Various federal statutes empower United States Customs and Border Protection ("Customs") to impose substantial civil and criminal penalties against importers, customs brokers, and even those who are not directly involved in the importation process. The purpose of this article is to provide suggestions about how to defend yourself if you are or are about to become a subject of a penalty action. This article highlights some approaches that can be employed to defend these actions.
View Penalty Actions Seriously
An enforcement tool frequently used by Customs is found under 19 United States Code § 1592, commonly known as a "592" penalty action. Under this statute Customs can penalize persons for entering or attempting to enter merchandise into the United States by any materially false information. Likewise, omission of material information is a violation. It does not matter whether there was any loss of revenue to the government for a violation to occur. Also, anyone who aids and abets such a violation is subject to penalty. Thus, one does not have to be the importer for this penalty statute to apply.
The statute provides for penalties based on the level of culpability: negligence, gross negligence, or fraud.
- A negligent violation can bring a penalty of the lesser of the domestic value of the merchandise or two (2) times the lawful duties. If there was no loss of revenue, a penalty of 20% of the dutiable value of the merchandise can be imposed.
- A gross negligence violation can bring a penalty of the lesser of the domestic value of the merchandise or four (4) times the lawful duties. If there was no loss of revenue, a penalty of 40% of the dutiable value of the merchandise can be imposed.
- A fraudulent violation can bring a penalty in the amount of the domestic value of the merchandise. The penalties easily can range into the millions of dollars if there has been a series of mistakes, or just one mistake repeated over and over.
The penalties can be mitigated given the particular circumstances, but nevertheless often are staggering.
In defending against "592" actions it is helpful to understand what prompts Customs to open a formal "592" investigation against an importer. The investigation can be prompted by a referral to a Customs Special Agent or other Customs Compliance Officer from a Customs Import Specialist, a Customs Auditor, or a tip from an outside source, such as a competitor. This is crucial, because the name of the game is to stay out in front of what is happening.
Consider Prior Disclosures as an Important Option
Assume an importer receives a request for information from a Customs Import Specialist. In the course of gathering the requested information the importer discovers his entries are incorrect. Under the "592" statute and accompanying regulations, as long as a formal investigation has not been commenced by Customs, the importer has the right to make a "prior disclosure" of the violation to Customs. Just a request for information from Customs does not necessarily equate to a formal investigation. Under the prior disclosure provisions, an importer making a valid prior disclosure to Customs can limit his penalty liability (for a negligent or grossly negligent violation) to no more than the interest on the lost revenue, provided the lost revenue is paid. Under a fraud case, the prior-disclosing importer's penalty liability is limited to 100% of the duties of which the government was deprived or may have been deprived. Again, the lost revenue must have been paid. Prior disclosures can be effective tools to battle a penalty action, so always have prior disclosures in mind.
Gather All Your Facts Before Speaking to the Government
There are times when it is too late for a prior disclosure to be made. In those cases the first thing the importer under investigation must do is identify the issues. For example, if a Customs representative calls or appears at the importer's business and identifies himself as a Customs Special Agent, alarm signals should be sounding. A Customs Special Agent is a law enforcement agent, just like an FBI Special Agent. Thus, it is virtually never a good idea to start talking to a Customs Special Agent without knowing the circumstances. This is not to say be uncooperative, but there is nothing wrong in inquiring what the matter is about and telling the Special Agent the importer's attorney will get back to the Agent. The basic rule here is to know what one is talking about and the implications of what one is saying before starting to provide substantive information to the Agent. Once the bell has been rung, it cannot be unrung. Think before one starts to talk.
Once the importer has a basic understanding of the circumstances, a knowledgeable decision can be made as to how to proceed. For example, a serious "592" action typically may be preceded by a lengthy investigation. It is best to have one's lawyer communicate with the Special Agent to try to learn the status of what is being investigated. The more the person under investigation knows the better the defense. An importer not knowing the specifics of the alleged violation is less likely to offer facts or explanations that might convince Customs that a violation did not actually occur. The unaware importer can typically only become deeper in trouble by talking. Thus, knowing what is alleged or is being investigated is crucial.
In one situation, once the importer knew what was being alleged it was able to defuse the matter by showing Customs had previously investigated the same issue with the importer some years earlier with a finding of no violation. In another situation, the importer relayed facts to Customs, however only half the story was told, thus leaving the impression of a violation. When all the facts were told there was no violation. In yet another situation, the importer talked without knowing the implications of his words and exponentially worsened the problem.
