Consequences of Non-Compliance with U.S. Import Laws and Regulations


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CLE Presentation: Nikolas Takacs, International attorney at Armstrong Teasdale

Foreign suppliers are an increasingly popular source for products sold in the United States. The complex framework of import laws and non-compliance associated with importing goods into the U.S. can result in significant penalties or unanticipated costs to companies. This seminar will identify key areas of concern and strategies for reducing the risk of non-compliance with U.S. import laws and regulations.

The choice of a lawyer is an important decision and should not be based solely on this presentation. All rights are reserved and content may not be reproduced, disseminated or transferred, in any form or by means, except with the prior written consent of Armstrong Teasdale.

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Consequences of Non-Compliance with U.S. Import Laws and Regulations

  1. 1. The Grapes of Wrath:Consequences of Non-Compliance withU.S. Import Laws and RegulationsNikolas E. TakacsApril 24, 2013
  2. 2. Agenda Legal Framework Import Compliance in Key Areas Duty Savings Opportunities
  3. 3. Consequences Penalties (civil and criminal) Back duties Seizures Delays in customs clearance Audits or investigations
  4. 4. Benefits Predictable costs Competitive advantage Duty savings Faster import clearance
  5. 5. Import Revenue U.S. Customs total revenue collected in 2012: $39.4 billion1 Estimated undercollection for 2012: $484 million1 U.S. Customs looking outside the box to increase collection1 United States Customs and Border Protection, “Import Trade Trends: Fiscal Year 2012, Year-End Report”,
  6. 6. Who Enforces U.S. Import Laws? Customs and Border Protection• Collects import duties• Facilities international trade• Division of the Department of HomelandSecurity The Department of Commerce• Enforces U.S. unfair trade laws(anti-dumping and countervailing duties) International Trade Commission• Independent quasi-judicial agencyenforcing unfair trade laws and intellectualproperty import investigations
  7. 7. Who Enforces U.S. Import Laws? Court of International Trade (CIT)• Article III court with universal subject-matter jurisdiction over appeals from CBP,Commerce, and certain ITC cases. Court of Appeals for the Federal Circuit• Hears appeals from the CIT and appeals from the ITC concerning IP issues. Office of the United States Trade Representative• Develops and recommends trade policy, negotiates free trade agreements. Food and Drug Agency• Safety and labeling requirements for food, drugs, and cosmetics. Consumer Product Safety Commission• Product safety laws for imported products. Federal Trade Commission• Statements concerning country of origin. Securities and Exchange Commission• Review of “conflict mineral” prohibitions under the Dodd-Frank Act. Department of Agriculture Environmental Protection Agency Fish and Wildlife Service
  8. 8. International Legal Framework World Trade Organization• Reduction of tariff and non-tariff barriers to trade World Customs Organization International standardization of norms associated with importprocedures Bilateral or Multilateral Trade Agreements (i.e. U.S.-Chile FreeTrade Agreement, NAFTA).• Negotiated by the U.S. Trade Representative• Not valid until implemented by Congress
  9. 9. U.S. Legal Framework Tariff Act of 1930 (19 U.S.C. ch. 4)• Most important statute governing customs and import law• Governs all aspects of the importation process Import Regulations under Title 19• The regulations interpreting the Tariff Act are also veryimportant, as the statute is very general in nature• Agency officials have tremendous discretion in enforcingcustoms and import laws
  10. 10. U.S. Legal Framework: Reasonable Care Customs Modernization Act (“Mod Act”), 19 U.S.C. §§ 1508-10:• Importers must exercise reasonable care on three issues or elseface customs penalties: (1) customs entry, (2) valuation, and (3)classification.• Ways to exercise reasonable care include: consulting with customsexpert, seeking a binding customs ruling or request for internaladvice, having internal controls for trade compliance, etc.• Consult “Informed Compliance” Publications on import topicsreleased by CBP:
  11. 11. U.S. Legal Framework: Penalties Penalties for Non-Compliance (19 U.S.C. § 1592)• CBP can review customs entries for compliance going backfive years from the time of entry.• Amount of penalty depends on level of culpability(negligence, gross negligence, or fraud).• CBP can assess penalties up to 100% of the value of eachimportation.• Importer can mitigate penalties by submitting a “PriorDisclosure” – a voluntary disclosure of the violations,permitted as long as CBP has not yet initiated a formalinvestigation.
