SMEs Facing Customs Negligence Penalties may Benefit from SBREFA

 

Unlike many other federal laws, small and midsize enterprises (“SMEs”) that import into the U.S. are not exempt from compliance with customs laws. The cornerstone of customs law is the Customs Modernization Act of 1993 (the “Mod Act”) which introduced the principle of “reasonable care.” Under the Mod Act, importers must exercise “reasonable care” when introducing or entering merchandise into the commerce of the U.S. or are attempting to do so. “Reasonable care” is not defined in the Mod Act, but is connected to the customs penalty statute, codified at 19 U.S.C. § 1592 (“Section 592″).

In general, under Section 592, no person (individuals and entities) by fraud, gross negligence, or negligence may enter or introduce (or attempt to do so) merchandise into U.S. commerce by making a material, false statement or material omission, whether oral or written in a document or electronically transmitted. The law also prohibits aiding or abetting others in violating the first subpart of the law summarized above. Violations of Section 592 are subject to monetary penalties that, depending on the level of culpability, can range from a maximum of 2 times the loss of duty (negligence) to 4 times the loss of duties (gross negligence) to 2 times the domestic value of the imported merchandise (fraud). Like many of its sister agencies, U.S. Customs and Border Protection (“CBP”) has significantly increased its enforcement efforts and is oftentimes issuing penalties regardless of a company’s size, revenue, or ability to pay.

For SMEs, a significant Customs penalty (or proposed penalty) can be a “bet the company” event, threatening the company’s viability and the livelihood of its employees, many of who may not be involved in the company’s importing practices at all. For those SMEs, SBREFA may offer some relief.

In March 1996, the Small Business Regulatory Enforcement Fairness Act of 1996 (“SBREFA”) was enacted. A section of the law requires U.S. Government agencies, including CBP, to establish a policy or program that reduces or waives civil penalties for violations of law or regulation by a small business, under certain circumstances. In May 1997, CBP’s legacy agency, the U.S. Customs Service, issued its Policy Statement Regarding Violations of 19 U.S.C. § 1592 by Small Entities (T.D. 97 – 46), setting forth the circumstances and procedures to waive the assessment of a Section 592 civil penalty for violations committed by small entities. These guidelines provide for a reduction in the initial assessment of a Section 592 civil penalty and a reduction in the ultimate penalty amount found to be due when certain mitigating factors exist.

Potential relief under SBREFA is available to small businesses, as defined under the laws governing the U.S. Small Business Administration (“SBA”). Generally, businesses with up to 500 employees may be eligible. An alleged violator has the burden of establishing to CBP that it is a small entity and that all of the following facts exist: “(1) the small entity has taken corrective action within a reasonable correction period, including the payment of all duties, fees and taxes owed as a result of the violation within 30 days of the determination of the amount owed; (2) the small entity has not been subject to other enforcement actions by Customs; (3) the violation did not involve criminal or willful conduct, and did not involve fraud or gross negligence; (4) the violation did not pose a serious health, safety or environmental threat, and (5) the violation occurred despite the small entity’s good faith effort to comply with the law.”

SMEs that are alleged to have violated Section 592 must provide evidence that they are independently owned and operated; are not dominant in their field of operation; provide copies of tax returns for the past 3 years and a current audited financial statement; and show their average number of employees over the previous 12 months.

CBP states that its SBREFA policy does not limit the U.S. Government’s right to initiate a civil enforcement action in the U.S. Court of International Trade to collect all duties, penalties, fees, and taxes due, limit the penalty amount that the Government may seek in a de novo trial in the CIT, or confer any substantive rights on the alleged violator in such a penalty and duties payment enforcement action.

CBP’s policy under SBREFA is not a “free pass” for SMEs facing a Customs negligence level penalty under Section 592. The proper circumstances must exist and the evidence must establish each element under the policy. For instance a 5-person company and its owners facing a $1.3M fraud penalty for an alleged “double invoicing” scheme resulting in $54,000 in lost duties cannot rely on SBREFA for relief from a potential business-ending penalty in the Port of Cleveland, but a 50 employee company facing a $1.7M negligence level in the Port of Miami arising from failure to properly file entries as subject to and submitting payment of antidumping and countervailing duties totaling more than $1M may rely on SBREFA for potential relief. The circumstances of each Customs Section 592 penalty case must be evaluated on a case-by-case basis to determine whether an SME can benefit under SBREFA. SMEs and their customs counsel who are familiar with CBP’s policy under SBREFA for Section 592 penalties is certainly helpful, but SMEs exercising “reasonable care” when importing have the best defense against alleged violations.