Learn if the Matter is Civil or Criminal
The importer also should learn early in the matter whether the alleged violation is civil or criminal in nature. If there is a dialogue established with Customs one can ask if the matter is civil or criminal. This is imperative to know as it will dictate how one should proceed. Also, under the "592" statute, before a civil penalty notice is issued a pre-penalty notice is issued to the importer. The notice recites the germane facts, the statutes violated and informs the importer of the contemplated level of culpability (negligence, gross negligence, or fraud). If a violation of Title 18 of the United States Code is listed, extraordinary care should be exercised as Title 18 is the criminal code of the United States. Although a pre-penalty notice is civil in nature, Customs has been known to list criminal statutes allegedly violated in the pre-penalty notice. This is an unmistakable tip that the matter is at least being contemplated as criminal.
The pre-penalty notice provides the importer with the opportunity before issuance of the final penalty notice to demonstrate a violation did not occur and/or to contest the alleged level of culpability. While this is an opportunity that should not be ignored, if the matter is criminal then one should consider asking for the civil matter to be placed on hold until the criminal element has been determined. Statements in response to a civil pre-penalty notice can be used against the importer in a criminal proceeding.
As noted above, a proper pre-penalty notice should describe the nature of the violation and the material facts establishing the violation. If it does not do so, the entity or individual to whom the pre-penalty notice was issued should ask Customs for the information. One should not be responding in the dark.
Be Judicious About Discussing the Case with Others
One alleged to have committed a "592" violation also should be careful with whom they discuss the facts of the case. While brokers are a wonderful resource of information on Customs laws, a broker or a business acquaintance is not one to whom confidentiality runs. Consequently, if a Customs Special Agent wants to know what the importer has said about the matter, or of a planned defense, and this information has been shared with someone other than the importer's lawyer, such as the broker or business acquaintance, this can have damaging outcomes for the importer. The broker or business acquaintance has no confidentiality privilege they can assert if approached by a Customs Special Agent. They can ultimately be made to divulge the information. Care must be taken with whom one shares information, particularly in a criminal matter.
Another practical strategy in defending against a penalty action is to consider a request to meet with Customs to discuss the issues accompanied by legal counsel. While not always appropriate, the more one knows the better the opportunity to convince Customs that a violation did not occur and/or that the level of culpability is less than that contemplated by Customs.
One alleged to have committed a violation cannot have too much information. The issues must be thoroughly researched. This may include fact gathering and legal research. Things are not always as they appear, and just because a violation has been alleged, it does not mean that Customs is right.
The importer has the right to respond to a final penalty notice irrespective of any prior response to a pre-penalty notice. The response can reiterate that no violation occurred, and/or that the level of culpability should be reduced, but the response typically should also include any argument for mitigating the penalty. The response should also include details on what the importer has done to assure the problem is not repeated. Safeguards and compliance plans need to be put into place if they do not already exist. Customs will want to know not just the reasons a violation occurred, but also the reasons it will not be repeated. Do not overlook the compliance plans; ideally, of course, they should be in place before a problem arises as they will often stop the problem from occurring.
Little is to be gained by arguments that the violation was the broker's fault, or that the importer was somehow not responsible. As the importer of record is responsible for its own entries, these are weak arguments at best. Further, the importer should have been communicating with its broker on its entries and examining the entries being filed on the importer's behalf. The broker is simply the importer's agent. The importer is almost always responsible.
What to do in a specific situation will vary, and often a defense turns not just on the facts, but on technical Customs law issues unique to a given case. This often can require intensive legal research and sometimes resort to litigation in the Court of International Trade. Just because Customs has taken a specific position does not always mean that it is right. Consequently, while respecting the position Customs has taken, it always is wise to show respect to Customs, its representatives, and the power Customs possesses, but do not take anything for granted.
The foregoing are some practical tips among many in defending against a Customs penalty action. It is not possible to list all tips in this article, and not all are appropriate in every situation. Nevertheless, among the best points to keep in mind are to always take "592" penalty actions seriously; try hard to stay ahead of the game; learn precisely what Customs is investigating and whether it is civil or criminal; be careful with whom one shares information; and think about the implications of your words before speaking.