Tag Archives: janet labuda

Buyer Beware

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by Janet Labuda

After the 2009 special enforcement initiative, called Operation Mirage, CBP compiled statistical data proved that the undervaluation of imported goods from China had risen to the level of significant risk in some product categories. Supported by the Administration’s direction to level the trade playing field, addressing undervaluation will continue to be part of CBP’s comprehensive trade enforcement strategy.

While working for CBP, an in-house counsel remarked that you would know you are on the right enforcement track when case law supports your theory of risk.

An example of this observation recently surfaced. In a press release dated October 3, Immigration and Customs Enforcement reported that, as alleged in a False Claims Act complaint, a company called Notations, acting as a wholesaler, repeatedly ignored warning signs that its business partner, which imported garments from China, was engaged in a scheme to underpay customs duties on the imported garments it sold to Notations.  Pursuant to the settlement, Notations admitted and accepted responsibility for failing to act in response to indications of fraudulent conduct. The company agreed to pay $1 million in damages, and implement measures designed to prevent future fraud in its business and supply chain operations.

The importer of women’s apparel manufactured in China presented false and fraudulent invoices to CBP, showing prices that were discounted by 75 percent, or more, to avoid customs duties. The wholesaler, Notations, which was the importer’s biggest customer, admitted that it aided this scheme by repeatedly ignoring warning signs that the importer’s irregular business practices were highly suggestive of fraud.

Notations has also agreed to implement a written compliance policy that will include measures to educate its employees on identifying red flags for fraud in import transactions, to monitor the conduct of its business partners who act as importers, and to report all potentially fraudulent conduct to CBP.

To be noted in this example, the court was successful in pursuing a case against a company that was not the importer of record, and that is in a foreign location.
This should be a warning to all companies. It is recommended that your written compliance plan include steps to monitor the players in your supply chain.   If your suppliers are buying overseas, your procurement team needs to remember that caveat emptor can save them a world of trouble.

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

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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

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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 [email protected]

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