Canada-U.S. Blog

Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

Will Canada Be Able To Negotiate A New Softwood Lumber Agreement With The US Before October 13th?

Posted in Canada's Federal Government, Softwood Lumber, Trade Remedies, U.S. Federal Government

Canada-US GlobeThe 2006 Softwood Lumber Agreement expired on October 12, 2015. There is now a one-year grace period in which the United States is obliged to refrain from bringing new trade cases against Canadian lumber. This means that new softwood lumber anti-dumping and countervailing duty cases may be filed by U.S. producers but cannot be initiated until October 13, 2016. It is too soon to tell if there will be a new Softwood Lumber Agreement before the October 13, 2016 deadline.Canada is attempting to avoid trade disruption caused by the initiate of new trade remedy disputes.  The current understanding is that the United States is asking for hard quotas, which was not what Canada and the United States negotiated in 2006.  New hard quotas on softwood lumber would be inconsistent with NAFTA.

Where are we at this point in time?

On May 10, 2016 (late at night), Steven Chase of Canada’s Globe & Mail newspaper tweeted the following:

“Global Affairs given nearly $30M to prepare for possible new softwood lumber war w/ U.S. It’s like a stimulus package for trade lawyers.”

On May 9, 2016, CBC Politics (@CBCpolitics) tweeted:

“Freeland says Libs are seized with softwood lumber issue, says she is talking to US all the time and will continue to do so.”

“Karine Trudel says softwood lumber deal has stalled; asks Liberals to defend forestry industry.”

Chrystia Freeland is the Minister of International Trade and Karine Trudel is an NDP MP.

From what we can tell, another softwood lumber dispute may be unavoidable.  This is an issue we will be writing about in the coming months.


Hidden Changes to Antidumping/Countervailing Duty Laws: Canada Tables Omnibus Budget Bill That Includes Changes to the Special Import Measures Act

Posted in Antidumping, Canada's Federal Government, Trade Remedies

Gavel and Scales of JusticeOn April 20, 2016, the Government of Canada (the Department of Finance) tabled Bill C-15 “Budget Implementation Act 2016 No. 1”, which is an omnibus bill that implements some tax and other measures outlined in the 2016 Federal Budget.  Since Bill C-15 is tabled by a majority government, the omnibus bill will surely be passed.  Bill C-15 should be of interest to importers, exporters and foreign producers (and trade lawyers) because Division 10 of Bill C-15 contains proposed changes to Canada’s trade remedies laws that are hidden at the end and could be overlooked. Articles 192 – 200 of Bill C-15 are the proposed changes to the Special Import Measures Act (also known as “SIMA”).  However, most of the changes relate to (1) situations where the margins of dumping and amounts of subsidy are determined to be insignificant and (2) limitation periods for Canada Border Services Agency (“CBSA”) and Canadian International Trade Tribunal (“CITT”) decisions in an expiry review.

Bill C-15 amends the SIMA to provide that a finding by the President of the CBSA of an insignificant margin of dumping or an insignificant amount of subsidy in respect of goods imported into Canada will no longer result in the termination of a trade remedy investigation prior to the President’s preliminary determination.  I do not recall this happening in recent years, but it may be that the CBSA did not initiate against certain countries where the CBSA determined the volumes of imports from particular countries were insignificant.

The changes relating to time periods for expiry reviews are not particularly problematic. Even though the CITT’s notice of the rescission of an order or finding has been reduced from 10 months to 2 months, parties will know that the rescission is coming because a full expiry review will not be conducted in cases where a the CITT determines that an expiry review is not warranted.

The “proposed” changes to SIMA are:

  • Section 192 of Bill C-15 changes the definition of “negligible” in subsection 2(1) of SIMA. The definition of “negligible” is clarified.  The negligible threshold is applied in respect of “goods that are released into Canada from all countries and that are of the same description”.
  • Section 193 of Bill C-15 creates a new provision (section 7.2 of SIMA) that permits the refund of antidumping and/or countervailing duties to an importer if duties are collected after the rescission of an antidumping/countervailing duty order of the CITT.  This is a good addition for importers who are assessed duties by the CBSA after the CITT rescinds and order.
  • Subsections 194(1)-(3) of Bill C-15 amend the preamble to section 8.1 of SIMA by making a minor amendment and by referencing an exception created in new subsection 8.1(1.3) of SIMA.
  • Subsection 194(4) if Bill C-15 contains a new provision (subsection 8.1(1.3) of SIMA) relates to the non-collection of preliminary duties where the President of the CBSA determines that the margins of dumping and/or subsidy amounts are insignificant.  This seems to be one of the significant amendments.
  • Section 195 of Bill C-15 amends section 30.1 of SIMA to address the revisions in section 194 of  Bill C-15.
  • Section 196 of Bill C-15 replaces paragraph 35(1)(a) of SIMA to clarify the rules relating to the termination of preliminary determinations where “the President [of the CBSA] is satisfied tn respect of some or all of those goods that the actual or potential volume of goods is negligible.”
  • Subsection 197(1) of Bill C-15 amends subparagraph 38(1)(a)(i) to refer to the President of the CBSA.
  • Section 197(2) of Bill C-15 adds subsection 38(1.1) of SIMA, which gives the President discretion to use the information available during the preliminary dumping investigation/preliminary subsidy investigation and determine that the margin or dumping or amount of subsidy is insignificant.
  • Section 197(3) of Bill C-15 adds subsection 38(1.2) of SIMA, which contains a deeming provision.  “…If the President [of the CBSA] determines that the margin of dumping or the amount of subsidy is equivalent to 0% of the export price of the goods, then the margin or amount of subsidy is considered to be insignificant and the investigation in respect of those goods continues.”
  • Section 198 of Bill C-15 amends paragraph 49(2)(b) of SIMA to account for the new rules relating to insignificant margins of dumping and/or amounts of subsidy.
  • Subsection 199(1) of Bill C-15 amends subsection 76.03(2) of SIMA to change the time period for the CITT’s notice where in the order or findings is deemed to be rescinded. Currently, the CITT must publish the notice 10 months before the expiry of the order or finding.  This will be changed to 2 months before the expiry of the order or finding.
  • Subsection 199(2) of Bill C-15 amends paragraph 76.03(7)(a) of SIMA to amend the time period for the CBSA’s expiry review investigation.  The CBSA currently has 120 days to conduct an expiry review (after receipt of the CITT’s LE decision that an expiry review is warranted). The CBSA will have 150 days to conduct an expiry review after receipt of the CITT’s LE decision.
  • Subsection 199(3) of Bill C-15 amends paragraph 76.03(10) of SIMA to amend a time period for the CITT’s expiry review decision.  Currently, there is no time period in the SIMA for the CITT’s decision (other than the 5 year anniversary date of the original Order). The CITT will have 160 days to make its expiry review decision (after the day on which the CBSA’s expiry review determination is received).
  • Section 200 of Bill C-15 indicate that the changes also apply to goods from a NAFTA country.

The changes relating to the negligibility issue apply in limited situations – where a country’s exports are less than 3 percent of the total volume of goods that are released into Canada from all countries and that are of the same description.  However, goods are not considered to be negligible if if they amount to less than 3% if the case is against three or more countries meet the less than 3% threshold and are above 7% when added together.

More analysis of these amendments will follow is subsequent postings.

