March, 2019
CBP Must Take a Meeting
Mark K. Neville, Jr.
A major theme of the customs and trade compliance regime in the United States is that it is founded on the bedrock principles of fairness and due process. We discussed this in 2016 in connection with an attempt by the government to assert a civil penalty claim in court under 19 USC § 1592 (Section 1592) based on a fraud level of culpability.1 The Court of International Trade rejected that attempt on the theory that the government had not clearly “exhausted its administrative remedies.”2 Customs and Border Protection could not surprise an importer in a collection action at the CIT on a civil penalty matter by alleging a violation that had not been the subject of the administrative process. A jump to a fraud level of culpability in the case filed with the court was, in essence, a new charge.
We come now to another court protection of this principle, again drawn from a civil penalty claim. In this consolidated action, United States v. Aegis Security Insurance Company and Tricots Liesse 1983, Inc.,3 the US brought an action seeking to collect significant duties and civil penalties following a disallowed prior disclosure.
The case offers up a cautionary tale for the government but, so too, does it suggest that importers must exercise care in initiating a prior disclosure.
Shortly after liquidation of the entries in May 2010 Tricot filed a Prior Disclosure5 with CBP at the port, asserting that the entries may not in fact have met the NAFTA-eligibility requirements but that they did qualify for Tariff Preference Level Quota Program (TPL) treatment. TPL in the NAFTA context is a sort of “poor man’s NAFTA” in the sense that the eligible textile and apparel articles will be products of either Canada or Mexico and that, up to certain prescribed quantity levels, the articles should be entitled to duty-free entry. Under TPL, which operates like a tariff rate quota,6 the importer is still liable for MPF.
A failure to meet all of these conditions will result in “blowing” the PD. That means that the importer gets no benefit vis a vis the penalty to be assessed. Note that, unlike the Internal Revenue Service authority to settle tax liability, CBP has no authority to accept a lower amount than the duty and fees due.8 So, to be clear, the PD is about managing the potential civil penalty exposure, because the duty and fee liability remains untouched in the face of a PD. The lesson here is simple and straightforward: the importer may not want to file a PD if it is not prepared to pay the duties and fees in full.
The ensuing play-by-play is important for an understanding of how the PD was handled by both Tricots and CBP. For ease, we have organized them by year.
Tricot disagreed on the statutory interpretation underlying CBP’s administrative practice and submitted a legal memorandum to CBP in January 2011.
In any event, CBP never responded to Tricots’ legal argument in its “written position paper,”11 instead notifying the importer that it had calculated the duty owed to be $2.2 million and the fees to be $44,000, and called upon the importer to make that payment. CBP stated that, once the payment was made in full, Tricots could seek a review of CBP’s calculations.
This “pay first, let’s discuss the numbers later” play is quite extraordinary. The more usual course would be for the importer to make its calculations and then to discuss the matter thoroughly with the Fines Penalties and Forfeitures officer at the port. In my experience, importers are best served if they take pains to anticipate areas that are likely to be controversial or at the least require a careful analysis. This is especially so if there is a lot riding in a matter of close legal interpretation. In such a case, it is often prudent to build into the PD submission itself a request for Internal Advice, so that the matter can be dispatched to CBP Headquarters’ Office of Regulations and Rulings. Experienced practitioners recognize this as standard practice where there are disagreements with the port; it is best to seek a formal ruling from CBP Headquarters on such a disputed issue.
In the event, Tricots did not make the payment called for by CBP but it did make an Offer in Compromise to close out the matter in June 2011. Tricots offered $85,000, double the amount of MPF they asserted was owing. CBP’s delayed reply in December merely noted that Tricots was not entitled to PD benefits as the PD had not been perfected due to non-payment of the full amount that had been calculated as due by CBP.
Tricots “stuck to its guns” and replied in April 2012 that it had perfected the PD (a schoolyard “did, too”?) and thus it only owed the MPF. Importantly, the importer did not ask for a hearing with CBP, despite that option having been afforded in the Pre-Penalty Notice.
