United States: Compliance Officers Beware: Court Decision Expands Scope Of Customs Penalty Provisions For Individuals Who ‘Introduce’ Goods Into US Commerce

Last Updated: September 23 2014
Article by David R. Hamill, David Salkeld and Tina Termei

In a case that could have a profound impact on the trade community, compliance officers, business owners, and others can now be held personally liable under the customs penalty statute1 for fraudulently or negligently providing information on imports. Under this decision, import managers and compliance personnel can now be held personally liable in circumstances other than fraud for imports that violate US custom laws.

In United States v. Trek Leather Inc. and Harish Shadadpuri (Trek Leather), the US Court of Appeals for the Federal Circuit sitting en banc found a corporate officer of an importer of record personally liable for gross negligence penalties where the importer understated the value of the goods. Slip. Op. No. 2011-1527 (Fed. Cir. Sept. 16, 2014). In its decision, the Court focused on those who "introduce" goods into US commerce — potentially anyone who creates documents or facilitates documents being used to enter goods into US commerce.2

In the case, the importer of record (Trek Leather) failed to include fabric assists in the price declared for men's suits. Under customs law, the cost of fabric assists provided to foreign manufacturers — which are then incorporated into imported suits — are required to be included in the price actually paid or payable. US Customs and Border Protection (CBP or Customs) determined that the entry documentation failed to include the costs of the assists in the price of the suits, which lowered the amount of duty payable to CBP by Trek Leather. Mr. Harish Shadadpuri was the president and sole owner of Trek Leather.3 Mr. Shadadpuri argued that he could not be held personally liable for underdeclaring the value of the goods because he did not serve as the importer of record.

In its en banc decision, the Court reversed its previous August 2013 panel decision and ruled that the customs penalty statute applies to any person, regardless of whether or not they are an "importer of record." The Court then found Mr. Shadadpuri was grossly negligent in "introducing" goods into US commerce when he transferred ownership of the goods to one of his companies acting as the "importer of record" (from another one of his other companies) and furnished commercial invoices understating the value of the goods to his customs broker.

The Court defined the term "introduce" by citing to an old Supreme Court decision, which extends "introduce" to more acts than the mere filing with customs officials papers that "enter" goods into United States commerce. According to the Court, "introduce" could cover:

[A]ctions that bring goods to the threshold of the process of entry by moving goods into CBP custody in the United States and providing critical documents (such as invoices indicating value) for use in the filing of papers for a contemplated release into United States commerce even if no release ever occurs.

The Court does not define the limits of the term "introduce," however, which could lead to attempts by CBP to expand the activities covered by such term.

Of critical importance, the Court emphasized that its decision "does not require any piercing of the corporate veil" and that Mr. Shadadpuri is not being held liable "because of his prominent officer or owner status," but because he personally violated the statute.

Potential Issues for Compliance Professionals — or Individuals Associated with Import Compliance

The decision creates an expansive new category of individuals subject to negligence and gross negligence penalties under the customs penalty statute and regulations. This means that importers are likely to face a whole new array of risks. Some of the more apparent risks include:

  • While the potential scope of this decision is still to be determined, import managers and compliance personnel now are certainly at a greater risk under this decision of being held personally liable for "introducing" merchandise contrary to US customs laws.
  • While difficult to predict with certainty regarding the effect on future penalty cases, we expect Customs to be invigorated by the decision as it provides the agency with additional grounds to penalize non-compliant importers.
  • Owners of smaller businesses or closely held corporations, who are more involved in sourcing decisions and shipping arrangements, are particularly at risk.
  • Persons who sign documents (such as NAFTA certificates of origin) are likely to be affected by the case.

Importers will also have to consider how to address the potential effect of this decision in other customs proceedings, such as customs enforcement actions and focused assessments (audits), and the implications under other laws, such as the False Claims Act (FCA). We will be discussing our observations in this regard in future alerts.

While recognizing that companies are highly focused on containing costs, we strongly recommend now more than ever that — if your company is importing merchandise into the US — you take stock of your current import processes and procedures and make sure your company has adequate internal controls in place regarding your customs and import operations.

Footnotes

1. 19 U.S.C. § 1592(a)

2. The Court specifically declined to address the issue of whether the violations occurred for those who "enter" goods, such as the "importer of record" or broker, because prior case law found that the term "introduce" covered a broader range of conduct, including the actions at issue in the case.

3. Mr. Shadadpuri was involved in a similar investigation earlier, and conceded that he knew Trek Leather should have included the value of the assists.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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