Speak Up NOW: Canada Announces Consultations of Trade Remedy System

Posted in Antidumping, Canada's Federal Government, Cross-border trade, Trade Remedies

Canadian parliamentLISTEN UP – THIS IS AN IMPORTANT ANNOUNCEMENT.  In the 2016 Budget, the Government of Canada announced that it would be commencing consultations regarding Canada’s trade remedies system (that means Canada’s laws relating to antidumping and countervailing duties).  On April 29, 2016, the Department of Finance launched a consultation on potential changes to Canada’s trade remedy system.

The Government of Canada is interested in hearing from a wide range of affected parties – so importers, exporters and foreign producers should speak up so that the only voice heard is not the Canadian Steel Producers.

The consultations address three key areas:

  • A. Calculation of normal values: consideration of changes to better account for situations where prices or costs in the exporter’s home market may not be reliable for the calculation of normal values or where profit rates cannot be established on the basis of an exporter’s sales of the like good in the exporting market.
  • B. Enforcement: consideration of new proceedings to address circumvention or seek clarification of what goods are subject to a measure, as well as possible changes to the granting of product exclusions.
  • C. Evidentiary standards: consideration of changes to certain evidentiary standards to ensure that trade remedy proceedings are conducted where warranted, and that interested parties have sufficient opportunity to defend their interests.

All parties with an interest in these consultations are invited to make a submission in writing by June 29, 2016. Canada has provided an explanation for the areas of consideration. Canada seeks comments responding to the following questions:

Particular Market Situation

(1) Should SIMA be amended to provide for the finding of a particular market situation that has rendered the exporter’s domestic sales unusable for the calculation of normal values?

(2) What factors should be adopted for determining the presence of a particular market situation? For example,

  • (a) government influence and distortion of the price of inputs;
  • (b) the presence of government-owned enterprises in the market; or
  • (c) other conditions in the market that render sales in that market not suitable for use in price calculations.

(3) What alternative approaches or benchmarks should be used to calculate normal values where a particular market situation has been found in respect of the product under investigation? For example,

  • (a) domestic sales of other sellers or producers in the exporter’s home market;
  • (b) export sales to third-country markets; or
  • (c) the constructed price based on the cost of producing and selling the good in the exporter’s home market, plus a reasonable amount for profits.

(4) Where a particular market situation is found to exist for an input good, what alternative approaches or benchmarks should be used to determine a fair market price for that input? For example,

  • (a) the price of the input supplied by a non-government-owned enterprise in the country of export to the exporter, to other exporters in that country, or to an appropriate third country;
  • (b) the price of goods that are like the input, manufactured and sold in Canada or in a surrogate country; or
  • (c) the price of the input based on international price lists or markets?

Affiliated Party Transactions

(5) Should SIMA be amended to provide for the use of alternative methodologies when determining the price of inputs sourced from affiliated party suppliers?

(6) What alternative approaches or benchmarks would be appropriate? For example,

  • (a) the selling price between the exporter and unaffiliated suppliers of that input;
  • (b) the selling price between the affiliated supplier of that input and unaffiliated producers; or
  • (c) adjustments to the selling price from the affiliated supplier to the exporter, to account for any element of cost not sufficiently reflected.

(7) How should affiliation be determined?

(8) Are different procedures warranted for major inputs? If so, what should constitute a major input?

Profit Rates

(9) Do the existing methodologies for establishing profit rates under paragraph 11(1)(b) of the SIMR provide the CBSA with sufficient flexibility to determine a reasonable rate of profit for use in establishing normal values?

(10) Should greater preference be given to establishing a rate of profit on the basis of sales of the like good, whether sold by other producers in the exporting market, exported to third-country markets, or produced and sold in third-country markets?


(11) What is the extent of the problem of circumvention of anti-dumping or countervailing duties in Canada?

(12) Should SIMA be amended to include anti-circumvention proceedings? If so, what forms of circumvention should be covered?

(13) If SIMA were amended to include anti-circumvention proceedings, how should they be conducted?

  • (a) Who should be able to request the initiation of an anticircumvention proceeding?
  • (b) What sort of evidence should be required?
  • (c) To what extent should interested parties (importers, exporters, foreign governments, etc.) be able to participate?
  • (d) What should be the requirements with respect to causation and injury when examining trade practices alleged to constitute circumvention? For example,
    • — Should there be a requirement to prove that the trade practices in question were principally caused by the imposition of anti-dumping and countervailing duties?
    • —Should there be a requirement to prove that the trade practices in question diminish the remedial effect of the duties?

Scope Proceedings

(14) Should SIMA be amended to introduce proceedings for scope rulings?

(15) What procedural elements should be incorporated? Should all interested parties have participatory rights?

(16) What parties should be able to request a scope ruling? What information should be required to accompany a request to initiate a scope proceeding?

(17) What should the relationship be between potential scope proceedings and the existing determination/re-determination process? What bearing should scope rulings have on future determinations or re-determinations? Should there be retroactive application?

(17) What appeal / judicial review rights should be granted?

Product Exclusions

(18) Should SIMA be amended to place limitations on the Tribunal’s discretion to grant exclusions based on the end-use of the product or geographic location of the end-user?

Evidentiary Standards

(19) Is the current evidentiary standard for the preliminary injury determination sufficiently clear and appropriate?

(20) Is it desirable to amend the evidentiary standard applied to the preliminary determination of injury to ensure that cases are not unduly terminated prior to the consideration of all relevant evidence?

Expiry Reviews (Canada’s Sunset Review)

(21) Is the current standard for initiating an expiry review under section 76.03 of SIMA sufficiently clear and appropriate?

(22) Should the standard for initiating an expiry review be clarified or changed to ensure that expiry reviews are conducted where there is a risk of continued or resumed dumping and/or subsidizing that is likely to cause injury or retardation?

It is expected that the Department of Finance will make changes to Canada’s antidumpnig and countervailing duty laws as a result of this consultation process.  The rules changes will affect the activities of the Canada Border Services Agency and could make it more difficult to obtain reasonable normal values.  The changes may also affect how the Canadian International Trade Tribunal conducts inquiries at the investigation stage and the expiry review stages.  If Canada makes changes to its trade remedies rules, the changes could have significant effect on importers, exporters and foreign producers.  This is why it is so important to participate in the consultation process.

The relevant documents are:

The Special Import Measures Act

The Special Import Measures Regulations

The Backgrounder

The Canada Gazette Notice

Frequently Asked Questions

Women Traveling With Expensive Purses/Handbags May Expect The CBSA To Ask Questions

Posted in Customs Law, NEXUS

Security Bag Check sign on a white background. Part of a series.

There is a trend at Montreal Trudeau International Airport – Canada Border Services Agency (“CBSA”) officers are asking women who return to Canada with expensive purses (Dior, Prada, Coach, Channel, etc.) to go to secondary inspection.  In the Secondary Inspection Area, the CBSA officers accuse the woman of purchasing their purse/handbag on their most recent trip outside Canada.  The woman must prove on the spot that the purse/handbag was (1) not purchased on the most recent trip, and (2) was declared if purchased on an earlier trip. If the person says they purchased the purse/handbag in Canada, they must produce the receipt right then and there or the purse/handbag will be seized.  When the purse/handbag is seized, the CBSA officer usually imposes a level 2 penalty (40% of the value) after they go online to find out the going price for that purse/handbag or a similar purse/handbag. The penalty is usually over $1000 and the woman’s NEXUS card is usually confiscated/cancelled.