For assistance with understanding and complying with U.S. Customs laws and regulations, as well as representation before CBP in investigations, civil penalties, prior disclosures and other matters, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.928.3474. 

Gazprom, Lukoil, Other Russian Energy and Defense Companies Targeted in Latest Round of U.S. Export Controls and Ukraine-related Sanctions

Last Friday, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) dramatically increased targeted economic sanctions and export controls against several Russian energy and defense companies, including Gazprom OAO, the largest gas extraction company in the world, and privately-owned petroleum company, Lukoil.  The BIS action is in addition to the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC) issuing new Ukraine-related economic sanctions against Russia’s financial services, energy, and defense sectors, also announced on Friday.

BIS added the following major energy sector companies to the Entity List:

  • Gazprom OAO; Gazpromneft; Lukoil, OAO; Rosneft; and Surgutneftegas.

BIS maintains the Entity List to impose a specific license requirement for the export, reexport or foreign transfer of items subject to the Export Administration Regulations (EAR) on those parties – businesses, research institutions, government and private organizations, and individuals – named on the list.  These license requirements are in addition to any other requirements and restrictions imposed elsewhere in the EAR.  Often, the stated License Review Policy for parties on the Entity List is “Presumption of denial,” although certain parties have a stated License Review Policy of determining a license application on a “Case-by-case” basis.  Currently, the License Review Policy for nearly every Russian party on the Entity List is Presumption of Denial.  This License Review Policy applies to the newly added parties.

The five (5) Russian energy sector companies added to the Entity List are subject to a license requirement when the exporter, reexporter or transferor knows those items will be used directly or indirectly in:

  • exploration for, or production from, deepwater, Arctic offshore, or shale projects in Russia. License applications for such transactions will be reviewed with a presumption of denial when for use directly or indirectly for exploration or production from deepwater, Arctic offshore, or shale projects in Russia that have the potential to produce oil.

Notably, it appears that licenses for natural gas projects will be reviewed on a case-by-case basis; therefore, exporters, reexporters, and parties seeking in-country transfers to the listed companies should be sure to obtain specific end-use information and document the stated end-use for potential licensing application purposes.   It should be further noted that this latest action is in addition to and does not replace export controls imposed by BIS on August 1 that designated certain items used in used in Russia’s energy sector, including exploration and production from deepwater, Artic offshore, and shale projects.  In its 1 August rule, BIS designated those items by specific Schedule B (export classification) numbers and other by the Export Commodity Control Number (ECCN).  A prior post explains those controls, http://bit.ly/1y4s9JN.

The Russian defense sector parties added to the Entity List include:

  • Almaz-Antey Air Defense Concern Main System Design Bureau, JSC; Tikhomirov Scientific Research Institute of Instrument Design; Mytishchinski Mashinostroitelny Zavod, OAO; Kalinin Machine Plant, JSC; and Dolgoprudny Research Production Enterprise.

Similar export controls as those imposed on the energy sector companies apply to the defense sector companies, with a License Review Policy of “Presumption of Denial.”

BIS and OFAC action continue to be largely coordinated.  OFAC updated the Sectoral Sanctions Identifications (SSI) List by adding Russian energy sector and financial services companies (and other names by which the companies operate or are known), AK Transneft OAO, Lukoil OAO, OJSC Gazprom Neft, Gazprom OAO, Rostec, Sberbank of Russia, Surgutneftgas, Bank of Moscow, as well as other financial services companies.  Additionally, OFAC added each of the defense sector parties to the SSI List that BIS placed on the Entity List.

For assistance with understanding and complying with the latest BIS action, Ukraine-related and other economic sanctions laws, regulations, and Executive Orders, as well as representation before BIS and OFAC in investigations, civil penalty, and voluntary self-disclosures, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.269.5138 (mobile). 

Yormick to Discuss U.S. Economic Sanctions at October Global Conference in Baltimore

Buffalo, NY and Cleveland, OH (8 September 2014) – International business and trade attorney, Jon Yormick, will discuss U.S. economic sanctions at the 25th Annual FCIB Global Conference on 12-14 October 2014 in Baltimore, Maryland.  He will be joined for a panel discussion by a Special Agent, U.S. Department of Homeland Security Investigations, Counter-Proliferations Investigations, and a Vice President, Structured Trade Advisory, of JPMorgan Chase Bank, N.A.

