On March 21, 2013, Canada introduced the 2013 Budget.  While the 2013 Budget was characterized as an austerity budget, it offered customs duty relief (hopefully translating into lower retail prices) on certain imported consumer goods.

The 2013 Budget permanently removed customs duties  on baby clothes and sports equipment (excluding bicycles, which I should note have been subject to anti-dumping duties for 20 years when originating in or exported from China or Taiwan).  Tariffs on these goods ranged from 2.5% to 20% and are being removed/reduced to “Free”effective April 1, 2013 (not an April Fool’s joke).  When a duty rate is “Free”, it does not mean the goods will be free in the stores (I have been asked this).

This is good news for importers of goods in respect of which the following H.S. Codes are applicable:

  • 4203.21.10 / 4203.21.90 – certain leather sports gloves (for cricket, golf, baseball and other)
  • 6111.20.00 / 6111.30.00 / 6111.90.00 – certain babies garments
  • 6209.20.00 / 6209.30.00 / 6209.90.90 – certain babies garments
  • 6401.92.92 – certain plastic sandals
  • 6402.12.20 / 6402.12.30 / 6403.12.20 / 6403.12.30 – cross country ski footwear and snowboard boots (downhill ski boots already duty free)
  • 9506.11.90 / 9506.12.00 / 9506.19.00 – skis, fastenings & bindings, ski poles, snow boards
  • 9506.21.00 / 9506.29.00 – water-skis, sailboards, surf boards, and other water sports equipment
  • 9506.31.00 / 9506.32.10 / 9506.32.90 / 9506.39.20 / 9506.39.30  / 9506.39.90 – golf clubs, golf balls and related golf equipment
  • 9506.40.00 – articles and equipment for table tennis / ping pong
  • 9506.62.90 – inflatable balls, like dodge balls
  • 9506.69.10 / 9506.69.90 – cricket balls, croquet balls, lawn bowling balls, squash balls, racket balls, etc.
  • 9506.70.11 / 9506.70.12 – ice skates and roller skates
  • 9506.91.90 – exercise / fitness equipment and gymnastics equipment, including trampolines and other
  • 9506.99.20 – hockey sticks and parts thereof and curling stones and clay pigeons
  •  9506.99.31 – automated batting cages, clay target throwing machines, soft ball / hard ball throwing machines
  • 9506.99.40 – cricket bats and leg pads
  •  9506.99.50 – protective pads and guards for ice hockey and fields hockey and other (except football)
  • 9506.99.90 – archery equipment, above ground swimming pools and wading pools, playground equipment, snowshoes, bobsleds, toboggans, etc.

This budget measure should make many Canadians happy.

We thought it would be helpful to provide our top fifteen questions to ask and answer prior to importing goods into Canada. We started with a top ten list and then decided to give a 50% bonus.

1. What is the tariff classification of the goods to be imported (the answer can be simple or difficult depending on the goods)?

2. Are the goods a prohibited importation and, therefore, are they inadmissible for entry into Canada?

3. What is the value for duty of the goods to be imported (the answer often is not straight-forward as a hierarchy of valuation methodologies may have to be applied)?

4. What is the country of origin of the goods to be imported (is there a certificate of origin)?

5. What is the applicable tariff rate and is there a preferential tariff rate due to the applicability of a free trade agreement?

6. Who is the importer of record and are they able to recover federal goods and services tax paid at the border?

7. Does the importer of record have an import (RM) number?

8. Is unrecoverable provincial sales tax and/or harmonized sales tax payable at the border?

9. Are the goods subject to an Order of the Canadian International Trade Tribunal and are anti-dumping and/or countervailing duties payable at the border?

10. Are the goods subject to excise tax or other charges payable at the border?

11. Are any permits, certificates or declarations required prior to the importation of the goods into Canada? Are any permits, certificates or declarations required with respect to use of the goods in Canada?

12. Are the goods subject to labeling and marking requirements?

13. Are the goods subject to product standards requirements?

14. Are the goods subject to restrictions under Canadian federal  (e.g., consumer protection laws) or provincial laws (environmental restrictions, transportation restrictions)?

15. Do you have documentation to support the answers to the above questions?

On March 1, 2013, the Government of Canada introduced Bill C-56 “Combating Counterfeit Products Act” in the House of Commons. Bill C-56 provides copyright and trademark owners with a Canadian legal process to stop the import and export of counterfeit goods and take those goods out of the commercial stream. This legal process is an important step forward.

Bill C-56 amends the Trade-marks Act and the Copyright Act to empower Canada Border Services Agency (“CBSA”) officials to proactively target, detain and examine counterfeit goods at the Canadian border (whether imported into Canada or exported from Canada).  Once Bill C-56 is passed into law, the trade-mark rights and/or copyright rights holders(s) may seek the assistance of the CBSA by filing a “request for assistance” in the form and manner to be specified by the Minister of Public Safety and Emergency Preparedness (the Minister to whom the CBSA reports). The substance of the “request for assistance” is a request to detain goods that are believed to be counterfeit. The request must include the trade-mark and/or copyright owner’s name and address in Canada and any other information required by the Minister, including information about the work or other subject-matter in question.  Undoubtedly, the owner will be required to provide information to demonstrate his/her owners and sufficient information to permit the CBSA officers to detain the alleged counterfeit goods.  For example, the trade-mark and/ or copyright owner would be required to provide samples of the goods they manufacture.

