Receiving a penalty notice from U.S. Customs and Border Protection (Customs) doesn’t just ruin your day. It dangles a sword of Damocles over a company’s head that will disrupt its internal operations, expose the company to potentially enormous financial penalties, generate significant legal fees, and take years to fully resolve. This article is a brief tale of risk assessment and caution for internal managers responsible for customs compliance now that we have entered the brave new world of United States v. Trek Leather.
First, a bit of substantive and procedural background. The customs penalty statute is codified at 19 U.S.C. § 1592 (Section 592). It makes it unlawful for any “person” to “enter, introduce, or attempt to enter or introduce” imported merchandise by means of an omission or false statement that is “material.” Section 592 provides for increasingly strict penalties for violations arising from simple negligence, gross negligence, and fraud. While fraud cases are rare, cases involving simple negligence and gross negligence are commonplace and often involve hundreds of thousands and even millions of dollars in alleged liability for penalties and unpaid duties. The sums demanded by Customs can achieve such astronomical heights in part because Customs has a 5-year lookback period under the statute of limitations.
If Customs and the importer are not able to resolve their differences at the administrative level (a process that often runs its course over two years), and the importer refuses to pay any alleged penalty remaining at the end of that process, in the normal course of affairs the case will eventually wind up at the U.S. Court of International Trade (CIT) where it will take several more years to resolve, and subsequently might go up on appeal to the U.S. Court of Appeals for the Federal Circuit (Federal Circuit) which will likely take at least two more years.
Provisions imposing penalties for customs violations have been part of the U.S. statutory framework since George Washington signed the Tariff Act of 1789. However, this article focuses on the expanded playing field excavated in September 2014 when the Federal Circuit announced Trek Leather. It is crucial for importers to understand Trek Leather because it dropped a bombshell into the field of liability for unintentional customs violations. The decision held for the first time in history that when company personnel are involved in or have responsibility with respect to the importing process, they can be held personally liable for even unintentional customs violations. Yes, you read that correctly.
Prior to Trek Leather, it appeared to many experts that if individuals involved in the importing process – such as officers, employees, and agents – did not act as the formal “importer of record” and make “entry” of the goods, they could not be held directly liable under Section 592 absent their own intentional fraud in the matter. In other words, if the violation involved just simple or gross negligence, only the company itself could be found liable for penalties. In Trek Leather the Federal Circuit squarely disabused outside experts of that notion and ushered in a host of new targets for the government to pursue in customs penalty actions.
The importer in Trek Leather was run by one Mr. Shadadpuri. The company was in the business of producing and importing men’s suits. Through Mr. Shadadpuri’s efforts the company provided dutiable “assists” in the form of fabric to the foreign factories, but the value of those assists was not always added into the price declared to Customs. The government brought a Section 592 action and the CIT found the company and Mr. Shadadpuri jointly and severally liable for $534,420 in penalties based on gross negligence.
On appeal, lawyers for Mr. Shadadpuri argued that only the importer of record, i.e., the company itself, could be found personally liable for gross negligence under Section 592. In contrary fashion the government argued that Mr. Shadadpuri could be held personally liable because even if importers of record are the only ones who can “enter” merchandise, the statute also expressly covers persons who “introduce” merchandise. To substantiate this claim, the government discussed the expansive interpretation of the term “introduce” by the U.S. Supreme Court in a 1913 case called Panama Hats. There the Supreme Court held that “introduce” covered the actions of a foreign person who prepared invoices for the U.S. importer to use in making entry. The Federal Circuit agreed with the government and held that the term “introduce” is “not restricted to the ‘technical’ process of ‘entering’ goods” and instead covers “actions completed before any formal entry filings” such as choosing which company will act as importer of record, or “sen[ding] manufacturers’ invoices to the customs broker.” Thus the Federal Circuit held Mr. Shadadpuri personally liable for the penalties and unpaid duties, without any finding to support piercing the importer of record’s corporate veil (i.e., proving that the malfeasance of the corporation should be visited upon its shareholders, officers, or directors). It is not hard to imagine that Customs might use this court ruling to threaten importers (especially small-to-medium size businesses) in an attempt to coerce their acquiescence to corporate penalties which might be fully defensible.
How liberally will the term “introduced” be interpreted? Customs penalty lawsuits continue to arise frequently and at the time of this writing the CIT and Federal Circuit have already issued twelve post-Trek Leather Section 592 decisions without elaborating further on this statutory term of art. Nevertheless, some insight concerning the government’s view can be gleaned from an interesting colloquy that arose during a hearing before the Federal Circuit in the Trek Leather case. One of the judges asked whether under the government’s theory a “CFO of General Motors” could be held personally liable for negligence under Section 592. The government responded in the affirmative, so long as that person “signs the documents” or otherwise “owes a duty.” However, the government stated its prerogative to “exercise prosecutorial discretion.” Importers and their in-house personnel will take cold comfort.
Still, since we know from the Trek Leather decision that sending invoices to customs brokers or choosing which company acts as importer of record falls under the Section 592 definition of “introducing” merchandise into the U.S., there already appears to be a troubling (if not terrifying) domain of actions that could give rise to liability for unintentional customs violations and in-house personnel who could potentially be liable for them. For example, it is possible under the language of Trek Leather that any individual – be it a company’s internal logistics employee, a supervisory compliance officer, or even a CFO – involved with or responsible for customs operations could theoretically “introduce” merchandise and thereby become directly liable for both the lost duties and penalties arising from unintentional customs violations. Hopefully cool heads will prevail within the government.
To be sure, only a small percentage of importing businesses will ever find themselves involved in customs penalty proceedings. However, customs attorneys operate as a clearing house of sorts for bad things that happen to importers, and we see the Section 592 mill continuing to churn out penalty actions.
In light of the brave new world ushered in by Trek Leather, now more than ever it behooves importers to review their internal processes and procedures and ensure that imported merchandise is properly classified and appraised, that the correct country of origin is declared, that all duties owed are paid, and that the risks and responsibilities for in-house personnel are identified and controlled.