Canada-U.S. Blog

Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

Oh, goodness, how do we manage it all?

Posted in Anti-Trust/Competition Law, Border Security, Corporate Counsel, Criminal Law, Cross-border deals, FCPA/Anti-Corruption, Politics

Originally published by the Journal of Commerce in April 2015

One thing is for sure if you have been involved with international trade in recent times. Things are getting ever more complicated and the risk management and compliance challenges are consistently getting harder to anticipate and manage. At the TPM in early March, we discussed the cybersecurity challenges facing the trading community. For example, there is the steamship line which in 2011 had all the data on the ship and in its offices wiped. What do you do with a shipload of containers and no idea what is in any of them! Imagine what the bad guys could do with that opportunity?

What about the terminal that got hacked by drug smugglers? The containers arrived in Antwerp, Belgium and the smugglers wanted to get their drugs before they were discovered. Their solution was to delete information about their containers from the terminal’s system, retrieve those containers and take off with them. Obviously, they didn’t do all that great a job, since their activities were discovered.

If those stories don’t hit close enough to home for you – how about the customs broker who had its system hacked with the result that information about the intended destination for a specific container was changed. The container was delivered to the new/wrong address. The situation came to light shortly thereafter when the actual buyer demanded his goods. The customs broker was hit with a claim for misdelivery, and found there was no insurance coverage! These events were deemed not covered by the E&O policy!

A few days ago, news broker the unclassified computer system in the White House was hacked by Russians. A few days earlier, on April 1, 2015, President Obama issued Executive Order 13694. It may the one of the few, if not, the only Executive Order issued which does not name names! It permits the Secretary of the Treasury and Attorney General to block the property of any person found to have engaged in activities which are “reasonably likely to result in, or have materially contributed to, a significant threat to the national security, foreign policy, or [the] economic health or financial stability” of the U.S. with the purpose of harming, compromising or causing significant disruption to computers or computer networks, significantly compromising the services of critical infrastructure, or the significant misappropriation of “funds or economic resources, trade secrets, personal identifiers, or financial information for commercial or competitive advantage or private financial gain.” These restrictions apply to both direct actors and those who aid and abet their malfeasance.

The international trade community has become used to incorporating the changes which arise from the current export reform efforts, from the actions of the Food and Drug Administration regarding food safety, and even from what seems to be the imminent fruition by Customs and Border Protection of the Automated Commercial Environment. There are the complications of dealing with conflict minerals and the labyrinth of Securities and Exchange Commission reporting requirements, plus what to do about cloud computing and its potential export restrictions impact. The list goes on as noted, but then we periodically have another major headache rear its ugly head, seemingly out of the blue.

One example of such an unexpected event is trade-based money laundering. If you are an American company selling to or buying from other parts of the world, you may get caught in this web, most often when dealing through third parties. What typically happens is the third party is thought by parts of the U.S. government to engage in money laundering or other illegal activity, your funds get tied up when the related bank account(s) get seized, and then you are stuck. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a list of red flags that in many ways contains relatively obvious examples when dealing with bad guys. The most common is the black market peso exchange where the products moving between countries are sold are seriously inflated prices. Some portion of the funds paid pays for the actual goods shipped, but the rest is laundered by a variety of means. Beside misrepresenting the price, the quantity or quality of the goods could also be altered. These seems rather obvious indicia, and so are not terribly helpful to honest business people.

What FinCEN did publish that is worth keeping in mind is if you are dealing with high dollar merchandise, such as electronics, auto parts, or precious minerals or gems, be cautious if there is a third party paying for the goods or services (e.g., if you have a distributor who takes your goods on consignment and then arranges for the ultimate buyer to pay you directly), letters of credit which get amended for reasons that make no sense; the inability of one of the parties to produce routine commercial documents; and significant discrepancies between the documents, especially when the data is related to the description, value, etc. of the goods.

FinCEN pointed out some other red flags, including negotiable instruments presented in round denominations for domestic transactions or deposited with foreign financial institutions. Negotiable instruments that are sequentially numbered or purchased at multiple locations and lack payee information or contain visible broker markings or symbols.

If you accept international wire transfers to pay for the goods you are selling, check where the transaction originates (some locations have been publicly identified as high risk (e.g., Mexico, Guatemala, Argentina, Brazil, Paraguay, Uruguay and Venezuela)). One should also be wary about payment destinations related to duty free zones, especially in the U.S., Hong Kong, China, South Korea, Taiwan, Spain, Panama and Curacao. Naturally, if there is no apparent business relationship between the originator and the beneficiary, that is suspicious, as is any customer who cannot provide basic deal information, including simple banking/payment information, plus if there are frequent transactions involving whole dollar amounts. There are a number of additional red flags FinCEN identified. While published original in 2010, FIN2010-A001 remains valid guidance if you have suspicions about the party with whom you are dealing. A copy can be found at:

Immigration and Customs Enforcement has weighed in on this topic as well. That agency’s list of red flags includes: payments to a vendor by unrelated third parties; false reporting, such as commodity misclassification, commodity over- or under-valuation; repeated importation and exportation of the same high-value commodity, known as carousel transactions; commodities being traded that do not match the business involved; unusual shipping routes or transshipment points; packaging inconsistent with the commodity or shipping method; and the always popular double-invoicing.

On the export side, the most common headache about value comes in one of two ways. Either the buyer boldly insists the invoice which accompany the shipment be significantly less than the actual cost of the goods (often by as much as 50%), or the exporter simply does not understand the value requirements for an export. We’ve seen this lack of understanding lead to serious issues with the Secret Service in the recent round of seeking to criminalize the export of automobiles. It is generally understood the Secret Service gained interest in these transactions because the values stated on the export documents were wrong. Yes, there was the new vs. used issue, but at the outset, discussions with the agents routinely included questions about the value. The correct value at time of export is the price at which the goods are sold to the foreign buyer. It is not the MSRP on the window tag. It is also not the net price, meaning if you received a deposit, you do not state the balance due on your invoice, but the full cost of the good as sold.

If this partial list of major headaches is not enough to give you a serious migraine, perhaps you prefer we address corruption/bribery issues or maybe you prefer human smuggling complications?

Yates Decided – Saner Heads Prevailed!

Posted in Aerospace & Defence, Anti-Trust/Competition Law, Constitutional Law, Corporate Counsel, Criminal Law, FCPA/Anti-Corruption, Government Procurement, Legal Developments, U.S. Supreme Court

Originally published by the Journal of Commerce in March 2015

Back in November in a column discussing the ever-increasing criminalization of civil violations, we mentioned the case of fisherman John Yates. Mr. Yates was the captain of a commercial fishing boat in the waters off Florida where he was catching red grouper. The state fishing authorities enforce this law. They stopped the boat, conducted an inspection, measured the catch and determined a few of the grouper he caught were too small as under 20” in size. The boat was ordered back to shore and, by the time it arrived there, somehow the total number of grouper were reduced from 72 to 69, plus some had gotten larger!

