What Does Informed Compliance and Reasonable Care Really Mean?

The Mod Act 25 years later

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F D E S I D E R I O @ G D L S K . C O M

W W W. G D L S K . C O M

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George Tuttle III, Tuttle Law Direct: (415) 288-0428Cell: (415) 254-5986Firm: (415) 986-8780Email: geo@tuttlelaw.comWeb: www.tuttlelaw.com

The Wild Wild West – the concept of Negligence and the Obligation of importers pre-Mod Act

What the Mod Act did and why

How it changed the obligations of Importersand CBP – and what is “negligence”

What the Mod Act says about Informed compliance and reasonable care

CBP’s view of Informed compliance and reasonable

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Pre-Mod Act -- Negligence and the Obligation of Importers

◦ Definition -- negligence◦ n. failure to exercise the care toward others which a reasonable or prudent person would do in the

circumstances, or taking action which such a reasonable person would not. Negligence is accidental as distinguished from "intentional torts“

◦ Negligence - a failure to use reasonable care or doing of something which a reasonably prudent person would not do.

◦ Pre-Mod Act law. -- Section 592 of the Tariff Act of 1930 (19 U.S.C. 1592) penalizes any person who imports, attempts to

import, or aids or procures the importation of merchandise into the United States "by means of any fraudulent or false

invoice, declaration, affidavit, letter, paper, or by means of any false statement, written or verbal, or by means of any

false or fraudulent practice or appliance whatsoever," unless that person has "reasonable cause to believe the truth of

such statement."

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What the Mod Act Did and Why

◦ Mod Act moved CBP entry processes to the current paperless entry environment

◦ Common importer mis-conception that CBP looks at entries

◦ Mod Act shifts burden (legal responsibility) to importers to:

◦ Importers and the (A)(1)(a) List -- responsible for retaining and submitting “entry documentation” for a period of 5 yrs upon request

◦ Responsible for classification, valuation, admissibility, etc.

◦ Standard of care – Reasonable care

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19 U.S. Code § 1484. Entry of merchandise

“importer of record” … shall, using “reasonable care” —

1. make entry …filing … information as necessary for CBP to determine whether the merchandise may be released from custody

2. by filing … the declared value, classification and rate of duty applicable to the merchandise, and other documentation or information necessary to enable CBP to—

(i) properly assess duties,

(ii) collect accurate statistics, and

(iii) determine whether any other applicable requirement of law (other than a requirement relating to release from customs custody) is met.

7/25/2019 5GTEC 2019

In House Report 103-362, Section 621, relating to the assessment of penalties under 19 U.S.C. § 1592, the Committee discusses

◦ Definition of negligence (and gross negligence)

◦ Meaning of “reasonable care” and “informed compliance”

◦ What is “Informed compliance”?

“to maximize voluntary compliance with Customs laws and regulations, the trade community needs to

be clearly and completely informed of its legal obligations. Accordingly, the law imposes a greater

obligation on Customs to provide the public with improved information concerning the trade

community’s responsibilities and rights under the Customs and related laws.”

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Customs uses the following definitions for Negligence:A violation is determined to be negligent if it results from an act (or omission) done through either:

the failure to exercise the degree of reasonable care and competence expected from a person in

the same circumstances in ascertaining the facts or in drawing inferences therefrom, in

ascertaining the offender’s obligations under the statute, or

in communicating information so that it may be understood by the recipient.

… a violation is determined to be negligent if it results from the offender’s failure to exercise reasonable

care and competence to ensure that a statement made is correct.

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In meeting the “reasonable care” standard, the Committee believes that the importer should consider utilization of

one or more of the following aids to establish evidence of proper compliance …

Seeking the guidance from … Customs … through the pre-importation or formal ruling programs; consulting with a

Customs broker, a Customs consultant or a public accountant, or an attorney; using in-house employees, such as

counsel, a Customs administrator, or, if valuation is an issue, a corporate controller who has experience and

knowledge of Customs laws, regulations, and procedures …

* * *

In using a qualified expert, the importer is also responsible for providing such expert with full and complete

information sufficient for the expert to make entry or to provide advice as to how to make entry. If the above steps

are taken, the importer will be presumed to have acted with “reasonable care” in making entry.

