs-trade-partnership-against-terrorism.
22 See CBP, “Guidance for Reimbursement Certificates,” https://www.cbp.gov/document/guidance/guidance-reimbursement-certificates.
23 See CBP, Best Practices of Compliant Companies (2013), https://www.cbp.gov/document/forms/best-practices-compliant-companies.
24 See CBP, “Partner Government Agencies (PGAs) Involved with BIEC,” https://www.cbp.gov/trade/trade-community/border-interagency-executive-council-biec/partner-government-agencies-pgas-involved-biec.