There was an argument about how the measurements were taken which ended with the fishery official admitting he did not follow the federal requirement which is to find a measurement which results in the greatest overall length. As one might guessed, three (3) fish were ordered thrown overboard and other catch was substitute for some of the fish. The government took great exception and decided to prosecute. Mr. Yates was convicted under the anti-shredding provision of Sarbanes-Oxley (SOX). He was also convicted of destroying evidence to impede a federal investigation, but acquitted of making false statements. In the end, it was the Section 1519 SOX violation which attracted significant attention. 18 U.S.C. § 1519 bars anyone who “knowingly alters, destroys, mutilates, conceals, covers-up, falsifies, or makes a false entry in any record, document or tangible object…” The question presented by this case as it was argued before the U.S. Supreme Court is whether a fish is a tangible object as envisioned by SOX.

The trial court said yes, the appellate court said yes, but on February 25, 2015, the U.S. Supreme Court said no! And thank goodness it did. If one is going to violate the law, a person should at least have knowledge of that law. While much fun was made in headlines along the lines of a fisherman getting through the nets of justice, the seriousness of the outcome should not be lost.

One factor which has become common place in the current enforcement environment is for prosecutors and their enforcement agency counterparts to seek ever more serious consequences for what appear to be even the simplest of violations. Admittedly, this phenomenon generally is tied to those situations where someone seemingly flunks the “attitude” test, but when this might happen to any company or individual remains something of a crap shoot! While this phenomenon is not new, it is getting more serious as prosecutors get creative in the laws they seek to apply.

As noted, the crux of the Yates case was whether fish should be considered tangible objects as defined in SOX. To any reasonable person, the obvious answer might be no, but even four (4) Supreme Court justices (in the dissent) said yes! The majority opinion looked at the context of SOX and the language in which 1519 is framed, all of which are targeted to corporate fraud, and came to the conclusion “a “tangible object” within §1519’s compass is one used to record or preserve information.” The government sought to argue the goal of SOX’s anti-shredding provision was to bar every form of spoliation of evidence, i.e., any change to any bit of evidence which might be used in a case. However, to the Supreme Court majority, general principles of statutory construction dictated a different outcome, even though the dissent looked at the use of the phrase “tangible objects” in many different contexts, applied the term literally, and voted to uphold the conviction.

As we watch the brain drain and ever less stable budgets at the agencies which enforce the import and export laws, the lesson of the ChemNutra case should not be lost. Back in 2009, ChemNutra and its owners Sally and Stephen Miller were indicted in Kansas City for 13 misdemeanor counts of distributing misbranded foods and another 13 misdemeanor counts of distributing adulterated foods. The imported wheat gluton in their pet food contained melamine which was put in by the supplier to artificially enhance its protein levels. None of these misdemeanor counts was surprising since violations of FDA laws and regulations are strict liability situations. However, the prosecutor was not happy getting only misdemeanor convictions, so he also charged a felony count asserting wire fraud which argued that Sally Miller, because of her background and training in China, knew or should have known the misclassification of the wheat gluton by the exporter would have caused the shipment to evade Chinese inspection requirements prior to exportation. The prosecutor also sought to criminalize the communications between seller and buyer discussing the correct classification of the product (which in other contexts is known as exercising reasonable care). The case ended as expected with the company and individuals (Sally and Stephen Miller) pleading guilty to one count related to the misbranding and another count related to the adulterated nature of the wheat gluton. However, in the process they lost their company, their fortune, and almost lost their freedom!

President Obama Issues Executive Order Promoting

Posted in Aerospace & Defence, Border Security, Corporate Counsel, Government Procurement

On Friday, February 13, 2015, President Obama signed an executive order, Promoting Private Sector Cybersecurity Information Sharing (the “EO”), designed to encourage private companies to share information regarding threats to cybersecurity across private sector industries and with the federal government. The EO was signed almost exactly two years after Executive Order 13636, Improving Critical Infrastructure Cybersecurity, and one year after publication of the National Institute of Standards and Technology’s Framework for Improving Critical Infrastructure Cybersecurity (“NIST Framework”). Similar to the NIST Framework, the EO does not impose mandatory requirements on the private sector, but rather is designed to encourage information sharing through providing a set of robust protections from public disclosure. Also similar to the NIST Framework, it is expected the best practices this new EO is intended to create will become the norm and so standards that all companies regardless of size or industry will need to implement.

Enacted as part of the Homeland Security Act of 2002, the Critical Infrastructure Information Act of 2002 created a framework that enables the private sector to voluntarily submit “critical infrastructure information” to the Department of Homeland Security (DHS) with the assurance such information, among other protections, cannot be used by agencies for regulatory enforcement purposes, will be subject to a special exemption from disclosure under the Freedom of Information Act (FOIA), and cannot be used by any federal or state agency in civil court proceedings. The term “critical infrastructure information” is broadly defined as information not customarily in the public domain and related to the security of critical infrastructure or protected systems, and is expected to include general technical data, such as information regarding zero day vulnerabilities, malware, harmful IP addresses, domains, or filenames. Much of the critical infrastructure in the U.S. (cargo terminals, banking systems, bridges, railroads, etc.) is owned by the private sector. Congress is yet to pass a comprehensive federal law on point, so it was not unexpected the President would call for yet another set of voluntary standards as an inducement to improve the cybersecurity safeguard mechanisms currently in place, fostering cooperation across various private sector industries. The fact that almost every week another successful intrusion is widely reported in the general press only added pressure to seek solutions which shore up the current protections to business operators and their customers.

Although the EO does not define particular cybersecurity threat information as “critical infrastructure information”, it directs the Department of Homeland Security’s National Cybersecurity and Communications Integration Center (NCCIC) to enter into “voluntary agreements” with Information Sharing and Analysis Organizations (ISAOs) “in order to promote critical infrastructure security with respect to cybersecurity.” ISAOs include nonprofit and for-profit entities organized for purposes of gathering, analyzing, communicating, disclosing and voluntarily disseminating to their members, whether private sector or government entities, in order to better understand security problems and interdependencies related to critical infrastructure and protected systems. The EO further directs the DHS Secretary to enter, through an open and competitive process, into an agreement with a nongovernmental organization to serve as the ISAO Standards Organization, which is tasked to identify a common set of voluntary standards or guidelines for the creation and functioning of ISAOs under the EO.