The importer followed this in July with a Petition in response to the Penalty Notice, again asserting that its PD was valid and that it only owed MPF and making a second Offer in Compromise at increased amount of $160,000. On August 3, the Tricots representative again sought to convince the same high-ranking CBP official, now joined by the Assistant Commissioner of Trade, to accept the new Offer and advance the same arguments. The CBP officials said they would get back to the representative but there was no activity for almost a year.
The parties later agreed to consolidate the Aegis and the Tricots’ cases.
The CIT treated the matter as a motion for summary judgment, with the effect that there were no material issues of fact in dispute and that the case could be resolved as a matter of law. The court stressed the primacy of Congressional scheme that mandates the importer’s right in a penalty proceeding to be able to make its case in a face-to-face meeting. This is found in Section 1592, in relevant part stating (at 1592 (b) (2)):
In a first-rate opinion, Judge Eaton distilled the case to its core elements
Hold the champagne. The Section 1592 (d) claim for $2.25 million unpaid duties survived, but was stayed pending resolution of the monetary penalties having been fully resolved. Thus, Tricots’ liability for duties and fees remains an open question as does the inquiry into the underlying substantive legal standards of the TPL eligibility scheme.
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We come now to another court protection of this principle, again drawn from a civil penalty claim. In this consolidated action, United States v. Aegis Security Insurance Company and Tricots Liesse 1983, Inc.,3 the US brought an action seeking to collect significant duties and civil penalties following a disallowed prior disclosure.
The case offers up a cautionary tale for the government but, so too, does it suggest that importers must exercise care in initiating a prior disclosure.
Unmerited NAFTA claims
The origins of the case can be traced back to shipments to the US for which NAFTA benefits had been claimed. Since the Canadian seller (Tricots Liesse 1983) was named as a defendant in the lawsuit, it suggests that the Canadian company was acting as a non-resident importer of record in its sales to the customers in the US.4 Tricots produced knitted circular fabric in Canada, sourcing its yarn and other materials from both NAFTA and non-NAFTA vendors. Over a three-year period from November 2005 through December 2008 Tricots made 875 entries for which NAFTA benefits were claimed. Under NAFTA, eligible products are entered duty free and are also exempt from merchandise processing fees (MPF), a user fee currently imposed at a rate of .3464% ad valorem, that is collected at the time of entry.Shortly after liquidation of the entries in May 2010 Tricot filed a Prior Disclosure5 with CBP at the port, asserting that the entries may not in fact have met the NAFTA-eligibility requirements but that they did qualify for Tariff Preference Level Quota Program (TPL) treatment. TPL in the NAFTA context is a sort of “poor man’s NAFTA” in the sense that the eligible textile and apparel articles will be products of either Canada or Mexico and that, up to certain prescribed quantity levels, the articles should be entitled to duty-free entry. Under TPL, which operates like a tariff rate quota,6 the importer is still liable for MPF.
Prior Disclosure (PD)
Here’s the lesson for importers—in order to get the benefit of a PD the importer must “perfect” the PD. That means, inter alia, that even if the importer files before or “prior” to a CBP investigation having been opened, it still must explain what happened, show that steps have been or are being taken to prevent a recurrence, calculate the revenue loss (unpaid duty and MPF and any other administrative fees) and, last but of prime importance, pay the duty and fees. On this last point—the statute of limitations7 is five years so the importer filing a PD must be prepared to ante up duties and fees for the previous five years.A failure to meet all of these conditions will result in “blowing” the PD. That means that the importer gets no benefit vis a vis the penalty to be assessed. Note that, unlike the Internal Revenue Service authority to settle tax liability, CBP has no authority to accept a lower amount than the duty and fees due.8 So, to be clear, the PD is about managing the potential civil penalty exposure, because the duty and fee liability remains untouched in the face of a PD. The lesson here is simple and straightforward: the importer may not want to file a PD if it is not prepared to pay the duties and fees in full.