Most women have the documentation about the purchase if it occurred in the last 2 years (sometimes an old visa statement or the store invoice. Sometimes the store will print a copy of an invoice from their records. If the purse/handbag was previously imported, the woman has the Casual Goods Accounting Document showing duties were previously paid.

Sometimes the purse was a gift from  husband or a boyfriend.  The woman must get the receipt or prove that the other person paid all applicable customs duties at the time of importation. This can be a problem if the woman is no longer on speaking terms with the giver of the purse/handbag.

If the purse/handbag was previously declared/reported on a declaration card after a previous trip outside Canada or by a courier (if the goods were shipped), it is important to know that the CBSA does not have authority under the Customs Act to seize the purse/handbag.  Section 12(7) of the Customs Act provides that the following goods are not subject to seizure:

“Goods described in tariff item 9813.00.00 or 9814.00.00 in the List of Tariff Provisions set out in the schedule to the Customs Tariff:

  • that are in the actual possession of a person arriving in Canada, or that form part of his baggage, where the person and his baggage are being carried on board the same conveyance,
  • that are not charged with duties, and
  • the importation of which is not prohibited under the Customs Tariff or prohibited controlled or regulated under any Act of Parliament other than [the Customs Act] or the Customs Tariff

may not be seized as forfeit under this Act by reason only that they were not reported under this section.” (Emphasis added)

Tariff Item 9813 relates to goods originating in Canada, after having been exported therefrom, if the goods are returned without having been advanced in value or improved in condition by any process of manufacture or other means, or combined with any other article abroad.

Tariff Item 9814 relates to goods, which have once been released and accounted for under section 32 of the Customs Act and have been exported, if the goods are returned without having been advanced in value or improved in condition by any process of manufacture of other means, or combined with any other article abroad.

So, if the purse/handbag was in Canada prior to the trip abroad and the duties were paid (either because the purse/handbag was previously declared or the purse/handbag was purchased in Canada, then the CBSA officer should not have seized the purse/handbag.  Now, it is easy for me to say this.  It is difficult to argue with the CBSA officer during the secondary inspection.  These issues should be resolved by filing a request for redetermination and a NEXUS appeal.



Canadian Manufacturers in the Agri-Food Sector Have an Opportunity to Eliminate Customs Duties

Posted in Agriculture, Canada's Federal Government, Customs Law

Globe with financial papersOn April 22, 2016, the Federal Government of Canada (in particular, the Department of Finance) launched public consultations on the elimination of unrecoverable customs duties (MFN rate) payable on imported manufacturing ingredients by manufacturers in the agri-food sector.  The consultation were first announced in the 2016 Federal Budget. The submissions are due on or before June 21, 2016.

What this means is that Canadian manufacturers (including foreign companies with a manufacturing operation in Canada) may make written submissions to the Department of Finance to request the elimination of customs duties (MFN rate) on imported food manufacturing inputs. Customs duties are an unrecoverable cost of the manufacturer. The elimination of the duties will reduce the cost of production and cause the manufacturer to be more competitive in Canada and in international markets.  In addition, food costs for Canadian consumers of processed food products will be reduced as the manufacturer can charge less for the processed foods (if made with some imported food ingredients).

The Government of Canada proposed to reduce to “Free” the MFN rates of customs duty of tariff items listed in Table 1 (which also appears after the page break in this blog post). Some of the food inputs listed in Table 1 include certain edible vegetables, roots and tubulars; certain edible fruits and nuts; certain spices; certain cereals and grains; certain products used in the milling industry; certain flours, malts, starches and wheat gluten; certain flours milled from seeds; certain animal or vegetable fats and oils; etc.

However, the Department of Finance would like input from the food processors who import these goods before they will make the decision to eliminate the duties.

In addition, the Department of Finance will also accept views on other tariff items that could be considered in the context of possible further tariff elimination initiatives designed to assist Canadian industry. For example, corn is not listed in Table 1 and is imported into Canada for further manufacturing in the agri-food sector (e.g., into corn syrup).

The submissions must include, at a minimum, the following information:

  1. Canadian company/industry association name, address, telephone number, and contact person.
  2. Relevant eight-digit tariff item(s) and description of the goods of particular interest.
  3. Reasons for the expressed support for, or concern with, the proposed tariff elimination, including detailed information substantiating any expected beneficial or adverse impact.
  4. If concern is expressed with respect to the proposed tariff elimination for one or more eight-digit tariff item(s), please provide views on ways to alleviate such concerns (e.g. limiting tariff elimination to certain end uses, gradual tariff elimination over a longer time period).
  5. Please identify if information provided in the submissions is commercially sensitive.

If submissions are prepared for an item not listed in Table 1, the submissions should demonstrate the benefit to Canada for the elimination. Any company that will increase Canadian jobs by hiring more workers or building another plant should consider make those benefits known in the submissions.

If the submissions are accepted and the tariffs are eliminated on the food processing inputs, the Canada Border Services Agency will no longer collect unrecoverable customs duties in respect of the goods. Any applicable goods and services tax (“GST”) would still be payable, but would be recoverable if the manufactured goods are taxable or zero-rated.

We would be pleased to assist Canadian manufacturers or foreign manufacturers with Canadian food processing operations 9existing or proposed) to prepare their submissions.  This is an opportunity that has a small window and long term benefits.

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Don’t Cross the Canada-US Border with a Fake/Real Grenade

Posted in Border Security, Canada's Federal Government, Criminal Law, Customs Law

Customs StopI am not kidding – I should not have to write this blog post – The Government of Canada says “Please do not cross the border into Canada with a grenade in your vehicle.”  It does not matter if the grenade is fake/inert or real/live.  I am writing this because on April 21, 2016, three people crossed into Abbotsford, British Columbia from the United States with a grenade in their car – Yes, a grenade was in the vehicle.  The grenade was found during a secondary examination by the Canada Border Services Agency. The three individuals who were in traveling in the vehicle were arrested.  Please see the National Post article for more information.

A grenade is ammunition under Canada’s customs laws and classified under tariff item 9306. However, a grenade is also classified under tariff item 9898 as prohibited ammunition.  Herein lies the problem concerning the importation of grenades – it is a prohibited importation under Canada’s customs laws.

Not only did this incident cause concern at the Canada-US border for the safety of the CBSA officers, the safety and welfare of everyone else crossing at the Abbotsford border crossing was at risk.  The border was closed while the investigation was undertaken.  This incident inconvenienced a number of people.

Shielded but Not Covered – Privacy Demands Better Protection

Posted in Corporate Counsel, Criminal Law, Cross-border litigation, Cross-border trade, Cybersecurity and Privacy, Legal Developments

On April 13, 2016, the Article 29 Working Party took action which some found surprising and others predicted. It found the EU-U.S. Privacy Shield did not contain adequate protections and needs further improvement. The Working Party’s statement can be found at

While acknowledging the Privacy Shield contains “significant improvements” over the previous Safe Harbor, the Working Party also stated its objective is to “make sure that an essentially equivalent level of protection is maintained when personal data is processed subject to the provisions of the Privacy Shield.”