Notably, the framework and the purpose of the EO track a bill introduced two days earlier by U.S. Sen. Tom Carper, D-Del., the Cyber Threat Sharing Act of 2015. See Cyber Threat Sharing Act of 2015. As with the EO, this bill seeks to improve cybersecurity for private businesses and the federal government by authorizing the sharing of threat data between the NCCIC and certified analysis and information sharing organizations.

Again, the key word of the EO remains “voluntarily,” and — at least for now — the government continues to use a carrot, rather than a stick, to gain private companies’ cooperation. That said, the EO’s framework is likely to represent yet another new “best practices” standard that will cause companies a dilemma – will companies have any choice but to incorporate these new “voluntary standards” as standard operating procedures? Given frequent headlines about the massive theft of personally identifiable information and the publication of otherwise business proprietary and sensitive data, cybersecurity policies will no doubt remain at the forefront of compliance measures for all companies, regardless of size or industry.

The More Things Change – The More They Stay the Same

Posted in Immigration law, Legal Developments

Originally published by the California Fashion Association in January 2015

Authored by Howard D. Shapiro and David S. Rugendor, Edited by Susan Kohn Ross

On November 20-21, 2014 President Obama announced “executive action” on immigration policy. These proposals were instantaneously controversial; businesses are left to ask – what does all of this mean to our company and our employees? – what is an employer to do?

Our advice: take a deep breath, do what you have always been doing, and proceed slowly and carefully.  The Executive branch of government may develop its own enforcement priorities, but it cannot write or fundamentally change existing laws.  That is the job of Congress, which is why, when all is said and done, true and meaningful immigration reform will only take place when Congress and the President reach a legislative consensus.

So first, businesses should do what they have always been doing. Nothing in any form of so-called “amnesty” relieves employers from the responsibility to properly maintain I-9s or comply with other types of immigration-related employment laws.  In fact, the current administration has made it a priority to investigate immigration compliance in the workplace. Therefore, the most important steps any employer can take are to identify and implement “best practices”, and continue to maintain your compliance activities as you always have.

What about the plethora of news article from seemingly credible sources, which discuss a new policy or procedure?  What about the employee who tells you about the “new law”, which changes everything and gives work authorization to entirely new classes of people?  Not so fast!

Immigration law is exceedingly complex.  We all know the phrase “the devil is in the details” and that is particularly true in this case. Details matter a lot and right now, there are very few concrete details, just a lot of policy statements.  Moreover, the change of one small fact – e.g., date of birth, date of entry to the United States, date of filing this paper or that, country of origin, etc. – can change everything.  The presence or absence of what otherwise seems to be just one trivial factor can make a world of difference.

As is often the case, those who need the laws’ help the most are those who do not have effective access to resources, finance-wise and legal assistance-wise.  It is because of this sector of the population that a new cottage industry of those who exploit the desperate situations of others was spawned.

So, as an employer, you may likely confront a situation wherein one of your employees shows up with a piece of paper, or set of papers, from a “notario” or “legal assistant” and simply asks for your signature.  Proceed with great caution, particularly when it is a loyal, valued and hard-working employee who seeks that help.  Even if you are not asked to pay for any services, if given a stack of papers to sign, take some time to check to see who drafted the paperwork.

  • Are the drafters reputable immigration lawyers or accredited individuals from a social services agency or charity?
  • What does the paperwork obligate you to do?  Realize that if you sign anything, you should expect your statements to be investigated and verified.  You may one day receive a phone call from an immigration officer, or even a personal visit.  When you sign under the penalty of perjury, there may be criminal sanctions if what you are saying is untrue, even if the untruth is inadvertent.  If the individual prepared the documents improperly, you might find yourself in a middle of a mess that could put the company at risk, as well as you personally.
  • So be very careful, and know that even if the person who is presenting you with the paperwork claims he or she is a lawyer, you are wise to not be rushed to sign and, further, may and should consult your own attorney for advice if you have any doubts.

It is reasonable to expect there may be lawsuits challenging Mr. Obama’s actions, and this may delay, alter, or even scuttle some of the President’s proposals.  None of this is a done deal – so much has yet to be worked out – through the courts and through negotiations, and ultimately with new laws which have yet to be written, much less enacted.  For now, here is what we do know about provisions of the executive actions which specifically address employment based immigration:

  1. Employment Authorization for H-4 visa dependents – within the next few months.  U.S. Citizenship and Immigration Services will likely publish new regulations that will authorize employment for the spouses of H-1B visa holders that have approved immigrant visa petitions but cannot for now complete their applications for permanent resident status due to backlogs in the immigrant visa quota system;
  2. Extended Optional Practical Training (OPT) for foreign students and graduates from U.S. universities will be expanded to cover additional degree programs and the duration of such OPT employment authorization for STEM students and graduates will be extended as well.  These changes will require new regulations, which will take at least a few months to be finalized;
  3. Modernizing the Employment Based Immigrant U.S. System:  The President has directed U.S. Citizenship and Immigration Services and the U.S. Department of State to make changes to the employment based immigrant visa system.  Few details are yet available regarding the specific changes to be made or the timing of those changes.  It is believed that those individuals with approved immigrant visa petitions who cannot now file applications for adjustment of status due to backlogs in the employment based immigrant visa quota system will be granted the employment and travel related benefits of a pending application for adjustment of status;
  4. Promoting Research and Development in the United States – Changes have been proposed to benefit investors, researchers and founders of start-up companies who have been awarded substantial “U.S. investor financing” or who “otherwise hold the promise of innovation and job creation through the development of new technologies or the pursuit of cutting edge technologies.”  There are no details yet regarding these changes or the relevant timing;
  5. Modernizing the PERM program for labor certification – no specific changes have yet been identified, nor are there any time frames yet for such changes.

In conclusion, employers should not assume any of the executive actions announced to date dramatically change their situation or that of the vast majority of their employees.

It is true that Mr. Obama may direct how immigration enforcement is prioritized, but otherwise, not much has changed – yet! Employers should continue their existing hiring and termination best practices, continue to rely on the advice of their legal counsel, their trade associations and human resources best practices, and otherwise generally proceed cautiously.  While it is important to keep abreast of current news reports,  employers would be wise to exercise the utmost in caution because bad information is sprouting up everywhere and will continue to do so.

Proper Internal Controls: A Must

Posted in Aerospace & Defence, Agriculture, Constitutional Law, Corporate Counsel, Criminal Law, Cross-border trade, Export Controls & Economic Sanctions, FCPA/Anti-Corruption, Government Procurement, Legal Developments, NAFTA Chapter 11, Trade Agreeements, Trade Remedies, Transportation

Originally published in the October 2014 Journal of Commerce on-line

When have you done enough? Based on a recent exchange in a LinkedIn discussion group, there is real disagreement. Despite that lack of concurrence, two court cases decided in the last few months again drive home the point that proper internal controls are a must. The first is United States v. Trek Leather,  2011-1527, Court of Appeals for the Federal Circuit, 2014 U.S. App. LEXIS 17746, September 16, 2014 Decided. The second is the United States v. C.H. Robinson Co., 2013-1168, Court of Appeals for the Federal Circuit, 760 F.3d 137, 2014 U.S. App. LEXIS 14260, 36 Int’l Trade Rep. (BNA) 469, July 27, 2014 Decided.

