Customs Law Advisory - Court Rulings Support Importers’ Rights to Limit Customs Penalties

Court Rulings Support Importers’ Rights to Limit Customs Penalties
Last month, the U.S. Court of International Trade issued two decisions in which it rejected broad arguments made by U.S. Customs and Border Protection (“Customs”) that would have invalidated prior disclosures filed by the Ford Motor Company.  The Court’s decisions demonstrate it will not dismiss a prior disclosure without specific facts showing that the importer should have known an investigation had already begun.

Under U.S. law, if an importer discloses a material false statement or omission made as part of an entry and pays all duties owing the maximum civil penalty is significantly reduced, usually to an amount for interest.  However, the disclosure must be made before Customs begins an investigation relating to the violation, or with a lack of knowledge of such an investigation.  In the absence of a prior disclosure, depending on the facts in the case, penalties can range from double the duties that should have been paid up to the full value of the merchandise (in the worst cases involving fraud).

The first of the two recent CIT decisions concerns entries made by Ford in 1989, containing equipment to manufacture auto parts.  In late 1990, Customs requested all the records associated with the entries and, in June 1991, Customs issued a subpoena for the documents.  In August 1991, Ford filed a prior disclosure on the entries, disclosing total value underreported by more than $16 million.  Customs argued to the CIT that the prior disclosure was invalid because at the time it was filed, Ford should have known it was the subject of an investigation.  Customs claimed penalties ranging from $1.7 to $21.3 million.  The CIT found that Customs’ request for documents, by itself, was insufficient to advise Ford that it was subject to an investigation.  The Court denied Customs’ motion to dismiss Ford’s prior disclosure defense.

The second of the two CIT decisions concerns entries made by Ford from 1987 through 1992, containing vehicles, vehicle engines and parts.  In May 1992, Customs issued a letter to Ford advising that it was commencing a formal investigation regarding the proper declaration of assists and indirect payments on those entries.  In August 1992, Ford submitted a prior disclosure regarding certain direct payments to the supplier negotiated after importation, but not previously reported to Customs as part of the merchandise value.  Customs argued to the CIT that the submission was invalid because Ford should have known that it was under investigation for all undeclared payments of any kind.  Customs claimed penalties ranging from $17 to $34 million.  The CIT found that the actual scope of the investigation, if any, was an issue yet to be decided and it would not grant Customs’ motion to dismiss Ford’s prior disclosure defense.

Penalty cases are highly dependent on the facts and prior disclosure validity will always depend on the specific violation and what can be proven regarding any prior contact with Customs.  The CIT will conduct further proceedings to litigate these cases and the final decisions, as well as any appeals, are likely to provide additional guidance for importers that properly file prior disclosures from time to time.  If you have any questions regarding Customs penalty or prior disclosure procedures, please contact Greg McCue at (202) 429-6421.