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“The following are two examples of how the reasonable care standard should be

interpreted by Customs:

(a) the failure to follow a binding ruling is a lack of reasonable care; and

(b) an honest, good faith, professional disagreement as to correct classification of a

technical matter shall not be lack of reasonable care, unless such disagreement

has no reasonable basis, e.g. snow skis are entered as water skis.”

7/25/2019 9GTEC 2019

Mod Act definitions of negligence and “reasonable care” are incorporated Customs Regulations:

◦ 19 CFR 171 Appendix B -- Guidelines for the Imposition and Mitigation of Penalties for Violations of 19 U.S.C. 1592

“Reasonable care” is not a “mitigating factor” but a defense to an allegation of negligence when Customs believes or alleges that importer made an error.

The defense of reliance on the expertise of a Customs expert, such as a broker, constitutes an affirmative defense that must be proven by the importer … United States v. Optrex America, Inc., 560 F. Supp.2d 1326 (C.I.T. 2008).

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CBP Ruling 663795, dated Feb 27, 2003◦ Alleged Loss of Revenue - $711,1 18.55◦ Culpability – negligence◦ Proposed Penalty - $1,422,237◦ Alleged Violation – Misclassification

◦ Import specialist phoned importer and broker and advised them of the NIS's determination, but did not do so in writing … Despite this telephone communication, importer continued to classify merchandise under” Free” subheading.

◦ import specialist later issued a Request for Information, CF 28, requiring to submit list of entries, Petitioner did not respond to the CF-28, and the matter was referred to the Office of Investigations

◦ Decision:

◦ we conclude that, in the absence of binding rulings or protest decisions issued in regards to this equipment, [importers] classification, while it may have been incorrect, was not sufficiently unreasonable to give rise to a penalty based on negligence. See House Ways & Means Committee Report No. 103-361,

◦ Accordingly, the penalty and duty demand are remitted in full with respect to the above-quoted allegation contained in the penalty notice.

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CBP Ruling 637663 dated Nov. 03, 2003

• Alleged Loss of Revenue - $ 207,938

• Culpability – negligence

• Proposed Penalty - $414,000 (?) (Claim asserted against sureties for $128K)

• Alleged Violation – misclassification of truffles

• JFK Customs issued a Notice of Action (CF 29) proposing a rate advance on entry number H77-0071228-1, involving a shipment of truffles.

• The merchandise was originally classified in subheading 0712.30.4000.

• The CF 29 stated “Based on a review of the invoice description and the airway bill, the merchandise is properly classified under HTS #0709.52.0000 and subject to 100% duty under the “Beef Regime”

• The port subsequently issued 16 CF 29’s on October 9, 200, indicating that all the truffles were classified in subheading 0709.52.0000, HTSUS.

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CBP Ruling 637663, cont.,

• Subsequently, ORR issues ruling that the Italian and Chinese origin MAP truffles are classifiable under subheading 0709.52.00, HTSUS.

• Decision

In this case, there was no binding ruling or decision on whether the MAP process changes the classification of the truffles from “fresh or chilled” to “prepared or preserved” …. Customs had not communicated a disagreement with the importer’s classification until after the entries at issue were filed.

. . . at the time the entries were filed, it is clear that the question of whether the MAP process rendered the truffles a product in Chapter 20, was still an undecided classification issue.

We conclude that, in the absence of binding rulings or protest decisions issued in regards to the merchandise at issue, the petitioner's classification, while it may have been incorrect, was not sufficiently unreasonable to give rise to a penalty action based on negligence.

7/25/2019 15GTEC 2019

CBP Ruling HQ 663931, dated Mar 2, 2004◦ Alleged Loss of Revenue - $ 37,284.90

◦ Alleged Violation – Misclassification and Quota evasion

◦ Culpability – Negligence

◦ Proposed Penalty -- $74,569.80

◦ Importer entered the merchandise under HTS 7222.40.4510 and CBP said the correct classification was HTS 7222.40.4590

◦ The steel was subject to a of 5% tariff-rate quota under HTS 9903.72.15.

