Originally published by the Journal of Commerce in July 2012.
One of the hallmarks of an importer’s relationship with Customs and Border Protection is reasonable care. In its simplest terms, this means the importer has taken all the reasonable steps necessary to make sure the classification and value of his goods are accurately stated at time of entry. Similarly, to the extent his goods are subject to any admissibility requirements, they are met. So, for example if you imported food, you would have met the Food and Drug Administration requirements, and if you imported toys for children, any Consumer Product Safety Commission requirements are satisfied prior to entry. Country of origin applies to all goods. The typical relationship between importer and customs broker consists of the importer relying on the broker to guide him or her through the process. It comes as quite a shock when importers find out unless they have a written agreement with their broker in which the broker agrees to shoulder the legal consequences for non-compliance, “my broker did it” is not a valid defense!
The corresponding requirement placed on customs brokers is responsible supervision and control. The legal definition can be found at 19 C.F.R. 111.1 and states:
“Responsible supervision and control” means that degree of supervision and control necessary to ensure the proper transaction of the customs business of a broker, including actions necessary to ensure that an employee of a broker provides substantially the same quality of service in handling customs transactions that the broker is required to provide. While the determination of what is necessary to perform and maintain responsible supervision and control will vary depending upon the circumstances in each instance, factors which CBP will consider include, but are not limited to: The training required of employees of the broker; the issuance of written instructions and guidelines to employees of the broker; the volume and type of business of the broker; the reject rate for the various customs transactions; the maintenance of current editions of CBP Regulations, the Harmonized Tariff Schedule of the United States, and CBP issuances; the availability of an individually licensed broker for necessary consultation with employees of the broker; the frequency of supervisory visits of an individually licensed broker to another office of the broker that does not have a resident individually licensed broker; the frequency of audits and reviews by an individually licensed broker of the customs transactions handled by employees of the broker; the extent to which the individually licensed broker who qualifies the district permit is involved in the operation of the brokerage; and any circumstance which indicates that an individually licensed broker has a real interest in the operations of a broker.”
While the legal obligation of the importer carries with it a short definition, the legal obligation of the broker is far less concise. What is clear is simply taking a classification from an importer and using it, without checking further, does not meet the standard. Similarly, allowing untrained clerks to guess at classification, not auditing files to insure compliance, failing to advise importers about shortcomings with their documents, and so on, all also fall below the expected standard of care.
Why raise this now? In the last two months, we have seen significant penalties issued to importers who naively relied on their customs brokers to correctly classify their goods, and found out how wrong they were. The corporate entities involved – and they were two quite different but prominent brokerage operations – had no controls in place to make sure their staff was making entry properly. In one case, during the course of the events about which CBP complained, the broker had three different license holders and not one of them picked up on how inept the clerk was, even after CBP Forms 28 and 29 were issued. The importers share some of the blame since they often do not do their homework and instead assume since the broker is licensed by CBP, the broker must know what it is doing. Nothing could be further from the truth.
Similarly, exporters, often small and medium sized companies, rely on their forwarders to be familiar with the rules and guide them through the process. BIS’ states: “Agents are responsible for the representations they make in filing export data. Moreover, no person, including an agent, may proceed with any transaction knowing that a violation of the EAR has, is about to, or is intended to occur. It is the agent’s responsibility to understand its obligations.” State pretty well ignores forwarders until something goes wrong, and then they are viewed suspiciously. The bottom line with the forwarders is if a license was required and you failed to get one, “my forwarder didn’t do his job” is not a valid excuse for the same reasons an importer cannot shield himself from liability if his broker messes up. Interestingly, from the forwarding side, other than with a routed transaction, the exporter remains liable in all circumstances.
Whether an exporter dealing with a forwarder or an importer dealing with a customs broker, it is important for international traders to keep in mind, you must do your homework. The view of the regulators is you are the principal and if your agent messes up, you are responsible. Now that you have that multi-million dollar penalty in your hands, and this is the point where you rail against your service provider for the lousy service provided and find out, you agreed to terms and conditions of service which severely limit what you can recover, and those terms and conditions of service are different in different circumstances. For example, if your service provider also acts as an air freight forwarder, for the most part, your recovery will be limited to $9.07 per kilo or $20 per lb. under the Warsaw Convention which governs the carriage of goods by air. In the ocean transportation environment, the operative agreement is the Carriage of Goods by the Sea Act. The current limit of liability is $500 per package, although if the Rotterdam Rules are ever adopted that could change.
Having read this column to this point, you say, but the forwarder also prepared the documents and that is where he messed up. Factually that may be true, but from a legal perspective, it could be argued he was preparing those documents as part of his transportation-related services. Even if that argument fails, be careful – most forwarders have separate terms and conditions of service which have limits of $50 or $100 per shipment. Customs brokers have similar terms and conditions and with them, the usual limit of liability is also $50 or $100 per shipment.
If you are a halfway experienced international trader, at this point you are saying but those terms and conditions are in fine print on the back of the document. Again, you would be correct, but because it is common practice for the backs of transportation related documents to be used to convey terms and conditions, and yes, the fine print is really small – have you read an ocean bill of lading lately – these limits of liability stand up in court.
The view of the export enforcement folks is you cannot self-blind, meaning if you are in a transaction that has red flags to it, you cannot ignore them. Frankly, in the context of the relationship with a service provider, that philosophy does not go far enough. Here is the real truth – you can no longer decide who your business partners are based strictly on cost. You have to look at the big picture and take the time to find out whether the service provider is blowing smoke or really knows what he or she is doing, and this applies to your suppliers and customers as well. Business has gotten much more complicated, whether viewed from the regulatory or commercial perspective, and so homework is a must and it has to be thorough as well – and keep records on what you did, it could save your company lots of money in the end.