February, 2015
Customs bonds cannot bankrupt an importer
Mark K. Neville, Jr.
Every so often Customs and Border Protection (CBP) will take an action in a trade remedy case that cries out for reversal. We understand full well the fact that CBP has been criticized by domestic producer interests in the past for not doing enough to prevent the evasion of importers’ liability for antidumping and countervailing duty. That is why CBP has consistently made trade remedies one of its Priority Trade topics.
But CBP can go overboard and when it does, its actions should be dialed back.
And that brings us to this month’s discussion of a recent court case in which the US Court of International Trade (CIT) enjoined CBP from requiring the posting of a customs bond in the full amount of the total potential antidumping duty liability faced by an importer. The decision, Kwo Lee Inc. v. United States,1 is one of those refreshing instances in which we can be thankful for an independent judiciary as a check on executive branch action.
But first, a quick reminder of the bond requirement is in order.
In its effort to safeguard the revenue,7 however, CBP refused to treat Kwo Lee’s imports as though they were entitled to the lower rates. Instead, CBP required that, in lieu of a cash deposit for the full amount of the higher duty, Kwo Lee would have to post single transaction bonds at the PRC-wide rate of $4.71/kg. The nature of the bonding process is that the importer would be required by the surety company to post collateral in the full amount. The importer challenged the bonding action as being arbitrary and capricious.
The importer sought and obtained a temporary restraining order (TRO) from the CIT but, with some irony, the cost of the TRO was the posting of a bond of $1 million. The importer also sought a preliminary injunction (PI) and it was this motion which led to the issuance of the decision. In a well-crafted opinion, Judge Pogue ran through the criteria for the granting of a PI and, in so doing, showed up just how unsatisfactory had been CBP’s processes. The four criteria that are typically weighed in a decision whether to issue a PI are:
Recall that the AD rate collected on imports is producer-specific. As a result, in order to make use of that producer’s AD rate it is vital to be able to prove that the imported garlic was produced by that specific Chinese entity. Obviously, there is a great incentive to falsify the documents if, by so doing, the imported garlic can be attributed to a producer whose exports merit a lower AD rate.
Here, the court noted that CBP had not given a full explanation for its actions, but noted that apparently the bonding requirement was due to incomplete or faulty phytosanitary documents issued by China. CBP sees flaws in the certificates as evidence of fraud. The importer pointed out that these documents are normally not models of precision—indeed they were said to be notoriously unreliable-- and that they ordinarily do not list the names of the producers but only the storage location and inspection site. The court stated that it would be unfair to single out the importer for heightened bonding requirements when the documents are so routinely imperfect. The sudden increase in volume by the importer need not only signify a plan to engage in fraud but could just as easily be a function of the importer seeking to seize the business opportunity created by the difference in the AD rates. Moreover, the volumes were quite consistent with harvest conditions. In consequence, CBP may have offered an explanation that ran counter to the facts. Finally, in its analysis of this criterion, the court found that CBP may not have offered the importer enough of an explanation for its decision. Plaintiff’s questions were serious and substantial and as a result, this second test of likelihood of success was met.
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Customs bonds
The administrative practice for all commercial shipments into the US is that an importation and entry bond must be posted and in effect prior to the goods being released.2 Among other obligations assumed by the importer/principal under the bond, the importer agrees to pay duties, taxes and charges and to produce documents and evidence and to redeliver the goods if called upon.3 As a result of this scheme, CBP can afford to be relaxed about getting paid the duties and fees associated with a customs entry because there is a customs bond in place.4 As a result, although the duty will accrue at the time of arrival within the customs territory, the duty need not be paid at the time of the entry but within 10 days of the time of entry. Further, the duty being paid at that time is an estimated duty. The final duty obligation is not reckoned until the date of liquidation which is typically 314 days after entry.5 The major exception is in antidumping duty or countervailing duty cases, where liquidation is normally delayed for many months more due to the pendency of an investigation or an annual review of an order by the Department of Commerce. As a result of the extended pre-liquidation period, the final accounting of the additional duty obligation is in limbo and that makes all of the parties—importer, bond company, CBP—nervous as problems in collection will usually rise are in direct proportion to the delay. Bonds can either be single entry or continuous, the latter being issued to cover all entries over the course of a year. The amount of the bond will vary from one importer to the next, since it is a function of the duty liability anticipated.6 There is a great deal of latitude by, and deference to, CBP in its decisions on bond requirements but we shall see that there is an outer limit to that deference.Antidumping duty bonding
We come to the case of Kwo Lee. The importer sought to import garlic from China. That raises immediate issues, because garlic from China has been the subject of an antidumping duty order (AD Order) for the past 20 years. That means that the importation of Chinese-sourced garlic will attract antidumping duties. But the nature of that AD Order of the law is that the duties will vary widely, from one producer to another, and with an unassigned, PRC-wide rate. The PRC-wide rate is a whopping 376.67%, which translates to $4.71/kg while the rate specifically assigned to the producer of the garlic imported by Kwo Lee in an earlier (2008) New Shipper Review is 32.78% or $.35/kg. Kwo Lee jumped at the chance to capitalize on the opportunity created by the tremendous gap between the duty collected on many other garlic exports and the duty collected on its’ producers exports.In its effort to safeguard the revenue,7 however, CBP refused to treat Kwo Lee’s imports as though they were entitled to the lower rates. Instead, CBP required that, in lieu of a cash deposit for the full amount of the higher duty, Kwo Lee would have to post single transaction bonds at the PRC-wide rate of $4.71/kg. The nature of the bonding process is that the importer would be required by the surety company to post collateral in the full amount. The importer challenged the bonding action as being arbitrary and capricious.