In Trek Leather, the appellate court found the President of the company liable for gross negligence in circumstances where he knew the value being declared at time of entry was too low, submitted the documents himself or through third parties to the customs broker, and never corrected the entries.  There doesn’t seem much in doubt about the intentions of the individual involved.  The same cannot be said in the second case. In that case, Robinson was acting as a common carrier to move goods in-bond from Los Angeles to Laredo for export to Mexico. Ultimately, on appeal. Robinson was found liable for the duties and taxes ($106,.407.86) on the goods when it could not establish where they had been delivered. According to the court, the only evidence Robinson could produce as to disposition of the shipments was pedimentos which turned out to be phony. In short, Robinson does not appear to have implemented any internal controls to make sure the shipment was adequately documented as having been delivered as directed.

In the LinkedIn discussion about Trek, one compliance officer made the point of saying, he thought he had done enough to protect himself because he made sure to put in writing whatever he thought needed improvement. Is that really enough? The conundrum every compliance person faces, and, in fact, every employee is when you think something is not being properly done, just what do you do?

Some hold to the proposing never put it in writing! Others think only major points of disagreement should be in writing. Frankly, this is a no win situation. If you put nothing in writing and the inevitable goes wrong, senior management will undoubtedly look at the compliance person as the one responsible and he or she loses his job, and possibly his/her reputation. However, if you put everything in writing, it perhaps protects you from being fired, but that is not assured. At the same time, putting it in writing presents a big hurdle, too. What do you put in writing? To whom do you send it? If the issue is material to the compliance of the company, is there a point at which having put it in writing and not had the material issue you are raising dealt with, should you leave? If so, when?

When Sarbanes-Oxley was first enacted, the Securities and Exchange Commission (SEC) implemented rules that basically required lawyers to make a what was euphemistically referred to as a noisy withdrawal where the lawyer fired the client. In other words, the lawyer was to signal to the SEC the reason for the lawyer withdrawing was related to the misdeeds of the client, the SEC filer.  Do you want to implement something similar if you think the company is going down the wrong path?

Let’s take a couple of examples and see how they play out. Let’s assume the product is being exported and, depending on its configuration or level of sophistication, in some cases it is subject to an export license and in others it is not. You are the Compliance Officer (import and export) for the company and report to the Controller. You find out all the shipments are being exported without benefit of an export license, regardless of their configuration. You take this finding (and you have the documentation to back it up) to the Controller who tells you she will handle it. You check the next few shipments and find the practice continues. What do you do? Do you sit tight, monitor a few more shipments, and when nothing changes, you send the Controller a strongly worded email reminder, and then what? You are the Compliance Officer. The company is publicly traded. You are also the person with ultimate responsibility for export licensing.  What is your next move?

You can go back to the Controller, but suppose the Controller has instructed the export staff to engage in this practice (but won’t discuss it with you)? Do you now go over the Controller’s head? If you do, you are either out of a job or working for someone who will undermine you at every turn.  If the company is large enough, there are other avenues to pursue, including Legal and Human Resources. Eventually, you have to hope you can find the right person to carry forward your concerns to the CEO, unless you are daring enough to do it yourself and have the needed access! What if the CEO does nothing? Does your view of options change if the Controller is the daughter-in-law of the CEO?

On the other hand, if the company is smaller and you are faced with the same dilemma, you may have no place to go. Do you stay? Go? You can bet when the Bureau of Industry and Security comes knocking, the first place the agents visit is your office. Do you turn over your emails and point a finger at someone else? If you do, you just hung a lasso around the company’s neck. It will surely appear to the enforcement folks the company was doing this on purpose. Your own actions will be questioned. Did you do enough? Were you complicit?  Where do you suppose events go from here? Who do you think ends up on the short end of the stick?

While these scenarios sound familiar, what they and the Robinson and Trek cases do is remind everyone yet again, the best defense in any enforcement action is having proper internal controls, which are correctly documents and truly followed. Good internal controls are generally defined as those which the company established based on actual, not wishful, procedures. They are properly documented, there is buy-in by management and staff, and those internal controls are regularly reviewed and updated as warranted. Can you still have rogue employees with their own agendas? Of course, but companies that invest in serious internal controls implement them because they see the value of being compliant. Isn’t that where you would prefer to work? If you don’t work in such a place, what is your exit strategy?

Say What?

Posted in Corporate Counsel, Criminal Law, Cross-border trade, FCPA/Anti-Corruption, Legal Developments, Trade Agreeements, Transportation

Originally published in the November 2015 Journal of Commerce on-line

Many trade associations are grappling with declining membership likely contributed to by the absence of pressing issues grabbing industry-wide attention, despite export reform and the ACE roll-out. A quite different phenomenon continues to expand – the criminalization of civil violations. Two recent cases are reminders of this expanding effort by enforcement agencies and federal prosecutors.

In 2013, we had United States v. Yuri Izurieta and Anneri Izurieta. These individuals and their company were indicted and convicted in Florida. The allegations were conspiracy to unlawfully import goods in violation of 18 U.S.C § 545 and 18 U.S.C. § 371. The corporation did not appeal, only the individuals. The Eleventh Circuit Court of Appeals vacated the individual convictions on the grounds the statutes on which the government relied did not include criminal sanctions. It is worth keeping in mind that other statutes would have carrier such consequences, but they would have been misdemeanors only.

The Izureitas’ company imported cheese, butter and bread from Central America which were contaminated with E. coli, Staphylococcus aureus and Salmonella. FDA refused admission and Customs issued redelivery notices. When FDA wanted to inspect the goods, the Izureitas refused to provide locations, underdeclared goods which were imported, failed to be redeliver, export or destroy, and otherwise generally failed to cooperate with the FDA.

During oral argument, the appellate court raised the question of whether the statutes on which the case relied carried with them criminal penalties. As traders know, 21 U.S.C. § 381(a) and 19 C.F.R. § 141.113(c) are the basis for FDA and CBP’s redelivery activities. 19 C.F.R § 141.113(c) allows Customs to impose a fine of three times value for any goods which are not timely redelivered or exported. 21 U.S.C. § 381(a) provides that goods may be conditionally released to the importer pending FDA release and the procedures for recall, examination and so on. The cited law and regulation are framed as civil fines; nothing is said about criminal consequences. There is a similar civil framework to 19 U.S.C. § § 1499 and 1623. 21 U.S.C. § 381(q)(6) does address certain criminal activities, but none of them relate to the allegations in this case – the failure to hold, redeliver, export and/or destroy the imported goods. Put another way, the court held the law and regulations cited warn of civil consequences only.