Some of the Working Party’s concerns had to do with the cumbersome nature of how the package of documents is constructed (with the agreement and the multiple supporting letters of assurance), which, according to the Working Party, makes the protections of the Privacy Shield difficult to access and understand, if not in some places contradictory. Additionally, the Working Party found inadequate protections as some protections in the law are not included in the Privacy Shield. In particular the purpose limitation (why the data is being captured and retained) and the lack of a clear data retention principle (which is neither mentioned nor can it be inferred) were cited. Further, automated processing of data is not even mentioned. Additionally, since the Privacy Shield will allow the on-forwarding of data from the EU to the U.S. and then to third countries, the Article 29 Working Party “insist[ed]” the Privacy Shield should require the same level of protection when the data is transferred outside the U.S. as is required when the data is transferred from the EU to the U.S. It also found the redress mechanism too “complex” and “difficult” for EU citizens to use, saying, in the end, it would be “ineffective.” The Working Party called out the Ombudsman process as particularly noteworthy, but questioned the independence of any such person.

A major concern in the context of the negotiation of the Privacy Shield was fall-out from the Snowden disclosures regarding massive data collection by the U.S. As such, from the American side detailed assurances and explanations were provided by the Office of the Director of National Intelligence (“ODNI”). The Working Party found those ODNI written assurances did not “provide sufficient details in order to exclude massive and indiscriminate collection of personal data originating from the EU.”

The Working Party also pointed out “the Privacy Shield adopted on the basis of Directive 95/46/EC needs to be consistent with the EU data protection legal framework, both in scope and terminology. In this regard, a review of the text of the Privacy Shield will have to take place after the entry into application of the General Data Protection Regulation in the course of 2018, in order to ensure the higher level of data protection offered by the Regulation is followed in the Privacy Shield.[emphasis in original]”

Finally, in its conclusion, the Working Group appreciated “the improvements the Privacy Shield offers compared to the invalidated Safe Harbour decision. But, given the concerns expressed and the clarifications asked, it urges the Commission to resolve these concerns and provide the requested clarifications in order to improve the draft adequacy decision and ensure the protection offered by the Privacy Shield is indeed essentially equivalent to that of the EU. [emphasis in original]”

There are two upcoming EU events which may well dictate the final outcome. From the EU structure side, the Article 31 Committee must now weigh in. The full title of the Article 31 Committee is Committee on the Protection of Individuals with regard to the Processing of Personal Data,” so its input is critical. It has meetings scheduled on April 29 and May 19 and is not expected to issue an opinion until after those meetings take place. After that, the European Commission will have to decide whether to try and revise the agreement in the face of the comments already in hand from the Article 29 Working Party, along with any recommendations from the Article 31 Committee.

The second event is the expected ruling of the Court of Justice of the European Union regarding the legality of mass surveillance of EU citizens. If the Court finds that surveillance illegal, it could throw into serious doubt the scope of the national security exceptions in the Privacy Shield. Since the Safe Harbor was struck down over mass surveillance concerns, the whole situation, at least right now, is in a total state of chaos. For companies, this makes proceeding even more dicey. The Data Protection Authorities in some jurisdictions have said complying with the old Safe Harbor provisions will not insulate companies from liability, even if they use model clauses instead (which would, in any case, need to be updated to articulate what appears in the current version of the Privacy Shield), so perhaps the wisest course of action is for companies to continue revising their procedures and modeling off the contents of the Privacy Shield as currently published, while waiting for a final guidance document.


TFTEA – Export Focus

Posted in Aerospace & Defence, Border Security, Controlled Goods Program, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Export Controls & Economic Sanctions, Exports, Legal Developments

In earlier editions of this blog, we first summarized the new law and then addressed the intellectual property rights changes it contained. Now, we turn to the export focused provisions in the Trade Facilitation and Trade Enforcement Act (“TFTEA”). Mainly those export provisions have to do with information collection for targeting.  However, new initiatives for promoting U.S. exports are let out in detail in TFTEA.

As most international traders are aware, the U.S. government has been developing a new computer, the Automated Commercial Environment (“ACE”) . ACE not only replaces the current Customs and Border Protection (“CBP)” system, but is designed to reengineer CBP’s operational processes; develop a new technology infrastructure; and integrate commercial, enforcement and administrative operations.  ACE is also intended to provide a platform whereby importers and exporters will be able to provide electronic data about their shipments through one portal, with the data filed being automatically referred to the relevant federal agencies with jurisdiction over the specific shipment.  The idea is those agencies will give a release or hold message quite quickly, and then the goods move on their way. This process is often referred to as creating a “single window”, with the International Trade Data System being the portal used to funnel the data to the various agencies.  While providing a single point of data exchange between the government and international traders, ultimately the idea is to streamline the process for goods entering and leaving the country.  Government-wide utilization of this new ACE process by all affected federal government entities is mandated to occur no later than December 31, 2016, by Executive Order 13659, signed by the President on February 19, 2014.  By then, CBP, as well as 47 Partner Government Agencies (PGAs), are scheduled to be on-board.  CBP has done a good job posting up-to-date information about ACE implementation at

Exporters have long filed their data electronically with the Bureau of Census (“Census”) through the Automated Export System (“AES”). Now, Census and CBP are migrating the AESDirect system into the ACE single window platform. The transition should be complete by April 30, 2016.

The TFTEA requires this new system must be used for all data and relevant documentation, exclusive of applications for permits, licenses or certifications, needed for the clearance of cargo for export by December 31, 2016. The CBP National Targeting Center, together with the Office of Trade, will be using this powerful data bank to identify possible violations of U.S. law, in particular those involving the trade priority issues on which CBP focuses: agriculture, antidumping and countervailing duties, import safety, intellectual property rights, revenue, textiles and wearing apparel, and trade agreements and preference programs.

When it comes to exports, we can expect Census, State, Commerce, Defense and the other export regulatory agencies to focus on goods which require licenses and are shipped without benefit of those licenses, are otherwise misdescribed, and especially those misdescribed goods which seek to evade U.S. export controls or economic sanctions.

With regard to exports, we also anticipate a higher level of watchfulness regarding violations of intellectual property rights (IPR). The National Intellectual Property Rights Coordination Center is mandated to coordinate with CBP to prevent the importation and exportation of merchandise which infringes IPR. This focus goes hand-in-hand with CBP’s attention to protect the Made in USA label.

Illicitly trafficked cultural property, archaeological or ethnological materials, and fish, wildlife and plants being exported will also be monitored and, again, the improved targeting capabilities of ACE will likely increase the number of export inspections, as potential violations are suspected or identified.

CBP also hopes to finally resolve the troublesome in-bond system. Data in ACE will enable CBP to monitor in-bond moves and enhance the ability of the agency to verify that each transaction reaches its final destination in the U.S. or is re-exported in a timely manner.

Regarding export promotion, a new State Trade Expansion Program (STEP) has been established through passage of the TFTEA. Grants will be made available to states to assist eligible small businesses as to:

(A) participation in foreign trade missions; (B) subscription to services provided by the Department of Commerce; (C) payment of website fees; (D) design of marketing media; (E) trade show exhibition; (G) reverse trade missions; (H) procurement of consultancy services (after consultation with the Department of Commerce to avoid duplication); or (I) any other initiative determined appropriate by the Associate Administrator for International Trade of the Small Business Administration (“SBA”).