Dispute over TPL
Tricots played a dangerous game. In filing its PD, the importer asserted that is products were eligible for TPL treatment and, thus, were duty-free. Tricots filed a follow up submission to CBP in December 2010 purporting to show that its calculation of revenue loss showed only an MPF due of roughly $44,000.9The ensuing play-by-play is important for an understanding of how the PD was handled by both Tricots and CBP. For ease, we have organized them by year.
2011
CBP responded to the December 2010 submission by saying that it accepted the MPF calculation but noted that the duty liability remained in place. That was because it was CBP’s policy that claims for TPL must be made via Certificates of Eligibility that had to have been filed before the entries had finally liquidated.10Tricot disagreed on the statutory interpretation underlying CBP’s administrative practice and submitted a legal memorandum to CBP in January 2011.
In any event, CBP never responded to Tricots’ legal argument in its “written position paper,”11 instead notifying the importer that it had calculated the duty owed to be $2.2 million and the fees to be $44,000, and called upon the importer to make that payment. CBP stated that, once the payment was made in full, Tricots could seek a review of CBP’s calculations.
This “pay first, let’s discuss the numbers later” play is quite extraordinary. The more usual course would be for the importer to make its calculations and then to discuss the matter thoroughly with the Fines Penalties and Forfeitures officer at the port. In my experience, importers are best served if they take pains to anticipate areas that are likely to be controversial or at the least require a careful analysis. This is especially so if there is a lot riding in a matter of close legal interpretation. In such a case, it is often prudent to build into the PD submission itself a request for Internal Advice, so that the matter can be dispatched to CBP Headquarters’ Office of Regulations and Rulings. Experienced practitioners recognize this as standard practice where there are disagreements with the port; it is best to seek a formal ruling from CBP Headquarters on such a disputed issue.
In the event, Tricots did not make the payment called for by CBP but it did make an Offer in Compromise to close out the matter in June 2011. Tricots offered $85,000, double the amount of MPF they asserted was owing. CBP’s delayed reply in December merely noted that Tricots was not entitled to PD benefits as the PD had not been perfected due to non-payment of the full amount that had been calculated as due by CBP.
2012
That led to the usual Pre-Penalty notice being issued by CBP to Tricots in February 2012, in which CBP advised Tricots that it was looking to assert a penalty claim, in this case at the negligence level of culpability. And here we discern yet another lesson—the statutory frame for negligence penalties establishes a range of ½ to 2 times the loss of revenue. Here, CBP signaled to Tricots that it was looking for 1x the revenue loss. So, if we sum the numbers, we see CBP telling the importer, “we want the duty ($2.2 million) plus the MPF ($44,000) plus the penalty (those amounts yet again).” In other words, the penalty levy doubles the amount that would have been owed to $4.5 million.Tricots “stuck to its guns” and replied in April 2012 that it had perfected the PD (a schoolyard “did, too”?) and thus it only owed the MPF. Importantly, the importer did not ask for a hearing with CBP, despite that option having been afforded in the Pre-Penalty Notice.
2013
There was a hiatus until May 3, 2013. At that time there was a telephone conversation between a CBP Headquarters official and a Tricots representative12 who urged CBP to accept the June 2011 Offer of $85,000 because there had been no loss of revenue. That was unavailing as shortly thereafter (May 9) CBP sent a formal confirmation that the PD was not valid, as well as a rejection of the Offer along with a Notice of Penalty for the $4.5 million in duties, fees and penalties.The importer followed this in July with a Petition in response to the Penalty Notice, again asserting that its PD was valid and that it only owed MPF and making a second Offer in Compromise at increased amount of $160,000. On August 3, the Tricots representative again sought to convince the same high-ranking CBP official, now joined by the Assistant Commissioner of Trade, to accept the new Offer and advance the same arguments. The CBP officials said they would get back to the representative but there was no activity for almost a year.