Yormick’s presentation, “Navigating Economic Sanctions … Successfully,” will cover compliance with complex and ever-changing U.S. economic sanctions and Executive Orders, how they apply to U.S. and foreign parties, and how companies may find legitimate business opportunities available under sanctions programs.  He will also use recent civil penalty settlements to examine how companies can avoid violations and costly penalties.

The event will take place at the Sheraton Inner Harbor in downtown Baltimore.  More information about the conference, including how to register, can be found at http://bit.ly/1urehUS.

Yormick regularly advises and represents publicly-traded and privately-held companies on matters such as compliance programs, due diligence reviews, investigations, penalty proceedings, export licensing of defense and “dual use” items and technologies, economic sanctions and trade embargoes, export licensing of foods, medicine and medical devices under the Trade Sanctions Reform and Export Enhancement Act (TSRA), prior and voluntary self-disclosures of violations, and ruling requests.  His clients include those in the advanced manufacturing, advanced materials, aerospace and defense, distribution, electronics, energy, medical device, oil/gas, pharmaceuticals, professional services, steel, textiles and apparel, and transportation/logistics sectors.

With a membership of over 1,100 global credit and trade finance professionals in 55 countries around the world, FCIB is internationally recognized as the premier association of executives in finance, credit and international business, providing export credit and collections insight, practical advice, and intelligence to companies of all sizes – from Fortune 500 multinationals to medium and small private companies.

CBP Clarifies Post-Importation Claims under Trade Preference Programs

Last Friday, U.S. Customs and Border Protection (CBP) issued guidance regarding proper procedures for submitting claims for preferential tariff treatment under NAFTA, a host of other U.S. Free Trade Agreements, and other preference programs.  It is important that U.S. importers (as well as Canadian and other non-resident importers to the U.S.) know which procedures are available under these different programs in order to preserve their rights to make preferential claims and the timing of when those claims can be made.

In issuing its guidance, CBP noted that importers have historically used a variety of post-importation methods to submit an initial claim for preferential duty treatment, including Post-Entry Amendments (PEAs), Post Summary Corrections (PSCs), Protests filed under 19 U.S.C. § 1514 and post-importation claims submitted pursuant to 19 U.S.C. § 1520(d).

Citing to a pair of court decisions from the Court of Appeals for the Federal Circuit, CBP explained how not all trade preference programs are identical in allowing post-importation preference claims. The court has held that a Protest may not be used to make a preference claims because liquidation of an entry without a claim is not a “protestable decision”.  CBP also cited to Headquarters Ruling Letter (H193959, dated July 30, 2012) that also discussed the limitations on using Protests as a viable procedure to assert a duty preference claim.

CBP’s guidance noted, however, that the law implementing certain preference programs expressly provides for post-importation claims pursuant to 19 U.S.C. § 1520(d).  This allows for a post-importation claim to be made up to one (1) year after the entry date.  This method of submitting a post-import duty preference claim is limited to: NAFTA, CAFTA-DR, Chile FTA, Colombia FTA, Korea FTA, Oman FTA, Panama FTA, Peru FTA.  The guidance goes on to state that for these preference programs, post-importation preference claims can only be submitted under 19 U.S.C. § 1520(d).  PEAs and PSCs are not a valid procedure to submit an initial post-importation preference claim under these Free Trade Agreements.

Where a preference program does not have a post-importation provision under 19 U.S.C. § 1520(d), CBP will continue to accept PEAs and PSCs for initial post-importation preferential duty claims on unliquidated entries.  These procedures will apply to numerous preference programs, including: African Growth and Opportunity Act (AGOA), Australia FTA, Bahrain FTA, Civil Aircraft Agreement, Generalized System of Preferences (GSP), Insular Possessions, Israel FTA, Jordan FTA, Morocco FTA, Pharmaceutical Products Agreement, Singapore FTA, and others.

In reviewing which post-importation procedures can be used to submit an initial preferential duty claim under the different programs, CBP importantly noted in its guidance that the court decisions held “failure to claim preference timely does not give rise to a right to protest[,]” meaning Protests filed under 19 U.S.C. § 1514 as an initial claim for preferential duty treatment will be “rejected as non-protestable” by CBP.  Therefore, importers will need to submit preference claims prior to liquidation.

For assistance with understanding and complying with U.S. Customs laws and  regulations, due diligence support in merger and acquisitions and other strategic alliances, as well as representation before CBP on Protests, in investigations, civil penalties, prior disclosures and other matters, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.928.3474.