When states apply for these STEP grants, they must submit their plans for a program. Priority status may be given to state programs that focus on eligible small business concerns as part of a trade expansion program; and demonstrate intent to promote trade expansion by socially and economically disadvantaged small business concerns; small business concerns owned or controlled by women; and rural small business concerns.  A program that promotes trade facilitation from a state that is not one of the 10 states with the highest percentage of eligible small business concerns engaged in international trade (as determined by the most recent data from the Department of Commerce) may also receive priority status, as well as those that include:

(I) activities which have resulted in the highest return on investment based on the most recent year; and (II) the adoption of shared best practices included in the annual report of the Administration.

We encourage eligible small business concerns to monitor the Small Business Administration (“SBA”) website for additional information. Find out whether your state is submitting an application and how you can become involved in the process. Contact your local District Export Council – – and/or U.S. Dept. of Commerce, U.S. Export Assistance Center –  – for additional details.

There is to be a pilot program within six (6) months of enactment. The SBA Inspector General must submit a report to the Senate Committee on Small Business and Entrepreneurship and the House Committee on Small Business detailing the use of amounts made available under the STEP grants under section 1207 of the Small Business Jobs Act of 2010 (15 U.S.C. 649b note).

Further seeking to assist small businesses to export, Subtitle C of the Export Enhancement Act of 1988 (15 U.S.C. 4721 et seq.) is amended by inserting after section 2313 the following:


‘‘(a) STATEMENT OF POLICY.—It is the policy of the United States to promote exports as an opportunity for small businesses. In exercising their powers and functions in order to advance that policy, all Federal agencies shall work constructively with State and local agencies engaged in export promotion and export financing activities.

‘‘(b) ESTABLISHMENT.—The President shall establish a State and Federal Export Promotion Coordination Working Group (in this section referred to as the ‘Working Group’) as a subcommittee referred to as the ‘TPCC’).

‘‘(c) PURPOSES.—The purposes of the Working Group are—

‘‘(1) to identify issues related to the coordination of Federal resources relating to export promotion and export financing with such resources provided by State and local governments;

‘‘(2) to identify ways to improve coordination with respect to export promotion and export financing activities through the strategic plan developed under section 2312(c);

‘‘(3) to develop a strategy for improving coordination of Federal and State resources relating to export promotion and export financing, including methods to eliminate duplication of effort and overlapping functions; and

‘‘(4) to develop a strategic plan for considering and implementing the suggestions of the Working Group as part of the strategic plan developed under section 2312(c).

‘‘(d) MEMBERSHIP.—The Secretary of Commerce shall select the members of the Working Group, who shall include—

‘‘(1) representatives from State trade agencies representing regionally diverse areas; and

‘‘(2) representatives of the departments and agencies that are represented on the TPCC, who are designated by the heads of their respective departments or agencies to advise the head on ways of promoting the exportation of United States goods and services.’’.

These efforts indicate a renewed and enhanced focus on promoting exports from the U.S., particularly exports of merchandise from small business entities. Of course, the devil is in the details!  Everything depends on how the program is rolled out and how the funds are actually allocated. If you think STEP could help your company, keep an eye out for more information. The SBA publishes STEP information at  This link also provides details about the administration of STEP in each state. will eventually be improved so as to become a comprehensive resource for information about exporting goods from the United States. Small business concerns that are exporters, the President’s Export Council, state agencies with responsibility for export promotion or export financing, district export councils, and trade associations will be consulted before recommendations for improvement are drawn up. will also make available information about resources relating to export promotion and export financing in each state, together with information about state agencies with responsibility for export promotion or export financing, district export councils (private sector individuals appointed by the Secretary of Commerce to 59 regional councils with the goal of assisting Commerce to enhance American exports) and trade associations located in the state. If this works out as advertised, it will be a valuable assistance to exporters, particularly small business entities.  Obtaining this type of information can be very difficult and time consuming now no matter how good is the freight forwarder with whom you partner.

While waiting for these various options to roll-out, American exporters should keep in mind with the use of ACE, the risk of making a mistake in the declaration of your product at time of export is being increased. Are you ready to heightened curiosity by the federal government about your shipments?

TFTEA – CBP Organizational Structure

Posted in Aerospace & Defence, Border Security, Corporate Counsel, Cross-border deals, Cross-border trade, Customs Law, Export Controls & Economic Sanctions, Legal Developments

Among its many provisions, the Trade Facilitation and Trade Enforcement Act (“TFTEA” or the “Act”), H.R. 644, formally establishes U.S. Customs and Border Protection (“CBP”) as a department within Homeland Security (“DHS”). Section 802(a) contains the key provisions. That section amends Section 411 of the Homeland Security Act and the U.S. Code to reflect the new department information.  TFTEA marks the first authorization of CBP since passage of the Homeland Security Act in 2002, finally doing away with that awkward U.S. Bureau of Customs and Border Protection name that no one used, except in legal paper; and is, of course, the very same agency title that leads so many Administration officials and others to call it Customs and Border Patrol!  By virtue of Section 802(b), CBP continues to carry out the functions, missions, duties and authorities vested in the agency from earlier times.  Further, all rules, regulations and policies previously put in place by CBP remain in force.

In reviewing Section 802(a), it is clear the current structure and hierarchy of CBP has been formalized, with a few notable modifications. In this Alert, we summarize the CBP structure approved in the Act.  However, one ever vexing issue is the number of reports called for from CBP in this Act and so many other laws. As a result, the Commissioner will be quite busy compiling reports and carrying out assessments, covering topics such as CBP’s Business Transformation Initiative, port of entry infrastructure needs assessments, and personal searches conducted by CBP personnel.  The Act also requires the DHS Secretary to certify in writing prior to entering into or renewing an agreement with a foreign government for a trusted traveler program that the proposed or renewal partner foreign government routinely submits lost and stolen passport information of its citizens to INTERPOL and shares this information with the United States.

CBP is still headed by a Commissioner, with the revised “Commissioner of U.S. Customs and Border Protection” (Commissioner) title. He (or she) continues to be assisted by a Deputy Commissioner. The Senate Committee on Finance continues to confirm all nominees to the position and maintains sole jurisdiction over confirmation of the Commissioner.