  12. 12. U.S. Legal Framework: Penalties Other Penalties• Recordkeeping penalties (19 U.S.C. 1509)− Up to $100,000 or 75% of the appraised value of themerchandise (whichever is less) for failure to produce a recordupon demand.• Drawback penalties (19 U.S.C. 1593a)• Counterfeit trademark penalties (19 U.S.C. 1526(f))
  13. 13. CBP Priority Trade Issues Revenue Antidumping and Countervailing Duties Penalties Intellectual Property Rights
  14. 14. Areas of Import EnforcementI. ClearanceII. ClassificationIII. ValuationIV. Country of Origin/MarkingV. Other Issues:A. Anti-Dumping and Countervailing DutiesB. Intellectual Property Rights EnforcementC. Customs Investigations/Inquiries
  15. 15. Customs Clearance Process Steps:• Arrival of goods at port of entry• Entry• Classification• Inspection• Liquidation (final ascertainment of duties)
  16. 16. Customs Classification How are import duties calculated?• Ad valorem (% of value) or perunit (per kg, per liter, etc.)• May vary by country 14.9% 3.9¢/kg
  17. 17. Customs Classification Harmonized Tariff Schedule (HTSUS):• Tariff classification system used for imported goods• Organized in chapters from 0-99, with 21 sections• 17,000 potential classifications, each good has anassociated tariff rate• Classification can be extremely complex
  18. 18. Customs Classification Example: Classification:• Ch. 16: Preparations of meat, of fish or of crustaceans,mollusks or other aquatic invertebrates.− Heading 1604: Prepared or preserved fish; caviar and caviarsubstitutes prepared from fish eggs.• Subheading 1604.14: Tunas, skipjack, and bonito in airtightcontainers.» Provision 1604.14.10: Packed in Oil.
  19. 19. Customs Classification Issues with customs classification:• Product may have functions that are described in multipletariff headings• No tariff provision may accurately reflect the product• Tariff Schedule does not change as fast as technology
  20. 20. Customs Classification How is classification determined?• Plain language of each chapter, section, and heading, andcorresponding notes• General Rules of Interpretation• Prior CBP rulings, precedent by the Court of InternationalTrade and the Court of Appeals for the Federal Circuit• Harmonized System Explanatory Notes
  21. 21. Customs Classification Example: Tariff classification of the Apple iTouch.• Which heading?− 8471: Automatic data processing machines− 8517: Apparatuses for transmission of data in a wired orwireless network− 8528: Monitors and projectors, not incorporating televisionreception apparatus
  22. 22. Customs Classification Example: Tariff classification of an Apple iTouch.• Heading 8471: Automatic data processing machines.• Why?− CBP looked at prior rulings and judicial precedent for similar productsand determined that the iTouch met the requirements of 8471 by being“freely programmable”.• Classification:8471 Automatic data processing machines and units thereof;magnetic or optical readers, machines for transcribingdata onto data media in coded form and machines forprocessing such data, not elsewhere specified orincluded:8471.30.01 Portable automatic data processing machines,weighing no more than 10kg, consisting of atleast a central processing unit, a keyboard anda display …
  23. 23. Customs Classification Challenging a Classification Decision by CBP:• If CBP classifies an import under a tariff classification thatthe importer does not agree with, it can file a “protest” andsubmit arguments against CBP’s decision.• CBP will review their decision and make a redetermination.• Importer can ultimately file an appeal to the Court ofInternational Trade after CBP’s review.
  24. 24. Customs Classification Takeaways:• Clear descriptions on the merchandise on the commercialinvoice• Not reasonable care to rely on customs brokers• When in doubt, request for internal advice or a customsruling
  25. 25. Customs Valuation Importer must declare a value for the imported merchandise Value declared to CBP directly impacts how much duty is paid Area of focus for customs compliance
  26. 26. Customs Valuation Transaction Value:• Most common method of customs valuation• = “price paid or payable for the imported merchandise.• Must have a bona fide sale (i.e. transfer of title and risk ofloss from seller to buyer) to use transaction value
  27. 27. Customs Valuation Transaction Value:• Assists: If buyer provides other non-invoice benefits toseller, those must be added to the price.− Example: Shoe company produces molds in China andsupplies the mold free of charge to its shoe manufacturerin China. The value of the mold must be added to theprice declared to CBP.• Other assists: buying commissions, engineering work doneoutside the United States, R&D, royalties, etc.