The importer sought and obtained a temporary restraining order (TRO) from the CIT but, with some irony, the cost of the TRO was the posting of a bond of $1 million. The importer also sought a preliminary injunction (PI) and it was this motion which led to the issuance of the decision. In a well-crafted opinion, Judge Pogue ran through the criteria for the granting of a PI and, in so doing, showed up just how unsatisfactory had been CBP’s processes. The four criteria that are typically weighed in a decision whether to issue a PI are:
- Likelihood of success on the merits
- Irreparable harm that would otherwise occur without the injunction
- Balancing of the equities
- Public interest.
Irreparable harm
In the case of Kwo Lee, the court found a viable an immediate irreparable harm, counting the additional bonding requirement at more than $10 million (129 containers at an average additional bond of $117,500 per container). The posting of the full collateral, rather than the payment of a fractional amount as a premium, is a financial burden that the importer is unable to meet. This will result in the imported goods being held in CBP custody and not released. This subjects the importer to loss of goodwill and damage to his reputation and, more meaningfully, exposes the importer to imminent and immediate bankruptcy and, ultimately, to a loss of meaningful judicial review.Fair chance of success on the merits
Since the irreparable harm rung has been met, the court noted that the importer need only show that it had a “fair chance” of success on the merits. This is met if the importer raises questions that are “serious, substantial, difficult and doubtful.” Despite CBP’s authority to safeguard the revenue, and despite the administrative regime for enhancing the security of importers’ bonds,8 an arbitrary or capricious action will be struck down.Recall that the AD rate collected on imports is producer-specific. As a result, in order to make use of that producer’s AD rate it is vital to be able to prove that the imported garlic was produced by that specific Chinese entity. Obviously, there is a great incentive to falsify the documents if, by so doing, the imported garlic can be attributed to a producer whose exports merit a lower AD rate.
Here, the court noted that CBP had not given a full explanation for its actions, but noted that apparently the bonding requirement was due to incomplete or faulty phytosanitary documents issued by China. CBP sees flaws in the certificates as evidence of fraud. The importer pointed out that these documents are normally not models of precision—indeed they were said to be notoriously unreliable-- and that they ordinarily do not list the names of the producers but only the storage location and inspection site. The court stated that it would be unfair to single out the importer for heightened bonding requirements when the documents are so routinely imperfect. The sudden increase in volume by the importer need not only signify a plan to engage in fraud but could just as easily be a function of the importer seeking to seize the business opportunity created by the difference in the AD rates. Moreover, the volumes were quite consistent with harvest conditions. In consequence, CBP may have offered an explanation that ran counter to the facts. Finally, in its analysis of this criterion, the court found that CBP may not have offered the importer enough of an explanation for its decision. Plaintiff’s questions were serious and substantial and as a result, this second test of likelihood of success was met.
Balancing of equities
Facing imminent bankruptcy, the equities were in favor of the plaintiff. Without a PI, the importer would suffer irreparable harms, while the government faced the possible loss of millions of dollars in antidumping duties if the PRC-wide AD rate were found to apply. The court observed that the Commerce Department had previously determined that the importer’s producer was eligible for its own AD rate. The result is that there would not be a need for any enhanced bonding. For its part, the government only faces possible injury that is susceptible to legal remedy and mitigation through future bonding. Public interest In its analysis of this test, the court pointedly noted that the public interest is served by the accurate and effective, uniform and fair enforcement of trade laws. Maintaining security for the antidumping duties cannot be done at the cost of subjecting an importerto an unjust bonding requirement. Moreover, as the court noted Preserving Plaintiff’s access to meaningful judicial review, a public interest in itself, protects against unchecked and unchallenged enforcement by preserving Plaintiff’s opportunity to litigate a potentially meritorious claim.
Conclusion
The court concluded that the importer had demonstrated that it was entitled to a preliminary injunction. The court was willing to look at the merits of the importer’s case and decided, on the basis of these facts and circumstances, that it would not permit CBP to bankrupt this importer........................................................................................................................................
1. Slip Op. 14-121 (October 16, 2014).
2. 19 CFR § 142.4.
3. If the importer breaches any of its bond obligations, CBP can issue a liquidated damage claim.
4. Only those importer bonds which are issued by approved surety companies are acceptable. Note that many other customs activities beyond importation and entry are the subject of separate bonds, including brokerage business, foreign trade zone or customs bonded warehouse activities, commercial gauger operations and duty drawback.
5. 19 CFR § 142.23.
6. The minimum bond amount for an importation and entry bond is typically $50,000, with the annual premium therefor being $500.
7. CBP has broad authority to safeguard the revenue, 19 USC §§ 66 and 1623.
8. 19 CFR § 113.13 (d).
2. 19 CFR § 142.4.
3. If the importer breaches any of its bond obligations, CBP can issue a liquidated damage claim.
4. Only those importer bonds which are issued by approved surety companies are acceptable. Note that many other customs activities beyond importation and entry are the subject of separate bonds, including brokerage business, foreign trade zone or customs bonded warehouse activities, commercial gauger operations and duty drawback.
5. 19 CFR § 142.23.
6. The minimum bond amount for an importation and entry bond is typically $50,000, with the annual premium therefor being $500.
7. CBP has broad authority to safeguard the revenue, 19 USC §§ 66 and 1623.
8. 19 CFR § 113.13 (d).
Mark K. Neville, Jr., LL.M. (International Legal Studies), NYU, is a long-time member of the Board of Advisors. He is Principal of International Trade Counsellors and may be reached at mkneville@itctradelaw.com. He has served as an adjunct professor at The University of California, Berkeley’s Haas School of Business and NYU’s Stern School. He is The Journal’s Customs & Trade correspondent.