Starting with a humble beginning, including collection of duties, excise taxes, fees and penalties on imported merchandise due to the desperate need for revenues after the U.S. declared its independence in 1776, the duties of the Commissioner have not surprisingly expanded over time. Now, CBP is one of the world’s largest law enforcement organizations, employing over 60,000 individuals.  The current duties of the Commissioner are formally stated in the Act and, for the most part, represent the role the trade community knows.  However, those duties are now expanded even further:

The Commissioner shall—

(1) coordinate and integrate the security, trade facilitation, and trade enforcement functions of CBP;

(2) ensure the interdiction of persons and goods illegally entering or exiting the United States;

(3) facilitate and expedite the flow of legitimate travelers and trade;

(4) direct and administer the commercial operations of CBP, and the enforcement of the customs and trade laws of the United States;

(5) detect, respond to, and interdict terrorists, drug smugglers and traffickers, human smugglers and traffickers, and other persons who may undermine the security of the United States, in cases in which such persons are entering, or have recently entered, the United States;

(6) safeguard the borders of the United States to protect against the entry of dangerous goods;

(7) ensure the overall economic security of the United States is not diminished by efforts, activities, and programs aimed at securing the homeland;

(8) in coordination with U.S. Immigration and Customs Enforcement (“ICE”) and United States Citizenship and Immigration Services, enforce and administer all immigration laws, … , including—

(A) the inspection, processing, and admission of persons who seek to enter or depart the United States; and

(B) the detection, interdiction, removal, departure from the United States, short-term detention, and transfer of persons unlawfully entering, or who have recently unlawfully entered, the United States;

(9) develop and implement screening and targeting capabilities, including the screening, reviewing, identifying, and prioritizing of passengers and cargo across all international modes of transportation, both inbound and outbound;

(10) in coordination with the (DHS) Secretary, deploy technology to collect the data necessary … to administer [a] biometric entry and exit data system;

(11) enforce and administer the laws relating to agricultural import and entry inspection …;

(12) in coordination with the Under Secretary for Management of the Department, ensure that CBP complies with Federal law, the Federal Acquisition Regulation, and the Department’s acquisition management;

(13) ensure that the policies and regulations of CBP are consistent with the obligations of the United States pursuant to international agreements;

(14) enforce and administer—

(A) the Container Security Initiative program …; and

(B) the Customs–Trade Partnership Against Terrorism program … ;

(15) conduct polygraph examinations…;

(16) establish the standard operating procedures …;

(17) carry out the training required …; and

(18) carry out other duties and powers prescribed by law or delegated by the Secretary.

The current Commissioner (Gil Kerlikowske) may continue to serve until a new Commissioner is appointed, which will likely to happen only once a new administration is in place, if then. [Since the original publication of this article, Mr. Kerlikowske has announced he will resign by year-end.] The Deputy Commissioner (Kevin McAleenan), and individuals serving as Assistant Commissioners (such as Todd Owen and Brenda Smith) and other officers and officials may continue to serve as the Executive Assistant Commissioners, Deputy Commissioner, Assistant Commissioners, and other officers and officials, as appropriate, unless the Commissioner decides to replace any of them.

Certain operational offices within CBP were formalized by Section 802(a) of the Act:

U.S. Border Patrol

The Chief of U.S. Border Patrol (“Border Patrol”) will now be at the level of Executive Assistant Commissioner (“EAC”), and each EAC continues to report to the Commissioner. The duties of the office are to:

(A) serve as the law enforcement office of CBP with primary responsibility for interdicting persons attempting to illegally enter or exit the United States or goods being illegally imported into or exported from the United States at a place other than a designated port of entry;

(B) deter and prevent the illegal entry of terrorists, terrorist weapons, persons, and contraband; and

(C) carry out other duties and powers prescribed by the Commissioner.

Air and Marine Operations

The person heading up this office will now be at the level of EAC. Air and Marine Operations duties are to:

(A) serve as the law enforcement office within CBP with primary responsibility to detect, interdict, and prevent acts of terrorism and the unlawful movement of people, illicit drugs, and other contraband across the borders of the United States in the air and maritime environment;

(B) conduct joint aviation and marine operations with ICE;

(C) conduct aviation and marine operations with international, Federal, State, and local law enforcement agencies, as appropriate;

(D) administer the Air and Marine Operations Center; and

(E) carry out other duties and powers prescribed by the Commissioner.


The Air and Marine Operations Center continues under the Border Patrol EAC. The Air and Marine Operations Center duties are to:

(i) manage the air and maritime domain awareness of the Department, as directed by the Secretary;

(ii) monitor and coordinate the airspace for unmanned aerial systems operations of Air and Marine Operations in CBP;

(iii) detect, identify, and coordinate a response to threats to national security in the air domain, in coordination with other appropriate agencies, as determined by the Executive Assistant Commissioner;

(iv) provide aviation and marine support to other Federal, State, tribal, and local agencies; and

(v) carry out other duties and powers prescribed by the Executive Assistant Commissioner

Office of Field Operations

The Office of Field Operations (“OFO”) is the largest component within CBP. As international traders know, OFO is responsible for managing CBP operations at regional or field offices, ports of entry, and pre-clearance stations overseas. The Assistant Commissioner will now be an EAC, still reporting to the Commissioner.  OFO coordinates CBP’s enforcement activities at U.S. air, land, and sea ports of entry, in order to:

(A) deter and prevent terrorists and terrorist weapons from entering the United States at such ports of entry;

(B) conduct inspections at such ports of entry to safeguard the United States from terrorism and illegal entry of persons;

(C) prevent illicit drugs, agricultural pests, and contraband from entering the United States;

(D) in coordination with the Commissioner, facilitate and expedite the flow of legitimate travelers and trade;

(E) administer the National Targeting Center;

(F) coordinate with the Executive Assistant Commissioner for the Office of Trade (“OT”) with respect to the trade facilitation and trade enforcement activities of CBP; and

(G) carry out other duties and powers prescribed by the Commissioner.


An Executive Director will head up the National Targeting Center, reporting to the OFO EAC. The Center’s duties are to:

(i) serve as the primary forum for targeting operations within CBP to collect and analyze traveler and cargo information in advance of arrival in the United States to identify and address security risks and strengthen trade enforcement;

(ii) identify, review, and target travelers and cargo for examination;

(iii) coordinate the examination of entry and exit of travelers and cargo;

(iv) develop and conduct commercial risk assessment targeting with respect to cargo destined for the United States;

(v) coordinate with the Transportation Security Administration, as appropriate;

(vi) issue Trade Alerts; and

(vii) carry out other duties and powers prescribed by the Executive Assistant Commissioner.

With the implementation of the Automated Commercial Environment (“ACE”) single window for trade transactions, we anticipate the National Targeting Center will have much more information, much earlier in the transaction, so as to be able to analyze goods for examination selection purposes. In other words, the Center’s role becomes that much more critical, as does the importance of correct and complete data being reported and transmitted from the outset for importers and exporters.


Within 30 days of enactment and annually thereafter, the OFO EAC must submit a report to the Committee on Homeland Security and the Committee on Ways and Means of the House of Representatives and the Committee on Homeland Security and Governmental Affairs and the Committee on Finance of the Senate a report on the staffing model for OFO, including how many supervisors, front-line CBP officers, and support personnel are assigned to each Field Office and port of entry.

In demanding this report, Congress has made clear it wants to keep tabs on the number of staff this office employs in its management, administration and field operations. What is not clear is whether Congress yet understands the importance to the trade community and the country of CBP staff other than front-line inspectors.

Office of Trade

Within 30 days of the TFTEA enactment, the assets, functions, personnel, and liabilities of the Office of International Trade will be transferred to the Office of Trade (“OT”) and the Office of International Trade will be abolished. [CBP had long ago indicated its displeasure with two offices with the letters IT in them, the other being its Information Technology section.] Neither CBP nor Homeland Security funds may be used to transfer assets elsewhere without prior Congressional approval.  However, the Commissioner is authorized to transfer any other CBP assets, functions, or personnel to OT which will be headed up by an EAC.