  28. 28. Customs Valuation Related Parties:• Transaction value is presumed to be unacceptable for related party salesunless additional requirements are met.• Must demonstrate that the relationship did not influence the price.• Not exercising reasonable care to rely on either: (1) an internal transferpricing study; or (2) an Advance Pricing Agreement approved by IRS.• Different test than the IRS “arm’s length” test.• This is a high risk area and increased area of CBP enforcement.
  29. 29. Customs Valuation Takeaways:• Consider whether the commercial invoice accounts for theentire value of the imported goods.• Ask:− Is there a sale?− Does the seller receive any benefits that are not reflected onthe invoice?• Advance planning required if selling from an overseasrelated party.
  30. 30. Marking and Country of Origin Unless there is a specific exception, allproducts (or their packaging) must be markedwith the country of origin. Each imported product will only haveone country of origin. Importer has burden of ensuring that country of origin is correct. In the case of an assembled product, CBP will apply the “substantial transformation”test.• If an unfinished product is shipped from country A and assembled in country B, CBPwill see if the assembly in country B transforms the item into a new product that is anow a product of Country B. Special rules of origin to qualify for free trade agreements.
  31. 31. Marking and Country of Origin Takeaways:• Perform country of origin analysis for products assembled inmultiple countries• Substantial transformation as a duty saving strategy• Due diligence of suppliers to ensure that country of origin iscorrect
  32. 32. Antidumping and Countervailing Duties Protection for U.S. manufacturers from unfair importcompetition Increasingly a priority concern for the U.S. government Dumping: sales of products at “less than fair value” Countervailable Subsidy: Subsidy granted by foreigngovernment that is specific to export
  33. 33. Antidumping and Countervailing Duties U.S. industry: petition Commerce and ITC for AD/CV duties against importsof a product from a certain country Standard: “Material injury” or “threat of material injury” Examples of cases: Petroleum Wax Candles from China, Ball Bearings fromGermany, Solar Panels from China, Frozen Fish Fillets from Vietnam U.S. industry = domestic producers or workers of the merchandise inquestion Purpose: protect U.S. manufacturing, not U.S.-based companies withoverseas production
  34. 34. Antidumping and Countervailing Duties AD/CV Duty Investigation Process:• ITC: material injury investigation• Commerce: calculates dumping margin (% below fair value)or countervailing duty margin (% of subsidies)• If the U.S. industry is successful, Commerce and the ITC willimpose an antidumping duty or countervailing duty “order
  35. 35. Antidumping and Countervailing Duties AD/CV Duty Rates:• Importers from the country in question must pay a deposit for AD or CVduties at time of entry• Commerce conducts annual reviews of the AD and CV duty rates• Final AD/CV duty rate not calculated until years after entry• These AD and CV duty rates can be extremely high and can bringimporters into bankruptcy• All AD and CV proceedings are subject to judicial review at the Court ofInternational Trade
  36. 36. Antidumping and Countervailing Duties Takeaways:• Require counsel approval before importing products subjectto AD/CV duties• Retrospective nature of the duty assessment process• Consider options for advocating for removal of products fromAD/CV duty order, or for obtaining lower margins
  37. 37. Intellectual Property Rights Protections Counterfeits• CBP has authority to seize suspected counterfeit goods for trademarksregistered with CBP Gray Market Goods• “Authentic” goods that are not authorized for importation by thetrademark holder• CBP can seize certain gray goods if the trademark holder has requestedgray market protection (known as Lever Rule protection) IP Infringement• The ITC can bring exclusion proceedings (section 337) for goods thatviolate U.S. IP rights
  38. 38. Intellectual Property Safeguards Counterfeits• Importers: make sure you are not buying counterfeit goods• U.S. manufacturers: register your trademarks with CBP and provide CBP withinformation on trademarks Gray market• Importers: make sure the manufacturer is licensed by the trademarkholder to import, or ensure an exception applies allowing importation• U.S. manufacturers:− Consider applying for Lever Rule protection against gray market imports− Ensure that you have obtained and own the foreign trademark for yourproducts
  39. 39. Criminalization of Import Laws Deterrent against Non-Compliance• Bases:− 18 U.S.C. § 1519 (Sarbanes-Oxley Anti-Obstruction Statute):• Whoever knowingly alters, destroys, mutilates, conceals, covers up,falsifies, … any record, document, or tangible object with the intentto impede, obstruct, or influence the investigation or properadministration of any matter within the jurisdiction of anydepartment or agency of the United States … or contemplation ofany such matter or case, shall be fined under this title, imprisonednot more than 20 years, or both.− False Claims Act (31 U.S.C. §§ 3929-3733).− Customs criminal provisions under 18 U.S.C. ch. 27.− Application of other statutes not specific to import, such as theLacey Act or the Food, Drug and Cosmetic Act.