◦ The quota was filled at the time of entry.

◦ importer failed to reference the appropriate Chapter 9903 tariff number, and failed to tender the additional duties at the time of entry summary.

◦ Importer claimed it exercised reasonable care by relying upon its broker to properly classify the merchandise and to determine whether it was subject to quota and therefore, it was not negligent.

◦ CBP HQ agrees

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CBP Ruling HQ 663931, cont.,

• Decision

• The administrative record shows that the petitioner consulted with a licensed customs broker, a qualified expert as defined by the Report of the House Ways and Means Committee cited above.

• The petitioner requested specific advice regarding whether the merchandise at issue was subject to quota if imported from Argentina.

• The broker advised that she called CBP to confirm that Argentina was exempt from quota and dumping duties and that the classification was under either subheading 7213.91.3010, 7213.92.4510 or 7213.92.6010, HTSUS.

• Knowing generally that the broker had consulted with CBP about the possible exemption from quota of its merchandise, it was reasonable for the petitioner to rely on the broker’s advice that the wire rod from Argentina was not subject to quota and dumping duties

7/25/2019 17GTEC 2019

CBP Ruling HQ 663931, cont.,

• Facts

• In an e-mail importer specifically requests advice from Broker whether the merchandise is subject to quota if shipped from Argentina and whether the broker can please check how the situation stands “as of today.”

• Broker replies “I checked my files and called customs to confirm that Argentina is exempt from Quota and dumping duties.”

• Later, Broker informs importer “I have a problem with this entry, I have an error message that states this cargo may be possible quota. I have reviewed the tariff number and it shows possible special 99 number. Tariff 7213.91.4590 was used, is this correct. All I have is a commercial invoice.

• Subsequently, a proposed penalty in the amount of $74,569 with a tentative culpability level of negligence.

7/25/2019 18GTEC 2019

United States v. Golden Ship Trading Company, 25 C.I.T. 40 (2001)

o Importer misrepresented the country of origin of the merchandise ("tee-shirts") on the entry as the Dominican Republic when the actual country of origin was the People's Republic of China.

o Importer, Ms. Wu did not dispute that the country of origin is the People's Republic of China, but denied any negligence on her part. She claimed she was defrauded by the exporter because he concealed the fact that the tee-shirts were manufactured in China.

o The court found that Ms. Wu failed to exercise reasonable care because she failed to verify the information contained in the entry documents.

o Under the regulation's definition of reasonable care, Ms. Wu had the responsibility to at least undertake an effort to verify the information on the entry documents.

o “There is a distinct difference between legitimately attempting to verify the entry information and blindly relying on the exporter's assertions.”

7/25/2019 19GTEC 2019

CBP’s Publication on Related Party Transfer Pricing and Reasonable care: “An importer that relies solely on an APA or transfer pricing study to conclude

that transaction value is acceptable would not be exercising reasonable care.”

Section 301, Entry origin declaration Statements and Golden Ship Trading:

“An importer that relies solely on information or unsupported statements from an exporter to establish the origin of a good would not be exercising reasonable care.”

7/25/2019 20GTEC 2019

Reasonable Care: Best Practices INTERNAL CONTROL COMPONENTS

• CONTROL ENVIRONMENT

• RISK ASSESSMENT

• INTERNAL CONTROL

• INFORMATION AND COMMUNICATION

• MONITORING

PREPARE FOR AUDITS – IDENTIFY CUSTOMS POSITIONS AND PROCEDURES

CUSTOMS INFORMED COMPLIANCE PUBLICATIONS

CBP MANUALS - E.G., STANDARD AUDIT PROGRAM

CUSTOMS QUESTIONNAIRES

FOCUSED ASSESSMENT QUESTIONNAIRE

SURVEY QUESTIONNAIRE

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MODIFY PROCEDURES TO ENSURE THEY ARE COMPLYING WHICH WILL ENABLE A PROMPT RESPONSE, INQUIRIES AND MEET CUSTOMS EXPECTATIONS

TAKE NECESSARY REMEDIAL ACTION TO ENSURE THAT ERRORS DON’T RECUR

CONSIDER PRIOR DISCLOSURE

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