The duties of the OT are to:

(1) direct the development and implementation, pursuant to the customs and trade laws of the United States, of policies and regulations administered by CBP;

(2) advise the Commissioner with respect to the impact on trade facilitation and trade enforcement of any policy or regulation otherwise proposed or administered by CBP;

(3) coordinate with the OFO Executive Assistant Commissioner with respect to the trade facilitation and trade enforcement activities of CBP;

(4) direct the development and implementation of matters relating to the priority trade issues identified by the Commissioner in the joint strategic plan for trade facilitation and trade enforcement;

(5) otherwise advise the Commissioner with respect to the development and implementation of the joint strategic plan;

(6) direct the trade enforcement activities of CBP;

(7) oversee the trade modernization activities of CBP, including the development and implementation of the ACE and support for the establishment of the International Trade Data System;

(8) direct the administration of customs revenue functions as otherwise provided by law or delegated by the Commissioner; and

(9) prepare an annual report to be submitted to the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives not later than June 1, 2016, and March 1 of each calendar year thereafter that includes—

(A) a summary of the changes to customs policies and regulations adopted by CBP during the preceding calendar year; and

(B) a description of the public vetting and interagency consultation that occurred with respect to each such change.

OT consolidates the CBP trade policy, program development, and compliance measurement functions into one office.

Office of Intelligence

This Office is under the leadership of an Assistant Commissioner, who reports to the Commissioner. The Office has the following duties:

(A) develop, provide, coordinate, and implement intelligence capabilities into a cohesive intelligence enterprise to support the execution of the duties and responsibilities of CBP;

(B) manage the counterintelligence operations of CBP;

(C) establish, in coordination with the Chief Intelligence Officer of DHS, as appropriate, intelligence-sharing relationships with Federal, State, local, and tribal agencies and intelligence agencies;

(D) conduct risk-based covert testing of CBP operations, including for nuclear and radiological risks; and

(E) carry out other duties and powers prescribed by the Commissioner.

This Office currently carries out these duties by collecting and analyzing advance traveler and cargo information, using enhanced law enforcement technical collection capabilities, sharing intelligence with other law enforcement agencies, federal, state, tribal and local.

Office of International Affairs

The Assistant Commissioner who heads up this Office reports to the Commissioner. The duties of the Office are to:

(A) coordinate and support CBP’s foreign initiatives, policies, programs, and activities;

(B) coordinate and support CBP’s personnel stationed abroad;

(C) maintain partnerships and information-sharing agreements and arrangements with foreign governments, international organizations, and United States agencies in support of CBP’s duties and responsibilities;

(D) provide necessary capacity building, training, and assistance to foreign customs and border control agencies to strengthen border, global supply chain, and travel security, as appropriate;

(E) coordinate mission support services to sustain CBP’s global activities;

(F) coordinate with customs authorities of foreign countries with respect to trade facilitation and trade enforcement;

(G) coordinate CBP’s engagement in international negotiations;

(H) advise the Commissioner with respect to matters arising in the World Customs Organization and other international organizations as such matters relate to the policies and procedures of CBP;

( I) advise the Commissioner regarding international agreements to which the United States is a party as such agreements relate to the policies and regulations of CBP; and

(J) carry out other duties and powers prescribed by the Commissioner.

The OIA focuses on international cooperation, including strengthening multi- and bilateral relationships to implement international agreements and joint efforts in order to facilitate and secure legitimate trade.

Office of Professional Responsibility

This office is headed up by an Assistant Commissioner and investigates internal misconduct, manages integrity-related programs and policies, and also conducts research and analysis into the misconduct of any CBP employees.


The Commissioner is expected to establish standard operating procedures for:

  • searching, reviewing, retaining and sharing information contained in communication and electronic or digital devices by CBP at U.S. Ports of Entry;
  • use of force employed by officers and agents, including the use of deadly force;
  • processing and investigating complaints against CBP employees for violations of professional conduct, which procedures must be uniform, standardized and publicly available; (Note: There are several links on the CBP website describing the procedure for filing complaints.)
  • notification of status to complainants;
  • mechanism for reporting use of deadly force by an officer or agent, including evaluating whether correct procedures were followed.

The EAC for Air and Marine Operations, together with the Office for Civil Rights and Civil Liberties and the Office of Privacy of the Department, are responsible for standard operating procedures (“SOPs”) to provide command, control, communication, surveillance, and reconnaissance assistance through the use of unmanned aerial systems.

These procedures must include:

(i) a process for other federal, state, and local law enforcement agencies to submit mission requests;

(ii) a formal procedure to determine whether to approve or deny such a mission request;

(iii) a formal procedure to determine how such mission requests are prioritized and coordinated; and

(iv) a process regarding the protection and privacy of data and images collected by CBP through the use of unmanned aerial systems.

The SOPs must require:

(A) in the case of a search of information conducted on an electronic device by CBP personnel, the Commissioner to notify the individual subject to such search of the purpose and authority for such search, and how such individual may obtain information on reporting concerns about such search; and

(B) in the case of information collected by CBP through a search of an electronic device, if such information is transmitted to another Federal agency for subject matter assistance, translation, or decryption, the Commissioner is to notify the individual subject to such a search of that transmission.

The Commissioner may withhold notifications of complaint status or the purpose or authority for a search, as well as how to obtain information about the status, if the Commissioner determines the information would impair national security, law enforcement, or other operational interests.


Training for all CBP officers and agents is mandated. A specific amount of continuing education will be formulated by the Commissioner, sufficient to maintain employee understanding of federal legal rulings, court decisions, and departmental policies, procedures, and guidelines. This educational component is especially important given the lack of significant enforcement cases by either CBP or ICE due to the retirement of knowledgeable staff.  This training is also critical given CBP’s reorganization into Centers for Excellence and Expertise and the apparent lack of understanding by most CBP personnel about value and other complicated issues.

Wait Times Transparency

Wait times for travelers entering the U.S. at the 20 highest volume international airports are available to the public through the CBP website. The information is determined according to federal flight data.  Wait times are determined by calculating the time elapsed between an individual’s entry into the CBP inspection area and that individual’s clearance by a CBP officer.

Reports are to be submitted to the relevant Congressional committees, to include wait times and ranking of each airport by wait time. The Commissioner must also provide adequate staffing at the CBP information center, so travelers may submit comments or speak with representatives about their entry experience in a timely manner.

Given how this provision is worded, it is not clear the current wait time controversy will be resolved. CBP and the trade still seem to measure the starting point differently. The Act seems to call for the wait time to start when the individual enters the CBP compound. However, the real wait time starts when the person gets in line to clear.

Other Authorities

The DHS Secretary has authority to establish additional offices or Assistant Commissioner positions (or other similar officers or officials) as deemed necessary to carry out the missions, duties, functions, and authorities of CBP, but must notify the relevant Congressional committees prior to exercising that authority.  The current expectation is no new positions will be added in the short-term and everyone currently in office will remain in place.