To reach its decision, the appellate court looked at the situation from the perspective of whether the plain language of the law or regulation violated fully informed a possible violator that a criminal sanction could result from the specific behavior. Due process requires fair warning of the consequences of one’s behavior. In the end, the court vacated the convictions on the grounds the statutes relied upon by the government did not provide that fair warning.

In a similar vein, we have United States v. John L. Yates, which was heard November 5 at the U.S. Supreme Court. Mr. Yates was the captain of a commercial fishing boat in the waters off Florida. He was catching red grouper. Under federal law, the fish must be at least 20” in size, anything smaller must be thrown back. A state fishing official was empowered to enforce federal laws, stopped the boat to inspect the catch, measured and found certain fish were undersized, ordered them held in a box and ordered the boat back to shore. By the time the boat got to shore, instead of 72 fish, only 69 could be found and the ones present were miraculously slightly larger. One issue of great debate between Mr. Yates and the fishery official was how the measurements were made. According to federal law, the process of measuring is to result in the greatest overall length. The fishery official admitted he did not follow that requirement.

The fact these three (3) fish were apparently thrown overboard led to a conviction under the anti-shredding provisions of Sarbanes-Oxley (SOX). Mr. Yates was also convicted of destroying evidence to impede a federal investigation, but it is the Section 1519 SOX violation which has attracted significant attention. 18 U.S.C. § 1519 bars anyone who “knowingly alters, destroys, mutilates, conceals, covers-up, falsifies, or makes a false entry in any record, document or tangible object…” The question presented by this case is whether a fish is a tangible object as envisioned by SOX. The issue here strikes the same theme as in Izurieta – would a potential violator know from reading the statute that his behavior could trigger criminal consequences? The trial court convicted Yates. The appellate court concurred. How the Supreme Court ultimately decides is expected to go a long way to either upholding such creative actions by enforcers, or if you listen to many legal scholars, overzealous prosecutors will be reined in.

It is reasonable to conclude this criminalizing of civil activities phenomenon is the result of many factors, including being a consequence of the financial crisis with its criticism of Justice for failing to prosecute and convict any noteworthy individuals; this has led to federal prosecutors looking for individual liability with greater frequency, but also to seek laws which create the potential for longer prison sentences. Another noteworthy factor is with the retirement of many experienced CBP and HSI staff, both agencies are struggling to rebuild the expertise needed to bring successful and significant trade fraud cases; as a result, many importers and exporters are lax in their declarations and record keeping, leading to greater frequency of bad behavior where the government wants a stiffer consequences. Where does your company fall in that spectrum?

Compliance is the Key – No Surprise!

Posted in Corporate Counsel, Criminal Law, Export Controls & Economic Sanctions, FCPA/Anti-Corruption, Legal Developments, NAFTA, Trade Agreeements, Trade Remedies

Originally published  in the January 2015 Journal of Commerce on-line

Last week, Women in International Trade in Orange County presented a half  day program that featured speakers from Customs and Border Protection, the Food & Drug Administration, Consumer Products Safety Commission and U.S. Dept. of Agriculture.  The luncheon speakers were two Assistant United States Attorneys. To anyone who has been paying attention to the actions of various government agencies, the message each speaker gave was not surprising.  The two prongs of that message were know the rules and play by them.  In other words, being compliant gets you a large measure of where you need to end up in order for your costs to be consistent and predictable.

Perhaps this point was driven home most of all by the two Justice attorneys. Both spoke about evaluating a potential target in part by the sense of whether or not that party is cooperating. Now, any lawyer worth his or her salt will tell you there are many shades of cooperation. The key is when and how you go about doing so.

Many times over the years, I have provided tips about how to deal with government agents when they visit your premises. The typical response is to ask for a written request and make sure you are only providing exactly what is requested – unless it is to your benefit to provide limited clarifying information. The two Justice attorneys were from the environmental crimes and national security sections. They were quite forthright in explaining they typically are only interested in going after bad guys. As such, many of the requests they make are designed to provide them with information to go after others than the party to whom the request is made. While that sounds somewhat comforting, it remains a fact, that companies are wise to be careful and precise about what they say and what they provide.

If you sell sensitive, military or dual use items, and your equipment ends up in the hands of terrorists, you can bet the company wants to figure out to whom it sold which items and would prefer to do so before rather than after information is given to Justice. At the same time, Justice needs that information quickly in order to stop the bad guys. How best to balance such strong and competing interests?

Admittedly protecting endangered species is typically not as time-sensitive for purposes of deciding about a prosecution, companies are faced with the same dilemma. What do share with Justice and when?  As an illustration of how not to handle the situation, take a look at what Gibson Guitar did when confronted by claims the wood it was using on some of its guitars was endangered.  There is an old adage about don’t flunk the attitude test. Gibson’s CEO got on talk radio and other media and complained his company was being singled out. It must have been more than embarrassing when internal emails were disclosed making clear there were red flags present which appear to have been ignored. If you have any doubt, take a look at the settlement to which Gibson agreed and the extensive/intrusive nature of the mandated compliance program.

Given Gibson’s experience with endangered wood, it does not take a genius to figure out the pressures on a company will be exponentially greater if the issue is national security.  This is especially true in the context where the question facing Justice is whether to charge a party, and if the answer is yes, should it be “just” the company or individuals as well?  Over the years,  many cases for a variety of crimes have been brought against only companies, a number of others against individuals, too, and some only against individuals. While each decision to prosecute turns on the facts and circumstances the case presents, the more knowing the conduct, the more likely an individual will be charged.  At the same time, Justice attorneys have acknowledged hearing the complaints of the American public that no individuals were charged as a result of the financial meltdown of 2007/2008/2009.  That having been said, a prosecutor often has the option of deciding whether the charge will be a misdemeanor or a felony and perhaps, in the end, that is the most critical for a person.

If a company has cooperated in a manner that does not compromise its rights, and has done so through professional and competent counsel, Justice will typically be far more reasonable to deal with than in circumstances where the company and its attorneys have thwarted Justice’s efforts at every turn. Now, let’s be honest and acknowledge that sometimes vigorous antagonism is the best option, especially in situations where Justice and/or the investigating agents are being too aggressive  (and we should all remain mindful there are cases of prosecutorial overreaching),  and, in the end, the level of cooperation a company gives is tied, at least in part, to how much Justice and the investigators explain about the nature of their inquiry.  Companies also should keep in mind Chapter 8 of the U.S. Sentencing Guidelines which addresses the sentencing of organizations.  It states, among other points, “the fine range for any [  ] organization should be based on the seriousness of the offense and the culpability of the organization”.   The Introductory Comments go on to say: “[t]he two factors that mitigate the ultimate punishment of an organization are:  (i) the existence of an effective compliance and ethics program; and (ii) self-reporting, cooperation, or acceptance of responsibility”. Note, there is no distinction drawn here between publicly traded and privately held companies.