  40. 40. Criminalization of Import Laws Transshipment of Goods: United States v. Wolff (N.D. Ill.)• Honey from China is subject to AD duties• Defendants accused of transshipping Honey from China through athird country, and falsely declaring the third country as thecountry of origin for customs purposes to avoid payment of ADduties• DOJ brought claim under the SOX anti-obstruction statute• Led to prison sentences, individual fines in the millions of dollars,and corporate forfeitures of $120 million
  41. 41. Criminalization of Import Laws Mislabeling Goods: United States v. Blyth (S.D. Alabama)• Seafood wholesalers charged with mislabeling imported fishto avoid antidumping duties on Vietnamese catfish• Defendants sentenced to prison for violating 18 U.S.C. 542and 545 Important to realize gravity of customs investigations – basicinquiries can turn into serious criminal matters
  42. 42. Customs Investigations and Inquiries CF 28: Request for Information CF 29: Notice of Action Focused Assessment• Priority is on major importers or high risk areas Quick Response Audit• Single issue audits• Usually based on prior identification of a concern Pre-Penalty Notice or Penalty Notice
  43. 43. Customs Investigations and Inquiries Treat all inquiries from CBP seriously Notify in-house counsel and outside counsel of CBP inquiries Consider whether to file a Prior Disclosure before it isprecluded
  44. 44. Best Practices Strong document retention system (7 years or longer).• Need to produce documents upon request• Files should be easy to locate Establish strong customs and trade policies and procedures.• Should be specific to the import activities that are actually taking place (and activitiesthat may take place)• Periodically review for updates• Consider outside audit by a law firm Show your work• Wrong answer does not necessarily mean a violation of reasonable care• Demonstrate how you arrived at your conclusions and why those conclusions werereasonable Importation as a legal functionIn-house counsel should be actively involved in import decisions
  45. 45. Duty Saving Strategies Duty Deferral/Refunds• Foreign Trade Zones− Goods entering the zone are not dutiable until they enter thecommerce of the United States for consumption• Drawback− Duty refund of 99% on imported goods that are exported ordestroyed
  46. 46. Duty Saving Strategies Duty Reduction• First Sale for Export− Multi-tiered sales structure (i.e. sales with a middleman)− Instead of declaring the value to CBP in the sale from the middlemanto the importer, the importer can declare the value from themanufacturer to the middleman in certain circumstances• Substantial transformation/shift in country of origin− Beneficial if the duty rate is lower in the final country• Deduction of freight and shipping costs− Ocean freight, marine insurance, and containerization can bededucted from the value declared to CBP
  47. 47. Duty Saving Strategies Preferential Trade Programs• Traditional Trade Agreements− Free trade agreements with 20 countries− Specific rules on qualifications• Special Duty Programs− Generalized System of Preferences (GSP)• Preferential duty treatment for 5,000+ products imported from 127designated countries− African Grown and Opportunity Act (AGOA)• Preferential duty treatment for imports from sub-Saharan Africancountries− Caribbean Basin Initiative (CBI)• Duty-free treatment for imports from Caribbean nations
  48. 48. Trending Trade Topics Trans Pacific Partnership• Proposed multi-lateral trade agreement with Pacific Rimcountries• May have impact on IP protections U.S.-EU Free Trade Agreement First Sale for Copyright• Supreme Court Decision in Kirtsaeng v. John Wiley & Sons,Inc.• New Rule: Copyright is exhausted upon first sale abroad
  49. 49. Contact and Questions?Nikolas TakacsAssociateArmstrong Teasdale