U.S. Imposes New Export Controls on Russia’s Energy Sector and Adds Russian Shipbuilder to Entity List

On 1 August, Under Secretary of Commerce for Industry and Security, Eric L. Hirschhorn, signed a rule amending the Export Administration Regulations (EAR) to “impose additional sanctions implementing U.S. policy toward Russia,” and address the ongoing developments in Ukraine. Under the rule, the Bureau of Industry and Security (BIS) imposes export controls on items used in Russia’s energy sector, including exploration and production from deepwater, Artic offshore, and shale projects. The rule also adds state-owned shipbuilder, United Shipbuilding Corporation, to the Entity List. On 31 July, the Office of Foreign Assets Control (OFAC) added United Shipbuilding Corporation, to the Specially Designated Nationals and Blocked Persons (SDN) List.

The new rule adds 15 CFR § 746.5 to the EAR, “Russian Industry Sector Sanctions,” and imposes export, reexport, and transfer controls on items classified under the following Export Control Commodity Numbers (ECCNs): 0A998 (Oil/gas exploration equipment, software, and data ), 1C992 (Commercial charges and devices containing energetic materials ), 3A229 (Firing sets and equivalent high-current generators), 3A231 (Neutron generator systems), 3A232 (Detonators and multipoint initiation systems), 6A991 (Marine or terrestrial acoustic equipment ), 8A992 (Vessels, marine systems or equipment, “specially designed” “parts” and “components” therefor), and 8D999 (“Software” “specially designed” for operation of unmanned submersible vehicles used in oil/gas industry). These new controls apply “when the exporter, reexporter or transferor knows or is informed that the items will be used directly or indirectly in Russia’s energy sector” for exploration and production from deepwater (more than 500 feet depth), Artic offshore, and shale oil/gas projects. The rule goes on to identify, without limitation, examples of items that are specifically covered by the new Russian Industry Sector Sanctions, as follows: drilling rigs, parts for horizontal drilling, drilling and completion equipment, subsea processing equipment, Artic-capable marine equipment, wireline and down hole motors and equipment, drill pipe and casing, software for hydraulic fracturing (“fracking”), high pressure pumps, seismic acquisition equipment, remotely operated vehicles, compressors, expanders, valves, and risers. The rule makes clear that “[n]o license exceptions may overcome the licensing requirements under new § 746.5,” except for license exception GOV, and that the license review policy is a presumption of denial.

The rule also adds Supplement No. 2 to Part 746, Russian Industry Sector Sanctions List. This new supplement includes the ECCNs referenced above, but also includes more than 50 “Schedule B” numbers. Schedule B numbers are a commodity classification number used for exports, administered by the U.S. Census Bureau and used for reporting foreign trade data. The following main Schedule B numbers and items are listed: 7304, 7305, and 7306 (line pipe, drill pipe, casing), 8207 (rock drilling or earth boring tools and bits), 8413 (oil well pumps and elevators), 8421 (industrial gas cleaning and separation equipment), 8430 (offshore drilling and production platforms and boring/sinking machinery), 8431 (oil/gas field machinery parts), 8479 (oil/gas field wire line and downhole equipment), 8705 (mobile drilling derricks), and 8905 (floating or submersible drilling or production platforms and floating docks).

For U.S. companies and foreign companies that are subject to U.S. export controls and the jurisdiction of BIS, these new Russian energy sector sanctions pose new compliance challenges and risks. As with any economic sanctions and export controls, but particularly with the progressing multilateral Ukraine-related sanctions, companies are urged to exercise enhanced due diligence in their compliance efforts. U.S. and foreign companies that currently export, reexport, or transfer commodities, technology, and software covered by the ECCNs and Schedule B, should be alerted to this new rule and its compliance requirements. U.S. companies and foreign companies that are subject to U.S. export controls that might only sell or transfer such items domestically should also undertake additional due diligence and not “self-blind” on determining whether Russia is the ultimate destination of the items.

The new rule can be found at this link, http://1.usa.gov/1okGBSH.

For assistance with understanding and complying with this new BIS rule, Ukraine-related and other economic sanctions laws, regulations, and Executive Orders, as well as representation before BIS and OFAC in investigations, civil penalty, and voluntary self-disclosures, please contact Jon P. Yormick, Attorney and Counsellor at Law, jon@yormicklaw.com or by calling +1.866.967.6425 (Toll free in Canada & U.S.) or +1.216.269.5138 (mobile).

Follow

Get every new post delivered to your Inbox.

Join 422 other followers