In short, the more knowing the conduct, the more likely individual liability will result.  The comments from all the speakers boiled down to know the rules and abide by them, and if you make a mistake, voluntarily disclose it.  This is sound advice for all companies, but now is the time to also get real – financial pressures make people do dumb things! So, while cooperation with a government investigation may, in fact, be the best route to follow, management at any company, regardless of its size, cannot simply ignore red flags.  Monday morning quarterbacking is simply too easy these days what with all the emails everyone writes!

Cuba Regulations Change – Round 1

Posted in Cross-border trade, Customs Law, Export Controls & Economic Sanctions, Trade Agreeements

In the January 16, 2015 Federal Register, both the Office of Foreign Assets Control (OFAC) and the Bureau of Industry and Security (BIS) published the first revisions to the U.S.’ Cuba economic sanctions. As expected, those changes consisted mostly of expanding existing exceptions or granting general licenses in already well-defined areas. With this round of changes, the beneficiaries are primarily financial institutions and the telecommunications and computer industries.

OFAC described the aim of its amendments to be to: “facilitate travel to Cuba for authorized purposes, facilitate the provision by travel agents and airlines of authorized travel services and the forwarding by certain entities of authorized remittances, raise the limit on certain categories of remittances to Cuba, allow U.S. financial institutions to open correspondent accounts at Cuban financial institutions to facilitate the processing of authorized transactions, authorize certain transactions with Cuban nationals located outside of Cuba, and allow a number of other activities related to, among other areas, telecommunications, financial services, trade and shipping.”

BIS stated the aim of its amendments was to “authorize the export and reexport of certain items to Cuba that are intended to improve the living conditions of the Cuban people; support independent economic activity and strengthen civil society in Cuba; and improve the free flow of information to, from, and among the Cuban people.”

The existing travel categories in the OFAC regulations deal with educational, journalistic and religious activities, professional meetings, and humanitarian projects.  In expanding those recognized activities, the new amendments allow travel agents and airlines to provide  authorized travel and carrier services. Equally important, they also authorize remittances through the U.S. banking system, and do so without the need for a special license.  Of course, anyone claiming to provide services under these amendments would be wise to retain all supporting documents as limitations remain on what is permitted.  For example, U.S. credit and debit cards may now be used for travel-related and authorized transactions. This means U.S. financial institutions may enroll merchants and process their transactions.  Financial institutions may also authorize depository institutions to open correspondent accounts at Cuban financial institutions.  Also authorized are stored value cards, checks, drafts, travelers’ checks and similar monetary instruments. Equally appealing for American travelers is these new regulations authorize the provision of health, life and travel insurance related services, all of which were previously barred.

For those permitted to commercially deal with Cuban entities under one of the existing exceptions or pursuant to a license, a significant challenge has been getting paid. The current regulations call for “cash in advance.” That requirement is now being changed to “cash before shipment” or “cash before transfer of title and control” with the expectation of easing payment for authorized transactions.

The other big winners are in telecommunications and the computer industry. When it comes to telecommunications, those entities are now permitted to provide services which link Cuba and third countries, including services incident to internet-based communications and the export and reexport of related communications items.  Also permitted are payment activation, installation and usage, roaming, maintenance and termination fees. Further, telecommunications companies are able now to provide fiber-optic cable and satellite facilities to allow linkage for Cuba to the U.S. or third countries.  Naturally, the efforts needed to first negotiate these deals is also authorized and would include market research, commercial marketing, sales negotiations, accompanied delivery, and servicing in Cuba.  Most helpful is the fact that expenses in Cuba are now permitted also for the staff which visits and returns, but the amount of time spent by that person in non-work activities is limited and cannot impinge on each person’s fulltime work.

In the computer arena,  the focus is internet-based services, including instant messaging, chat and email, social networking, photo and file sharing, web browsing, blogging and web hosting provided none of these efforts are related to promotion of tourism or domain name registration.  These services also include software design, business consulting, information technology management services (including cloud storage), and to install, repair or replace items that are specifically listed; all fall under the Consumer Communication Devices License Exception, see 15 C.F.R. § 740.19.

Any company planning to invoke these new general license opportunities should keep in mind it is required to notify OFAC within 30 days of commencing or ceasing to offer its services. Further, while the services are being offered, each January 15 and July 15 a report must be filed detailing the total amount of all payments made to Cuba or a third country related to services authorized under these new regulations and will cover the previous six months.

There are a number of changes which related to individuals, but we are here focused on benefits for American companies. Nothing in these revisions has anything to do with immigration issues, but travelers are now permitted to carry up to $10,000.  Further, the newly revised regulations incorporate the President’s position of now allowing travelers to purchase up to $400 worth of goods, with the value of the tobacco and liquor purchased limited to $100.

While certain agriculture, information and informational materials, donations of food and humanitarian efforts are authorized, there is nothing in the new regulations which permits the free flow of goods and services. There are, however, revised rules for professional meetings,  research, educational activities, and public performances, religious activities, clinics, workshops, athletic and other competitions and exhibitions.

BIS’ amendments explain the expansion of License Exception Consumer  Communications Devices, the creation of a new License Exception Support for the Cuban People (SCP) (see 15 C.F.R. § 740.21) , but also put an interesting twist on permitted exports by specifically authorizing exports and reexports to Cuba of items for the environmental protection of the U.S. and international air quality, and waters and coastlines.

SCP includes building materials, equipment and tools to construct or renovate privately-owned buildings, including residences, businesses, places of worship and those for private sector social or recreational use; tools and equipment for private sector agricultural activity; and tools, equipment, supplies, and instruments for use by private sector entrepreneurs, including equipment for auto mechanics, barbers, hairstylists and restaurants.  SCP also allows the temporary export for use in professional research for scientific, archeological, cultural, ecological, educational, historic preservation, or sporting activities.  The very same telecommunications and computer related  equipment which OFAC authorizes, BIS also authorizes under this license exception, along with the equipment needed for environmental protection.

When it comes to the CCD license exception, 15 C.F.R. § 740.19 contains a list of the types of computer hardware and software (including mobile phones) which are authorized for export or re-export.

BIS, too, deals with individuals by changing its regulations relative to multiple gift parcels in a single shipment, but the bulk of these new regulations is focused on changes to the export control list and so deals with goods.

