Archive | November 2014

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.