Janet Labuda on: “Reasonable Care: What the Heck Is It?”

In a case decided July 17, 2017 (Slip op 17-85), the Court of International Trade (CIT) ruled that an importer was negligent by misclassifying their imports. The importer argued that reasonable care was exercised because the company relied on the broker’s recommended classification. The broker suggested three possible classifications and the importer ultimately used the one with the lowest duty rate.

The court ordered the importer to pay $8,228.20 in unpaid duties plus prejudgment interest but said more information was needed before a penalty could be assessed.

According to the CIT’s opinion, 

“given the three conflicting classifications recommended by the broker, the Defendant had a duty to undertake some further investigation regarding the proper classification, whether it meant consulting the CROSS database of customs rulings, obtaining a second opinion, or consulting a customs attorney or other customs expert. There were also publicly-available customs rulings that, had Defendant consulted, would have alerted him to a potential problem with his classification prompting further investigation. Defendant could not reasonably have relied upon the recommendation of its customs broker under these circumstances. Without even questioning the broker’s changing advice, seeking any form of guidance from CBP, consulting publicly available rulings that may have raised questions about the classification, Defendant cannot have exercised reasonable care in classifying the entries prior to importation.”

In addition, the CIT found that the importer’s classification of all the items being entered were erroneous and that the importer thus negligently submitted materially false entry information. 

The CIT ordered the importer to pay the unpaid duties because it failed to file a timely protest, rejecting the importer’s argument that a letter from its broker sent in response to CBP’s proposed notice of action constitutes a protest. However, the court declined to issue summary judgment on the penalty amount, citing the need for more details on the importer’s history of previous violations, ability to pay, and the effect of a penalty on the importer’s ability to continue doing business.

When I worked for CBP I regularly questioned what really constituted the exercise of reasonable care as required by the U.S. Customs Modernization Act, which went into effect in 1993. CBP subsequently wrote an informed compliance publication providing guidance. 

The basic concept is simple: importers are required to inform themselves of all laws and regulations pertaining to their own Customs business activities.  According to CBP, “the importer of record is responsible for using reasonable care to enter, classify and value imported merchandise, and provide any other information necessary to enable Customs to properly assess duties, collect accurate statistics and determine whether any other applicable legal requirement is met.” 

What does the term reasonable mean? CBP will not provide you with a fail-safe definition. Nor is it a numbers game, where if I take these 10 steps, or 9 steps, or 8 steps, etc., am I exercising reasonable care? Obviously, from the opinion expressed in this most recent case, merely consulting a broker is not enough. Selecting the lowest duty rate out of a number of possibilities is not enough. 

Importers must work closely with the members of their supply chain taking a hands-on approach to ensure accuracy. As with all legislation, the courts will inevitably provide the final interpretation. Best not to be on the losing side of the opinion.

Compliance: it starts at the top

GeyerGorey LLP draws upon Janet Labuda’s contacts and experience to understand trade enforcement trends.  Here she is with her latest on the importance of compliance. Janet can be reached at the FormerFedsGroup.

By Janet.Labuda@FormerFedsGroup.Com

Whether you are a small to medium sized enterprise, or a large multinational corporation, creating a culture of compliance starts at the top. This compliance culture should permeate your entire organization starting with the Chief Executive, the Chief Financial Officer, and the corporate counsel.

Compliance is not something that can be compartmentalized, rather, it must be ingrained in the consciousness of every employee from the executive suite to the shop floor. This is one area where a top down driven process is vital. The compliance officer is responsible for implementing the compliance focused program that is established by the corporate ownership and top management.

However, all aspects of the company, whether sourcing, transportation, production, marketing, or sales must work together to support the compliance operation. Leaving just the compliance office to establish the ethic and carry the entire company is an accident waiting to happen.

I often hear that various departments in a company do not understand the compliance aspect of the operation, which sometimes leads them to negate the guidance of the compliance department.  This can lead a company down a slippery slope.

The corporate culture must embrace compliance across the entire company and all must understand the risk of potential regulatory violations.  A once a year training program is not going to cut it.  Compliance is something that everyone must  live, day in and day out.  Workplace evaluations should include a compliance segment for each and every employee. Every department head needs to understand and communicate compliance procedures to their direct reports.

The compliance department must keep a finger on the pulse of risk.  The compliance officer should be responsible for communicating these risks throughout the organization and information should be refreshed and disseminated as often as necessary.  To this end, the CEO must make time for compliance officers, and not leave this critical function on auto-pilot.

Once a vibrant internal compliance driven operation is rooted in the day-to-day operation, companies must push their ethic out to their entire supply chain.  This includes interaction with foreign suppliers, agents, and transporters.  Everyone in the supply chain needs to understand that by doing business with your company, they accept the strict standards that support adherence to the laws and regulations governing trade and all aspects of how the business conducts itself.  This should be reflected in all corporate negotiations, contracts, and purchasing agreements.

By taking this position, senior corporate management supports the highest levels of business ethics and integrity throughout the supply chain.  Compliance is not a skate on thin ice, or a fly by the seat of your pants exercise.  A culture of compliance provides that  sure footing needed when regul