2014
On June 13 CBP formally rejected the second Offer by letter. That rejection prompted a September 15 formal request by counsel fort Tricots for a face-to-face meeting, as is provided for by statute.13 This was followed by an October 30 email from counsel to a senior CBP attorney asking if the letter had been received and inquiring about the meeting. The CBP attorney replied that he had not seen the letter but that any meeting would be premature since the government was currently litigating a case with Tricots’ surety Aegis on the issue of retroactive TPL. On November 21, a lawyer for Tricots spoke with this CBP attorney and again asked for a meeting to review the Notice of Penalty. Again the CBP attorney explained that due to the litigation with the surety, which involved similar issues, CBP would not meet with Tricots.2015
Despite the CBP attorney stating that, “CBP was holding the administrative proceeding against Tricots [in abeyance?],” a year later (November 24, 2015), CBP proceeded to issue the Final Penalty determination against Tricots, to the effect that the importer owed $4.5 million ($2.25 million in duty and fees and $2.25 million in penalties).2016
Tricots made no payment, which prompted the government starting a collection action at the CIT in April 2016. Notably, the government doubled the penalty being sought to the top of the range for a negligence penalty (two times the loss of revenue). The government was seeking duties of $2.25 million and penalties of $4.5 million—almost $6.8 million.The parties later agreed to consolidate the Aegis and the Tricots’ cases.
Legal Principles
Before the CIT, the importer moved for a dismissal of the entre action against it since CBP had not complied with the statutory scheme and denied an opportunity for a requested meeting after the Notice of Penalty had been issued. The government argued that they had allowed earlier telephone conversations and therefore it was not appropriate to see any failure to exhaust administrative remedies.The CIT treated the matter as a motion for summary judgment, with the effect that there were no material issues of fact in dispute and that the case could be resolved as a matter of law. The court stressed the primacy of Congressional scheme that mandates the importer’s right in a penalty proceeding to be able to make its case in a face-to-face meeting. This is found in Section 1592, in relevant part stating (at 1592 (b) (2)):
If the Customs Service [now CBP] determines that there was a violation, it shall issue a written penalty claim to such person. The written penalty claim shall specify all changes in the information provided under clauses (i) through (vi) of paragraph (1)(A). Such person shall have a reasonable opportunity under section 1618 of this title to make representations, both oral and written, seeking remission or mitigation of the monetary penalty.
The government argued that there had been telephone conversations and also that Tricots should need to show substantial prejudice. The court was not convinced.In a first-rate opinion, Judge Eaton distilled the case to its core elements
- The statute provides for a meeting if the importer requests it
- Did the importer make such a request?
- Was the request for a meeting granted?
Hold the champagne. The Section 1592 (d) claim for $2.25 million unpaid duties survived, but was stayed pending resolution of the monetary penalties having been fully resolved. Thus, Tricots’ liability for duties and fees remains an open question as does the inquiry into the underlying substantive legal standards of the TPL eligibility scheme.
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1. Neville, “CBP is Held to its Administrative Position,” 27 JOIT p. 23 Sept. 2016.
2. See 28 USC § 2637 (d); United States v. Jean Roberts of Cal., Inc., 30 CIT 2027, 2030 (2006).
3. Slip Op. 18-29 (CIT 2018).
4. Aegis was the surety company which had issued a bond in support of the importer’s customs obligations.
5. The customs statute and regulations provide for a prior disclosure by importers and others, the effect of which is to lower the penalty levels that can be assessed against the disclosing party for violating Section 1592. 19 USC §1592 (c), 19 CFR § 162.74.
6. Under a tariff rate quota, imports of the subject goods up to a previously set import quantitative level will be assessed duty at a lower rate than imports made after that pre-set quantity level has been reached.
7. 19 USC § 1621.
8. Under the customs law, a Section 1592 violation will open up the importer and others to duty, fee and tax liability regardless of the otherwise final status of the entries’ liquidation. 19 USC § 1592 (d).
