Hey, mistakes happen. So do Customs penalties, when an importer’s mistakes result in underpayment of duties. Two recent Court of International Trade cases highlight common errors by importers and the ensuing consequences. What’s particularly noteworthy about them is that US. Customs and Border Protection successfully sought penalties against the individuals responsible for making false statements in their companies’ entries. There may be a trend developing here.
The Long Reach of Section 592
Section 592 of the Tariff Act of 1930, codified as 19 U.S.C. § 1592, directs that:
no person, by fraud, gross negligence, or negligence—
(A) may enter, introduce, or attempt to enter or introduce any merchandise into the commerce of the United States by means of—
(i) any document or electronically transmitted data or information, written or oral statement, or act which is material and false, or
(ii) any omission which is material,
CBP is authorized to assess penalties against violators, in the amount of twice the duties, fees and taxes that the importer did not pay due to negligence, four times for gross negligence and domestic value of the merchandise for fraud, plus collect the unpaid duties. Mistakes can be expensive.
The statute details an administrative procedure for CBP to impose a penalty. If the agency does so and it remains unpaid, a collection action may be filed in the CIT under 28 U.S.C. § 1582.
And, by the way, when section 592 states “no person” it means just that; even though a corporation may act as the importer of merchandise and be subject to a penalty, natural persons (such as corporate officers) who participate in the transaction may be held liable as well, as established in United States v. Trek Leather, Inc.
No Insulation from Liability
Our first case, United States v. Farkhan Khan, involved entries of wine bottle container bags and bottle and can wraps. The importer was a sole proprietorship, described as “an importing business registered in the name of Defendant with the State of Florida.” Although it too was named as a defendant in the collection action, it does not otherwise appear to have participated in the litigation.
All of the products were entered under Harmonized Tariff Schedule of the United States subheading 4202.92.1000, which covers “[i]nsulated food or beverage bags: With outer surface of sheeting of plastic or of textile materials: Other” at a 3.4 percent duty rate. CBP disagreed, first issuing a notice of proposed action and later reclassifying the goods at liquidation. The agency asserted that the wine bottle bags were classified in subheading 4202.92.90, as “(Other [bags and cases]: With outer surface of sheeting of plastic or of textile materials: Other [than insulated food or beverage bags]: Other.” The duty rate under this provision is 17.6 percent. CBP placed the bottle and can wraps in subheading 3824.90.92, a provision for “Other [chemical products and preparations of the chemical or allied industries (including those consisting of mixtures of natural products), not elsewhere specified or included]: Other: Other: Other.” The rate was 5 percent.
The rate advances were followed by section 592 penalty proceedings. CBP claimed that the misclassifications resulted from negligence and assessed a penalty of $45,374, one-quarter of the revenue loss due to the errors. The importer failed to pay the penalty or the additional duties assessed at liquidation, and the collection action followed.
In the CIT, the defendant argued that the original classification was correct, since the products all had insulating properties. The court thought otherwise. To qualify as “insulated”, it found, the product should be capable of “slowing or preventing the passage of heat from the food or beverage or to the food or beverage in question to maintain it at as close to ideal temperature as possible from the time the beverage is removed from a heating or cooling source until consumption.” The imported items did not have these qualities, so classification in subheading 4202.92.1000 was incorrect. The importer’s characterization of them as such at entry constituted material and false statements.
The court next determined that the erroneous classification resulted from negligence: “Defendant failed to exercise reasonable care because he failed to undertake the steps a reasonable importer would have taken to verify that the classification listed on the entry documents was correct.” Among other lapses, he neither provided adequate product information for his customs broker to determine the correct classification, sought a third-party’s opinion when his customs broker provided three alternative possible classifications for the wine bottle bags, researched published CBP classification rulings, including one that appears to be squarely on point, nor submitted a ruling request himself.
Imported Magnets Attract a Penalty
Our second tale of woe, United States v. Deladiep, Inc., involved two entries of Chinese-origin magnetic rubber sheets. Although these articles are subject to antidumping and countervailing duty orders, the importer failed to identify them as such or to deposit estimated duties. CBP issued requests for information, to which the importer failed to respond, and followed with rate advances to assess AD/CVDs. The agency also corrected the HTS classification, although this had no effect on the rate and amount of regular duty owed.
Predictably, the duty bills were not paid. CBP thereafter initiated penalty proceedings against both the importing company and the individual who “is the owner, president, and sole corporate officer.” Needless to say, neither one responded. CBP then issued a penalty, which again was ignored. After the agency collected a portion of the unpaid duties from the surety on the importation bond, it filed the CIT case to collect the balance plus the penalty and sought a default judgment after the defendants failed to appear.
The court reviewed the complaint and concluded that it did plead a prima facie case. Section 592’s requirement of a false statement was met because “Defendants’ statements and information representing that the imported magnets were not covered by the orders constituted false statements and information that were used to enter merchandise into the commerce of the United States.” The statements were “material” because they “had the tendency to influence Customs’ assessment of duties.” Because the defendants defaulted, there was “no evidence before the court that suggests Defendants exercised reasonable care.” The elements of a violation thus were met.
As a consequence, the CIT found that the defendants were jointly and severally liable for the unpaid duties plus prejudgment interest. It further imposed a penalty in an amount “which is twenty percent of the maximum penalty allowed by statute. This amount serves to penalize Defendants for their negligent violations of the statute and lack of cooperation at the administrative level, deters future violations, and reflects the magnitude of the wrongdoing.”
Coincidence or Trend?
There are a couple of lessons here. The first relates to the violations themselves. The common thread is that both importers simply ignored the applicability of high tariff rates to their merchandise. Whether this stemmed from ignorance or a willful disregard of inconvenient facts is unclear to me. In any event, the importers should have known they faced significantly high tariffs than they actually declared to CBP. The wise importer will learn from their mistakes.
The second lesson is that CBP is going after the individuals responsible for submitting false information in entries, in addition to their companies. The agency did not pursue aiding or abetting or “alter ego” theories to assert individual liability. Of course, under Trek Leather there was no need for it to do so. For liability purposes, it sufficed that they were persons that made false statements in connection with entries.
This does not necessarily mean that CBP will seek individual liability in every section 592 penalty case. The Khan and Deladiep cases involved small, single-person companies, which may have been a factor in CBP’s strategy in both of them. Perhaps because of the importers’ small size and (I’m guessing) limited resources, the penalty procedure probably offered the only practical option for CBP to collect the unpaid duties. If the companies lacked the money to pay, the owners would still be liable. There is no size cut-off in the statute, however, so any restraint on CBP’s part in other cases would be strictly voluntary.
The punch line is that persons who provide entry information to CBP had better be sure that the information is correct and has no material omissions. The precedent has already been set for for them to face individual liability if a mistake happens.