As stated at the outset, the amendments published are in areas where there exists relatively clear understandings about what is and is not permitted. The more difficult issues having to do with expanding trade and eliminating any license or other trading restrictions remain. Given the current climate in Washington, D.C., the likelihood of those fundamental changes happening before Obama leaves office seem highly unlikely, but stay tuned!

Customs Is Again Getting Overly Creative

Posted in Cross-border trade, Customs Law, Legal Developments, NAFTA, Trade Agreeements

In late October 2014, Customs and Border Protection (CBP) issued a guidance message in which it laid down new rules regarding post-importation/post-entry claims for duty preference  and duty reduction programs – see for the exact text. Specifically, CBP decided unless the program under which the duty free claim is being made specifically contains a post-entry claim process, the importer is barred from raising his claim for the first time by way of a protest. This positon may well get overturned by the courts, but in the meantime, importers need to be careful how they proceed. On the one hand, reasonable care mandates an importer not make claims he cannot support. At the same time, not all the duty deferral programs contain provisions for post-entry claims.

In its message, CBP stated the free trade agreements with the Caribbean countries (CAFTA-DR), Chile, Colombia, Korea, Mexico/Canada (NAFTA), Oman, Panama and Peru contain provisions allowing for post-entry claims. Therefore, those duty free claims must be raised by way of a 1520(d) claim, and not for the first time when filing a protest. For all the others, you must make the claim before the entry is liquidated by way of a Post-Entry Amendment (PEA) or Post-Summary Correction (PSC), or you are out of luck. Those stated by CBP to require the PEA/PSC process are AGOA, CBERA, CBTPA, Civil Aircraft Agreements, GSP, Insular Possessions, Intermediate Chemicals for Dyes and the Uruguay Round of Concession, the Pharmaceutical Products Agreement, and the free trade agreements with Australia, Bahrain, Israel, Jordan, Morocco and Singapore.

To justify its decision, CBP reached back to a case decided in 2005, Xerox Corp. v. U.S., 423 F.3d 1356 (Fed. Cir. 2005).  There, Xerox filed protests seeking reliquidation of its goods as NAFTA eligible, in circumstances where the original entries contained no such claims. The trial court found  Xerox’s protests were timely filed, but their claims were raised too late. NAFTA requires duty refund claims to be made within a year of entry, and Xerox’s claims were raised much later.  There is admittedly language stating CBP’s decision to liquidate as entered is not a protestable decision, but the context of that discussion was on the fact the NAFTA claims were not raised in the original entry or timely thereafter.  As a result, CBP could not make a decision about NAFTA when it liquidated the entries, and so no protestable decision occurred to resurrect those claims when filed after the one year deadline.

Interestingly, CBP listed Civil Aircraft Agreement claims in its CSMS memo. When those may be filed has already been addressed by the courts. In Aviall of Texas, Inc. v. U.S., 70 F.3d 1248 (1995),  Aviall filed its post-entry claims in accord with 19 U.S.C. 1520(c) (the clerical error provision then in effect, since superseded by the current protest framework, and effective for an amount of time beyond the then permitted protest period). Both the Court of International Trade and the Court of Appeals for the Federal Circuit held Availl’s claims valid, despite CBP’s attempt to enforce a regulation which mandated the required certification be filed only at time of entry, and the regulation which CBP enacted was invalidated as a result. Also in accord is Gulfstream Aerospace Corp. v U.S., 981 F.Supp. 654 (1997). Having lost the argument once, CBP stuck to its guns, invoked the discredited regulation and again tried to assert Gulfstream could not file the needed certifications at time of protest – CBP lost again!

The judgment in Gulfstream, supra at 668, well makes the point about why CBP is dead wrong with the position it has taken in its recent message:

Customs has explicitly held that § 10.112 allows duty-free documentation to be submitted with a protest, even where the documentation was required at time of entry:

[A]lthough the proper documentation … establishing protestant’s GSP claim, was not filed at the time of entry, as long as failure to file it was not due to willful negligence or fraudulent intent, the documentation may be filed at any time before liquidation or … before liquidation became final…. [I]f liquidation was timely protested, the protestant should be afforded an opportunity to submit documentation establishing free or reduced duty entry.

HQ 544455 (Mar. 14, 1995) (citing HQ 555269 (Dec. 20, 1990)) (emphasis added).

The protestant was required to file, in connection with its entries, documents that would have established the eligibility of its merchandise for a duty reduction…. [T]he protestant did not file the necessary documents at time of entry, but submitted them [five months after liquidation]…. 19 CFR 10.112[sic][] provides that if the importer fails to file the documents [] at the time of entry … but failure to file was not due to willful negligence or fraudulent intent, then they may be filed at any time prior to [final] liquidation….

HQ 221603 (April 30, 1991) (emphasis added).

19 CFR 10.112 [sic] provides … that a free entry document required in connection with entry … may be filed before liquidation becomes final, if lack of presentation at time of entry was not willful or negligent. This section is applicable because [the regulation requiring reduced duty documentation] requires [the documentation] at the time of entry.

The relevant portions of current 19 C.F.R. 10.112 read: “Whenever a free entry or a reduced duty document, form, or statement required to be filed in connection with the entry is not filed at the time of the entry or within the period for which a bond was filed for its production, but failure to file it was not due to willful negligence or fraudulent intent, such document, form, or statement may be filed at any time prior to liquidation of the entry or, if the entry was liquidated, before the liquidation becomes final…” In other words, the importer may file the document(s) with the post-entry claim or protest before the liquidation becomes final! Either method is permitted.

Similarly, 19 C.F.R. 10.172 authorizes a GSP claim to be made post-entry: “A claim for an exemption from duty on the ground that the Generalized System of Preferences applies shall be allowed by the port director … If duty free treatment is claimed at the time of entry, a written claim shall be filed on the entry document by placing the symbol ‘‘A’’ as a prefix to the subheading of the Harmonized Tariff Schedule of the United States for each article for which such treatment is claimed [emphasis added].” Here again, if the importer does not make the claim at time of entry, he is permitted to make it as either a post-entry claim or a protest.

In its October CSMS message, CBP cites H193959, a ruling dealing with a Singapore-US free trade agreement claim. In this case, the goods were imported without benefit of the claim. The entry was liquidated and a timely protest filed. CBP simply said no to the claim being made for the first time by way of a protest. While citing the Xerox case mentioned above, CBP also relied on Corrpro Companies, Inc. v U.S.,  433 F.3d 1360 (2006).  In that decision, the court found at Point 16: “… We observed, “[i]n the absence of a proper claim for NAFTA treatment, either at entry or within a year of entry … Customs cannot make a protestable decision to deny an importer preferential NAFTA treatment. Id. at 1365…” The court’s decision is not surprising – if the law requires a claim to be made within a given time frame and the importer is too late, his request is denied. With its current position, CBP has turned that holding on its ear in order to bar duty free claims in as many ways as possible.