9. For convenience, all of the amounts have been rounded.
10. The reference to “final liquidation” suggests that Certificates could be filed for entries that had been liquidated but which were under protest. In fact, this is the case. See ruling nos. 965827 (11/5/02) and 965040 (8/20/02) (TPL filed with the application for further review [protest]). You should note the mischaracterizing of ruling no. 229504 (9/4/02) cited at footnote 11.
11. The gist of that argument is set forth at footnote 10 of the Slip Opinion. The importer is seeking to establish that TPL is a completely separate issue from the task of calculating duty owed under Section 1592 (d). My own view is that the logical underpinning for this dichotomy has been stretched to its breaking point. After all, the claim that the goods are entitled to duty free treatment, which leads to a zero duty liability in the context of 1592 (d), rests solely and entirely on their TPL eligibility. And to assert that “… section 1592 (d) rests entirely outside of the constraints of 19 USC § 1514[the provision authorizing the filing of protests]” tells us nothing, even if it were tested and found to be true. In reality, the chronology and underlying facts suggest that the importer missed its opportunity to file a protest—its PD was filed only 23 days (May 28, 2010) after the liquidation date (May 5, 2010). And of course, the filing of the PD in no way would have cut off Tricots’ chance to file a protest and assert its TPL claim; that route would not and did not close until 180 days after the date of liquidation. Is this the origin of the argument that there should be a complete break between the filing of a TPL via a protest and the collection of revenue under Section 1592 (d)?
12. The record shows that this person is neither an attorney not a licensed broker. Slip Op. at footnote 13.
13. 19 USC § 1592 (b) (2).
2. See 28 USC § 2637 (d); United States v. Jean Roberts of Cal., Inc., 30 CIT 2027, 2030 (2006).
3. Slip Op. 18-29 (CIT 2018).
4. Aegis was the surety company which had issued a bond in support of the importer’s customs obligations.
5. The customs statute and regulations provide for a prior disclosure by importers and others, the effect of which is to lower the penalty levels that can be assessed against the disclosing party for violating Section 1592. 19 USC §1592 (c), 19 CFR § 162.74.
6. Under a tariff rate quota, imports of the subject goods up to a previously set import quantitative level will be assessed duty at a lower rate than imports made after that pre-set quantity level has been reached.
7. 19 USC § 1621.
8. Under the customs law, a Section 1592 violation will open up the importer and others to duty, fee and tax liability regardless of the otherwise final status of the entries’ liquidation. 19 USC § 1592 (d).
9. For convenience, all of the amounts have been rounded.
10. The reference to “final liquidation” suggests that Certificates could be filed for entries that had been liquidated but which were under protest. In fact, this is the case. See ruling nos. 965827 (11/5/02) and 965040 (8/20/02) (TPL filed with the application for further review [protest]). You should note the mischaracterizing of ruling no. 229504 (9/4/02) cited at footnote 11.
11. The gist of that argument is set forth at footnote 10 of the Slip Opinion. The importer is seeking to establish that TPL is a completely separate issue from the task of calculating duty owed under Section 1592 (d). My own view is that the logical underpinning for this dichotomy has been stretched to its breaking point. After all, the claim that the goods are entitled to duty free treatment, which leads to a zero duty liability in the context of 1592 (d), rests solely and entirely on their TPL eligibility. And to assert that “… section 1592 (d) rests entirely outside of the constraints of 19 USC § 1514[the provision authorizing the filing of protests]” tells us nothing, even if it were tested and found to be true. In reality, the chronology and underlying facts suggest that the importer missed its opportunity to file a protest—its PD was filed only 23 days (May 28, 2010) after the liquidation date (May 5, 2010). And of course, the filing of the PD in no way would have cut off Tricots’ chance to file a protest and assert its TPL claim; that route would not and did not close until 180 days after the date of liquidation. Is this the origin of the argument that there should be a complete break between the filing of a TPL via a protest and the collection of revenue under Section 1592 (d)?
12. The record shows that this person is neither an attorney not a licensed broker. Slip Op. at footnote 13.
13. 19 USC § 1592 (b) (2).
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.