The Art of Self Defense

Posted in Aerospace & Defence, Anti-Trust/Competition Law, Antidumping, Border Security, Buy America, Constitutional Law, Controlled Goods Program, Corporate Counsel, Criminal Law, Cross-border deals, Cross-border litigation, Cross-border trade, Customs Law, Cybersecurity and Privacy, Export Controls & Economic Sanctions, Exports, FCPA/Anti-Corruption, Government Procurement, Imports Restrictions, Intellectual Property, International Arbitrations, Legal Developments, NAFTA, origin, tariff classification, Tax, Trade Agreeements, Trade Remedies, Transportation, valuation, World Trade Organization

Corporate compliance programs come in all shapes and sizes and apply whether your company is privately owned or publicly traded. These internal controls take the form of accounting and audit procedures, import-export/regulatory policies, employment guidelines, ethics/anti-corruption initiatives and so on. The intent of any compliance program is to ensure that employees know what is expected of them and that their behavior complies with and is consistent with the “rules of the road” for your business or industry. A recent letter from Andrew Weissmann, Chief of the Fraud Section, Criminal Division, U.S. Department of Justice, affirms the importance of not only having a robust compliance program, but the need to ensure the adequacy of internal enforcement of that program, in this context, for underscoring the compliant nature of the company and mitigating the consequences of any misdeeds which may occur, in the face of enforcement action by any of the federal agencies with jurisdiction over your company.

It boils down to:

  1. A well-defined/well-documented compliance program (which can vary as pointed out above);
  2. Adequate training of affected employees and related internal and external stakeholders about your compliance program;
  3. Proper internal enforcement, including discipline/consequences, for those that violate its provisions; and
  4. Timely disclosure of violations to the appropriate authoritative body.

All of this is summarized in the U.S. Sentencing Guidelines section having to do with an “Effective Compliance and Ethics Program,” see Chapter 8, Part B, Section 2. If a company wanted credit for cooperation in the context of a criminal case, it had to show it had an effective program and that, despite that program, the individuals did what they did. In other words, those individuals acted outside the course and scope of their employment and so the company should not be held responsible for their actions.

Over time, with all the pressures being put on companies, acceptance of the need for a full blown compliance program expanded, and now it is the rare company, regardless of size, which does not have one. Whereas the Sentencing Guidelines have broad philosophical statements about compliance, by letter dated April 5, 2016, Andrew Weissmann , Chief, Fraud Section, Criminal Division, U.S. Department of Justice, added a remarkable amount of detail to the overall question of what is enough?

Admittedly the context of the Weissman letter has to do with alleged criminal behavior and is designed to set a high standard for companies that, if they meet those standards (after disgorging all profits related to their Foreign Corrupt Practices Act violative behavior), will be getting up to a 50% reduction in the possible fine. However, the elements of a successful program as described in this letter are a telling commentary on what the U.S. government thinks is an adequate compliance program. This language also no doubt sets the standard across the federal government to define the minimum standards for a compliance program and so are an important consideration as companies evaluate their own compliance efforts.

The key provisions in the letter read as follows.

The following items generally will be required for a company to receive credit for timely and appropriate remediation …

  • Implementation of an effective compliance and ethics program, the criteria for which will be periodically updated and which may vary based on the size and resources of the organization, but will include:

° Whether the company has established a culture of compliance, including an awareness amount employees that any criminal conduct, including the conduct underlying the investigation, will not be tolerated;

° Whether the company dedicates sufficient resources to the compliance function;

° The quality and experience of the compliance personnel such that they can understand and identify the transactions identified as posing a potential risk;

° The independence of the compliance function;

° Whether the company’s compliance program has performed an effective risk assessment and tailored the compliance program based on that assessment;

° How a company’s compliance personnel are compensated and promoted compared to other employees;

° The auditing of the compliance Program to assure its effectiveness; and

° The reporting structure of compliance personnel within the company.

Other factors the Dept. of Justice will consider in granting mitigation are likely to also be relied upon when other federal government agencies learns of misbehavior by a company. Those additional factors are:

  • Appropriate discipline of employees, including those identified by the corporation as responsible for the misconduct, and a system that provides for the possibility of disciplining others with oversight of the responsible individuals, and considers how compensation is affected by both disciplinary infractions and failure to supervise adequately.
  • Any additional steps that demonstrate recognition of the seriousness of the corporation’s misconduct, acceptance of responsibility for it, and the implementation of measures to reduce the risk of repetition of such misconduct, including measures to identify future risks.

Also of interest is the reinforcement of the Yates memo. That memo was issued on September 9, 2015 by the Department of Justice’s Deputy Attorney General Sally Yates.  Entitled Individual Accountability for Corporate Wrongdoing,  DAG Yates’ goal was to make clear to the entire Department, any activity involving the potential for liability on the part of a corporation can and must also focus on the potentially culpable the individuals involved.  Put another way, if a corporation comes to the attention of the Department for any reason, civil or criminal, for the business to get credit for cooperation, it must be prepared to turn over information condemning its employees.

Justice intends to pursue individuals where it can and companies which want full cooperation credit are going to have to provide evidence against their own employees and business partners if they want to avoid the full consequences of their lapses. If there was any doubt (and there really should not have been), that doubt is erased by the Weissmann letter. It specifically calls on companies to include “the disclosure of all relevant facts about the individuals involved in the wrongdoing.”

For those of us familiar with the voluntary disclosure concept ingrained with many agencies, some of the other requirements seem quite reasonable: 1) the disclosure has to happen before there is an “imminent threat of disclosure of government investigation”; 2) the disclosure is made reasonably promptly; and 3) the company discloses all the relevant facts.  The kicker comes in that “all the relevant facts” criteria is framed as including “the individuals involved in any FCPA violation”.  Up to now, when disclosures have been made for many types of violations, the company has typically not had to name names or directly point fingers at individuals. Will that change? Will that change only in the criminal context ? Will it be expanded to the civil context, too?

Another area where it might seem a new standard was set has to do with how “full cooperation” is defined. This section of the Weissmann letter starts with reference to disclosure of information about those involved in the criminal activity, but it goes to call on the company to be proactive (not reactive). For example, the company is expected to offer information even when not requested. Additionally, the company is to preserve, collect and disclose relevant documents and information relating to their provenance; provide timely updates about any internal investigation (including rolling updates); deconflict an internal investigation with a government investigation; provide all facts relevant to potential criminal conduct by third parties, companies and individuals, including  officers and employees; if requested, make company officers and employees with relevant information available for interview, including those located overseas (fortunately the letter acknowledges an individual’s Fifth Amendment rights) ; disclosure of all relevant facts gathered during the company’s independent investigation, including attributing facts to specific sources (subject to the attorney-client privilege); providing overseas documents , where they might be found, who found them and so on, unless barred by foreign law; unless legally prohibited, companies are also expected to facilitate third party document production and witnesses from foreign jurisdictions; and if requested, to translate documents in foreign languages.

These standards are quite high and one can quickly see where a dispute could easily arise between Justice and a company as to whether full cooperation has been forthcoming by the company. Hopefully readers will not be faced with that dilemma in the criminal context, but mistakes do happen. How much of what Mr. Weissmann has declared will make its way to the voluntary self-disclosure process encouraged by many agencies is an open question. A handful of agencies have robust mitigation guidelines, but even if they do, there remain cases where a good deal for discretion exists for the agency to exercise during decision-making. In other contexts, cases are dispose of relying strictly on the discretion of the agency’s decision makers.

Only time will tell how much Mr. Weissmann’s standards creep onto the civil side, but in the meantime, companies would do well to measure their existing compliance programs against the articulated standards because, frankly, Mr. Weissmann is merely repeating what most government prosecutors and investigators at all levels think is required for a truly robust and effective compliance program. How does yours measure up?