By Jon P. Yormick, originally published in Guide to International Business Expansion to the U.S., Invest Buffalo Niagara on February 2019.

Importing Goods into the U.S.

Recent policies, tariffs and continued aggressive enforcement by U.S. Customs and Border Protection (CBP) mean it is more important than ever for non-U.S. companies to be familiar with the legal standards for complying with U.S. customs laws and regulations governing the importation of merchandise into the U.S. The imposition of duties on steel and aluminum articles, goods of Chinese-origin and Executive Order 13785 (“Establishing Enhanced Collection and Enforcement of Antidumping and Countervailing Duties and Violations of Trade and Customs Laws”), signed by President Trump in 2017, have only increased the stakes in the event of non-compliance.

Non-U.S. companies with U.S. subsidiary or branch operations may be importing into the U.S. directly from overseas suppliers, as well as from parent and affiliated companies. Many non-U.S. companies that have not yet established a presence in the U.S. can act as non-resident importers in the U.S., a strategy that allows them to better serve U.S. customers. For any non-U.S. companies with U.S. importing activities, U.S. customs laws and regulations, as well as CBP’s investigation and enforcement activities, can pose significant challenges and risks.

U.S. customs laws and CBP regulations require all businesses and individuals to exercise “reasonable care” when importing merchandise into the U.S. However, “reasonable care” is not defined in these laws and regulations. In general, a lack of reasonable care can (and often does) lead to CBP imposing administrative monetary penalties on importers and others involved in the transaction that CBP alleges failed to meet this legal standard. CBP regularly exercises its monetary penalty power over non-U.S. companies.

For CBP to assess an administrative monetary penalty, the underlying violation must involve the introduction or entry of merchandise into U.S. commerce by means of a material and false act or statement (oral, written or electronic), or a material omission. “False” does not require intent; essentially, it means in error or incorrect. “Material” means information that tends to affect the decision by CBP to admit and release goods from its custody (“clear customs”) or assess accurate duties, taxes and fees. Penalties can also be imposed against those who aid and abet a violation of the customs laws and regulations.

Unlike Canada Border Services Agency’s (CBSA) Administrative Monetary Penalty System (AMPS) or sanctioning systems of other countries, CBP’s administrative penalties are not assessed according to a schedule that provides importers with some certainty as to the risk and potential exposure in the event of a violation or series of violations. Instead, CBP penalties can range from a maximum of two (2) times the unpaid duties (for simple negligence) to four (4) times (for gross negligence, generally meaning recklessness) to the U.S. domestic value of the imported merchandise (for fraud, where intent is shown by direct or circumstantial evidence). Each civil penalty case is determined by reviewing aggravating and mitigating factors. CBP administrative monetary penalties can also be limited to accrued interest on unpaid or underpaid duties, taxes and fees by submitting a full and complete voluntary prior disclosure of the infringements.

Meeting the reasonable care standard can be shown by evidence that the importer consulted with a U.S. customs broker, legal counsel familiar with customs laws and CBP regulations, or by other means. Generally, documentary evidence, including sworn statements, will be required to demonstrate that an importer or other party involved with the importation exercised reasonable care to defend against CBP’s allegations of a violation. The statute of limitations for negligence and gross negligence penalties is five (5) years from the time of entry, while the limitations period for a fraud penalty is five (5) years from the date the fraudulent activity is discovered. Therefore, complete and accessible documents will be necessary to defend a CBP civil penalty proceeding.

Non-U.S. companies, business owners, and individuals who are involved with U.S. importing activities are not immune to CBP’s civil penalties if they fail to meet the reasonable care standard. The case might involve a non-U.S. company acting as a non-resident importer that is assessed CBP monetary penalties for not declaring pencils imported into the U.S. from China as subject to U.S. antidumping/countervailing duties. It could also involve a non-U.S. company facing potential penalties for importing figure skating dresses into the U.S. and, in good faith but wrongly, declaring the dresses qualified as duty-free under the North American Free Trade Agreement (NAFTA). In both instances, and many others, CBP will pursue administrative monetary penalties against the non-U.S. company for importing practices that violated the “reasonable care” standard.

One recent concern arises from a CBP binding ruling issued in September 2018. The ruling relates to goods that qualify as duty-free under NAFTA rules of origin, but because key components originated from China, CBP found the item imported into the U.S. (an electric motor) was of Chinese-origin. Because of this, the item was subject to additional punitive duties imposed in 2018 by the Trump administration. Similar imported goods might also be subject to an additional punitive duty rate of 10% or 25%, depending on the U.S. tariff classification (HS) code.

In the ruling, the compliance risk relates to satisfying CBP’s “substantial transformation” standard for determining country of origin. Although the CBP ruling involved a NAFTA rule of origin issue in parallel to a more general country of origin issue, this same standard applies regardless of where finished goods are produced or assembled from foreign materials and components. Currently, this risk includes importing goods into the U.S. from countries such as Vietnam and Thailand, which are attracting more attention as importers of goods to the U.S. look to diversify or find alternative sourcing outside of China to avoid the additional punitive duties. As might be expected, many suppliers, middlemen and importers are becoming creative in seeking to avoid these duties – and CBP is prepared to investigate and assess civil penalties where evasion is found to exist, as well as refer matters to the U.S. Department of Justice for potential criminal prosecution. Importers need to perform the necessary research and due diligence to remain compliant and out of CBP’s crosshairs.

For more information on this topic and importing goods into the U.S., please contact Jon P. Yormick, Special Counsel at Phillips Lytle LLP. He can be reached at jyormick@phillipslytle.com or or 1-716-847-7006.