This article provides an overview of Customs' statutory penalties for import violations.
In 2016, Customs and Border Protection ("CBP" or "Customs") processed $2.28 trillion in imports, levying 13 monetary penalties totaling over $30.6 million on importers for fraud, gross negligence, and negligence for anti-dumping/countervailing duty ("AD/CVD") violations.1 This was largely fueled by The Trade Facilitation and Trade Enforcement Act (TFTEA), (PL 114-125), enacted on February 24, 2016. TFTEA increased the enforcement power of CBP, a move that will likely also increase trade prosecutions. This more aggressive approach will likely continue in 2017 and, based on President Trump's campaign promises regarding trade, it looks like CBP will have a busy year ahead.
Section 1592 of the Tariff Act of 1930 is the primary customs penalty provision regarding the importation of goods. It is the enforcement tool used by CBP to ensure customs laws concerning the Harmonized Tariff Schedule of the United States ("HTSUS") classification, valuation, and others are followed when importing into the United States.
How does 19 USC § 1592 work?
This statute gives authority to CBP to impose penalties for customs laws violations. The statute has different levels of culpability with respect to the penalties that may be imposed including fraud, gross negligence, and negligence. Specifically, § 1592 prohibits the importation or attempt to import merchandise by means of (1) false and material documents or electronic data or (2) material omissions. It also prohibits any person from aiding or abetting any other individual to violate the statute. Importers should be aware that this law is violated even when the government does not lose any duties or other revenue.
It must be noted that the statutory scheme puts primary responsibility on the importer of record, who must demonstrate that it has met its duty of informed compliance and reasonable care. However, this does not mean all other players in the transaction are immune from liability; the statute is not limited to the importer of record. Any other party who has participated in the transaction leading to a violation may also be held liable. Just because the importer of record may be a corporation or limited liability company does not preclude it from liability. In some cases, personal liability may attach for certain § 1592 penalties.
Fraud, gross negligence, negligence, what is the difference?
When assessing penalties, CBP charges the violator with one of three levels of culpability. The amount of penalties assessed against the importer depend on what level of culpability was ultimately assigned to the violator.
The regulations establish the following standards:
- Negligence: defined by Customs as the failure to exercise reasonable care;
- Gross Negligence: defined by Customs as "actual knowledge or wanton disregard"; and
- Fraud: defined by Customs as "voluntary and intentionally."
To put it simply, negligence occurs when the importer did not know that its conduct was a violation; gross negligence occurs when the importer did not know there was a falsity and did not care whether it was a violation or not; and fraud occurs when the importer knew or should have known of the falsity.
It is important to note that clerical errors or mistakes of fact are excepted from the statutory penalties. Unless the error or mistake was part of a pattern of negligent conduct, this event would not be considered a violation under the regulations.
How does CBP make the penalty determinations?
CBP determines whether a penalty is assessed by looking into several different factors. Various mitigating factors may be taken into account and include (1) contributing Customs error, (2) cooperation with the investigation, (3) immediate remedial action, (4) inexperience in importing, (5) prior good record, (6) inability to pay the customs penalty, and (7) customs knowledge. These factors are considered in mitigating the proposed or assessed penalty claim.
If an importer discovers customs violations, it has the option to file a prior disclosure with CBP. A prior disclosure will mitigate any potential penalties for the violations by voluntarily offering an explanation regarding why the violation happened and paying any owed duties. Importantly, prior disclosures must be submitted before CBP begins an investigation into the disclosed matter in order for the disclosure to be considered voluntary and, therefore, a mitigating factor. Importers should proceed with caution and seek legal advice and assistance in preparing and filing the prior disclosure. The filing of a prior disclosure demands a certain set of skills that is often beyond the reach of most nonlawyers.
Maximum Civil Penalty Levels-19 USC § 1592(c)
Whether or not there has been an actual duty loss can also affect the penalty assessment. For violations with a loss of duty the penalties are:
- Fraud: the maximum statutory level is the domestic value of the merchandise; under the regulations, the penalty may be five to eight times the duty loss.
- Gross negligence: the maximum statutory level is the lesser of the domestic value or four times the duty loss; the regulations anticipate two and one-half to four times the duty loss.
- Negligence: the maximum statutory level is the lesser of the domestic value or two times the duty loss; under the regulations, between one-half and two times the duty loss.
- For violations without a loss of duty the penalties are:
- Fraud: the statutory maximum is the domestic value; under the regulations, the penalty is 50 percent to 80 percent of the domestic value of the merchandise.
- Gross negligence: the statutory maximum is 40 percent of the domestic value; under the regulations, 25 percent to 40 percent of the domestic value of the merchandise.
- Negligence: the statutory maximum is 20 percent of the domestic value; the regulations estimate five to 20 percent of the domestic value of the merchandise.
As mentioned above, CBP's new enhanced enforcement powers will potentially lead to an increase in trade prosecutions.2 Therefore, we strongly recommend importers get acquainted with CBP's penalty assessment procedure. Knowing how CBP's penalty determination process operates can help importers to be better prepared in the unfortunate event they are involved in an import violation.
If you are faced with more complex matters such as a penalty, or have recently discovered violations of 19 USC § 1592 and are currently in need of expert legal advice, please contact our office.
Footnotes
1 CBP Facilitates Record Level of Travelers and Modernizes Trade Systems in FY2016, U.S. Customs and Border Protection (Jan. 12, 2017), https://www.cbp.gov/newsroom/national-media-release/cbp-facilitates-record-level-travelers-and-modernizes-trade-systems.
2 Trade Facilitation and Trade Enforcement Act of 2015 § 101, 19 U.S.C. § 4311 (2016).
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.