In what could foretell a significant increase in the enforcement of the coastwise trade provisions of the Jones Act, U.S. Customs and Border Protection (Customs) announced on July 18 the creation of the National Jones Act Division of Enforcement (JADE). The Jones Act’s coastwise trade provisions prohibit the use of foreign flag vessels when transporting cargo from one point in the United States to another, including when cargoes are shipped through an intermediate foreign country. The prospect of increased enforcement of the Jones Act is particularly significant because of the exacting manner in which Customs interprets the law and because Customs may impose very large penalties that include fines as high as the value of the cargo transported.
Therefore, due to the creation of JADE and as described below, shippers of any merchandise—but particularly crude oil, gasoline, diesel, renewable fuel and petroleum blendstocks—should be even more careful in their review of each transaction involving the shipment of products to a point in the U.S. to ensure strict compliance is maintained with the Jones Act and all Customs rulings issued pursuant to it.
Significance of the Jones Act on Commodity Markets
The prohibitions on coastwise trade under the Jones Act are implicated in the shipment of all types of commodities, but are particularly acute in the petroleum and renewable fuel markets where supply constraints in the Northeastern United States often place tremendous pressure to ship finished fuel and blendstocks from the Gulf Coast to New York harbor and New England. Depending on market conditions, the lack of U.S. flag tankers capable of such journeys and available pipeline capacity often make it prohibitively expensive to make these shipments, resulting in the Northeast still being reliant on fuel imports despite the U.S. production boom in petroleum products in recent years. As a result, many companies are seeking to blend U.S.-origin gasoline and other fuel blendstocks in other countries and return the resultant finished products to different U.S. ports—an activity that is in compliance with a 2014 ruling issued by Customs.
Companies engaging in this activity should be even more diligent in maintaining and documenting compliance with the 2014 ruling and similar precedent or otherwise risk an enforcement action. Despite the existing 2014 ruling and companies’ due diligence procedures, with the creation of JADE there is not much doubt that Customs will be more rigorous in its review of these transshipment activities.
Many industries other than the petroleum and renewable fuel sectors are affected by the Jones Act; often the rejection of metals, coal, agricultural products or consumer goods by foreign buyers or the inadvertent return of commodities to the U.S. can ultimately result in a potential Jones Act violation. The potential for violations is exacerbated by Customs’ strict interpretation of the Jones Act whereby using a foreign flag vessel to move merchandise from just one dock to another dock within the same port is considered to be a violation. As a result, companies through no fault of their own can find themselves in challenging situations if they have their U.S. cargoes preemptively rejected by a counterparty after loading onto a foreign flag vessel or realize at the last minute they have U.S.-origin material that they are planning to ship to the U.S. on board a foreign flag vessel or that was originally shipped from the U.S. on board a foreign flag vessel. These companies frequently must decide between risking potential non-compliance with the Jones Act or suffering substantial commercial losses through having to find an alternative buyer in another country. The creation of JADE will make it more likely that these situations will be investigated by Customs.
Potential for Increased Enforcement
This week’s announcement raises the specter that JADE will increase the frequency and thoroughness of Customs investigations and calls for whistleblower complaints. Specifically in its announcement, Customs stated that “the mission of JADE will be to assist Customs and industry partners on issues concerning coastwise trade, with the goal of being a clearinghouse for all coastwise trade issues.” The announcement, which stated that JADE will serve as “an advocate for coastwise trade,” linked to Customs’ “e-Allegation portal” for the submission of suspected violations.
Often Jones Act violations are difficult to detect in the commodity business because a U.S.-origin product is largely indistinguishable from a foreign product. Correspondingly, a commodity transshipped through another country to a different U.S. port on board a foreign flag vessel may not be identified as such unless the shipping papers, certificates of origin and terms of the contract are carefully examined and investigated. In light of the prospect of more enforcement by the JADE staff, shippers should be particularly vigilant in reviewing documents associated with any transaction involving shipment via foreign flag vessel where there is a potential for the merchandise to be returned either in its existing form or as a constituent element in a modified or new product. Even minor changes from one shipment to another can increase a shipper’s exposure to an enforcement action.