16 June 1999

A warning for importers

The following article is excerpted from "The Journal of Commerce" issue of 16 June 1999.

From coast to coast, United States Customs Service officials are being trained in the use of a powerful new weapon: civil penalties which can be assessed against importers and others for failure to make, save and produce certain records regarding importing operations, including electronic records....

Civil record-keeping penalties were at the top of Customs' wish list when the Customs Informed Compliance and Modernization Act was created. Importers and others already were under legal compulsion to maintain records of their Customs transactions for five years. Customs had the right to obtain these records through an administrative summons, judicially enforceable. But when importers' records were found to be incomplete, Customs had little recourse but to complain and make their decisions based on the information available.

As Customs evolved into an agency increasingly reliant on post-importation auditing, the Service argued that it needed a stronger weapon to wield against importers who failed to keep complete, detailed and accurate records. And what a weapon they got.

Section 509(g) of the Tariff Act, as added by the "Mod Act," authorizes Customs to assess importers with civil penalties of up to $10,000 per release of merchandise, in cases involving the negligent failure to make, keep and produce import records on demand.

The records that must be created and maintained under pain of penalty are specified in Customs' "(a)(1)(A) list," and include virtually every document presented to Customs in connection with the entry process, as well as importers' internal records (e.g. correspondence, proofs of payment, financial books of account) regarding those transactions....

It doesn't take the powers of Nostradamus to predict that customs' new record-keeping penalty authority, if wielded aggressively, will result in hundreds of thousands, or millions of dollars worth of penalty claims against importers who have done nothing wrong, but whose records may be disorganized, lost or unavailable....

For an idea of the agency's intentions, one need look no further than Customs recently published draft guidelines for the imposition and mitigation of record-keeping penalties. Customs is proposing to tie initial record-keeping penalty claims to the value of the merchandise involved in the release to which the record- keeping violation relates.

Thus, for example, the starting point for penalties based on negligent record-keeping violations would start at between 20% and 40% of the value of the merchandise involved in the particular release, or between $5,000 and $10,000, whichever is less....

Indeed, assuming that the merchandise in question is subject to duty at a rate of less than 10% (and the overall U.S. average is only about 3.5%), the record-keeping penalties which Customs is proposing under its guidelines may be considerably greater than the maximum penalty that could be assessed for a substantive "revenue loss" violation....

For intentional violations of record-keeping requirements, the draft guidelines suggests a penalty of between 50% and 80% of the value of the merchandise involved in the release, or between $50,000 and $100,000, whichever is less....

The customs laws already give the Customs Service a considerable advantage in its dealings with importers.

Through the actual and threatened use of civil penalty laws, Customs has the power to reach back five years or longer and reopen settled liquidations, collecting "withheld duties" and penalties to boot. (Often, claimed "withheld duties" are collected by simply threatening importers with a penalty.)

By contrast, importers must raise their claims by protest withing 90 days after their transactions liquidate, or they are forever barred — a tight deadline which Customs enforces religiously.

Record-keeping penalties give Customs an enormously powerful weapon that can be brought to bear against the trade co