When it comes to duty reduction or preference claims, as illustrated above, CBP’s own regulations typically contain language making clear the claim may be made at time of entry, by a post-entry claim, but also later – before liquidation is final – by protesting. What CBP is doing with this October CSMS is forcing importer’s into an impossible situation – fail to exercise reasonable care and make the claim in the face of a lack of documentation, not make the claim and hope to get the needed documentation prior to liquidation, or waive the claim altogether if you are in doubt about your ability to get the needed documentation before liquidation. You have to wonder whether CBP considered the additional work this guidance might well create for its own staff. How many pre-liquidation claims will now be filed as close to the deadline as possible because the importer had doubt about obtaining the needed documentation earlier? Filed close to the liquidation date, CBP will not have time to consider the claim, but the letter of the October CSMS will have been met – the claim was filed prior to liquidation. Is CBP’s next step to challenge the importer for having filed his claim too close to the liquidation date and deny his protest on that ground alone?

One also has to wonder how the courts will view CBP’s position, in the face of the very clear language in so many regulations and court decisions authorizing the right to protest, especially in view of the fact of the October CSMS was issued as a guidance document and not the result of a proposed regulatory change which subjects CBP’s position to notice and comment?

Court of Appeals for Federal Circuit (CAFC) Issues Decision In U.S. v. Trek Leather – Corporate Officer Held Liable

Posted in Aerospace & Defence, Anti-Trust/Competition Law, Border Security, Constitutional Law, Corporate Counsel, Criminal Law, Cross-border deals, Cross-border trade, Customs Law, Export Controls & Economic Sanctions, FCPA/Anti-Corruption, Government Procurement, Legal Developments, NAFTA, Trade Agreeements, Transportation

Yesterday, the CAFC issued its en banc decision in the U.S. v. Trek Leather case.  The Court held the President of the company liable for gross negligence due to his own actions, even if he is an agent of the company.

By way of background, the case originated as a penalty action by Customs and Border Protection (CBP) against Trek Leather and Harish Shadadpuri, its President.  When the full amount of the penalty was not paid, CBP initiated litigation. The Court of International Trade (CIT) found Shadadpuri liable for gross negligence. The CAFC overturned that decision. It held Shadadpuri could have been liable for fraud, or as an aider or abettor, or if the government had pierced the corporate veil, but since none of those theories were pursued, the government lost.  CBP then sought a hearing before the entire court (called an en banc hearing), and based on the decision issued yesterday, CBP won.

The Court reached back to a Supreme Court case decided in 1913 – United States v. 25 Packages of Panama Hats, 231 U.S. 358 (1913) – which dealt with the question of “introduce” in the context of 19 U.S.C. 1592.  In that case, the consignor shipped goods to the U.S. with invoices that “falsely and fraudulently” undervalued the merchandise.  When the goods arrived in New York, no entry was filed. However, the Supreme Court held the 1592 statute as then worded covered the acts of the consignors in providing the false invoices. The language of the statute at the time read: “…if any consignor, seller, owner, importer, consignee, agent or other person or persons, shall enter or introduce, or attempt to enter or introduce, … any imported merchandise by means of any fraudulent or false invoice… (emphasis added)”.

The current text of 19 U.S.C. 1592 reads: “… [No] person … may enter, introduce or attempt to enter or introduce any merchandise…. by means of (i) any document or electronically transmitted data or information, written or oral statement, or act which is material and false; or (ii) any omission which is material…(emphasis added)”

The CAFC began by saying it is quite obvious that Mr. Shadadpuri is a person and nothing in the way the law has changed over the years allows any other conclusion.  The court went on to frame the question to be decided as: “What is critical is the defendant’s conduct”.  It then examined that conduct. The facts cited by the court included:

1)         Trek Leather imported 72 entries of men’s suits;

2)         Shadadpuri had provided fabric to the manufacturer of those suits which qualifies as an assist [An assist is anything the importer provides to the manufacturer that is used in production that the manufacturer received at a reduced cost or at no cost.];

3)         The fabric assist was not added to the value of the suits at time of entry;

4)         As a result, the value of the suits was underdeclared at time of entry;

5)         The underdeclaration led to too little duty being paid;

6)         Shadadpuri directed the customs broker to cause sales in transit to be made, meaning the manufacturer issued the invoices to one company which Shadadpuri controlled. He figured out which of the other companies he controlled had the funds to pay for the shipments and directed the customs broker to make the appropriate notations on the invoices to direct the shipments to that other company  – Trek Leather – which acted as importer of record;

7)         The invoices given to the customs broker did not include the value of the assist, and, in fact, made no reference to it;

8)         Due to prior dealings with CBP, Shadadpuri knew the value of the fabric assist had to be declared at time of entry and be part of the dutiable value of the imported suits;

9)         Shadadpuri himself, or others working for him and at his direction, would fax the invoices to the customs broker; and

10)       After CBP began its investigation, Shadadpuri produced revised invoices which included the fabric assist and the broker submitted corrected entries accordingly.

During the CIT proceedings, Trek Leather admitted it was grossly negligent in the filing of its entries, so the only question left to decide was the liability, if any, of Mr. Shadadpuri. The CAFC looked at the broad meaning of the word “introduce” in light of the Panama Hats decision, and held, it did not need to deal with any of the other issues raised on appeal. “Under the rationale of Panama Hats, [introduce] covers actions that bring goods to the threshold of the process of entry by moving goods into CBP custody … and providing critical documents (such as invoices indicating value) for use in the filing of papers for a contemplated release into United States commerce even if no release ever occurs”.

The court then looked to the Restatement (Second) of Agency §343 (1958) to point out the longstanding principal of agency law which is “an agent who actually commits a tort is generally liable for the tort along with the principal, even though the agent was acting for the principal”. In short, whether or not Mr. Shadadpuri was the importer (and his lawyers had argued he could not be liable because he was not), the “introduce” language in 1592 certainly covered his misdeeds and so found him liable.

There is an old adage in the law about bad facts make bad law. It remains to be seen whether that is the case here and whether an appeal will follow. If not,  we are left to wonder how CBP applies this holding. Certainly, in the past, it has assessed 1592 penalties against those employed by companies as managers, officers and directors on a joint and several basis, never quite articulating the misdeeds of the individual(s) named as distinct from those of the company. We know on the export enforcement side of the equation, those agencies have no trouble finding ways to charge, fine and debar individuals due to the language of the statutes they enforce. We are seeing much greater imposition of individual liability when it comes to anti-corruption violations. Exactly how this holding will influence the enforcement agencies is not clear, nor is the question of its impact on the language in future laws and regulations.  Will this holding really turn things on their head? It is just too early to tell.