The CBSA will review the “request for assistance” and has the discretion whether or not to accept it.  The Minister Minister of Public Safety and Emergency Preparedness technically would be the person accepting the request for assistance under the proposed rules. the Minister may impose conditions of the acceptance of a request, such as the trade-mark and/ or copyright owner may be required to post security in an amount to be determined by the Minister.

A “request for assistance” would be valid for a period of two years beginning on the day it is accepted by the Minister (and may be extended every two years). If after the “request for assistance” is granted the ownership or substance of the trade-mark or copyright changes, trade-mark and/ or copyright owner must inform  the Minister in writing.

After the “request for assistance” is accepted, the CBSA may detain any goods that are the subject matter of the request.  The CBSA has the discretion to provide a sample of the detained goods to trade-mark and/ or copyright owner and any information about the copies that the CBSA officer reasonably believes does not directly or indirectly identify any person.  The CBSA may also permit the trade-mark and/or copyright owner to inspect the detained goods.  The trade-marks and/ or copyright owner will be given up to 10 days (5 days for perishable goods) to commence court proceedings to obtain a remedy under the Act.  If trade-mark and/ or copyright owner does not commence proceedings, the detained goods will be released.

Bill C-56 also creates a new civil remedy for trade-mark and/ or copyright owner(s) to pursue the infringer for monetary damages. Bill C-56 also sets out new criminal offenses and permits the court to impose fines up to $1,000,000 and/or imprisonment up to five years.

Bill C-56 will be closely watched.  Trade-mark and/or copyright owners may start to prepare their “requests for assistance” so that action may be taken when BillC-56 becomes law.

Many NEXUS card holders in the Trusted Traveler Program are not aware that there are electronic forms available on-line that they can complete prior to returning to Canada with their purchases.  The declaration process is simplified by the NEXUS Traveller Declaration Card (TDC).  Canadian residents who are members of the trusted traveler programs may complete this form to declare goods purchased and/or acquired outside Canada and must give the completed TDC to the Canada Border Services Agency (CBSA).  At many land border crossings, there is a secure deposit box in which to submit the completed forms in the NEXUS lane.

The TDC may be completed on-line (and printed in hard copy) or may be completed manually in black pen (the CBSA specifically states a black pen must be used). For more information, please refer to the CBSA web-site.

Please note that the TDC form cannot be used if the traveler is returning to Canada with tobacco products (such as cigars (non-duty paid/duty free, cigarettes (non-duty paid/duty free), cigarillos and tobacco sticks).

I recommend that frequent travelers keep a number of blank printed forms in their glove compartment or in a brief case.  The electronic form is downloadable and can be saved on a laptop with the information that stays the same (e.g., name, address, date of birth, identification, etc.). The main difficulty I find with the on-line form is finding a printer when I am traveling.

I should mention that I have clients who have completed and submitted the forms in the secure deposit box.  The problem is that the CBSA officer in the NEXUS lane usually did not see them deposit the TDC in the deposit box.  It would be helpful to inform the CBSA officer of the deposit of the forms if you are sent for a random secondary inspection as it may prevent misunderstandings.

The Canadian International Trade Tribunal has jurisdiction to determine whether the Canada Border Services Agency’s recapture of refunded customs duties is valid. In other words, if the CBSA issues a detailed adjustment statement (DAS) to claw back a refund, the affected importer may have a grounds for appeal if the DAS is issued too late.

In the June 1, 2012 decision in Grodan Inc. v. President of the Canada Border Services Agency (AP-2011-031), the Tribunal held it has jurisdiction beyond deciding matters of origin, valuation and tariff classification.

In this case, Grodan imported goods and used a tariff classification that resulted in duties being payable.  Grodan filed B2 amendments after it determined that it was entitled to duty-free treatment under H.S. code 9903.00.00.  The CBSA accepted the voluntary amendments and paid a refund of customs duties.  More than 48 months later, the CBSA took the position H.S. code 9903.00.00 was not available and issued a DAS to recover the refunded customs duties.  Grodan filed an appeal with the Canadian International Trade Tribunal.

The Department of Justice argued that the Canadian International Trade Tribunal did not have jurisdiction to consider whether the DASs were statute barred as beyond a 4 year limitation period.

In considering the scope of its own jurisdiction, the Tribunal noted:

  • The Tribunal’s jurisdiction is limited by statute, whether explicitly or implicitly;
  • Parliament intended to confer on the Tribunal broad appellate jurisdiction;
  • The Tribunal’s authority is not limited merely to the narrow substantive question of correct tariff classification, origin or value for duty of imported goods;
  • The Tribunal  may make such order, finding or declaration as the nature of the matter require;
  • The duties and functions of the Tribunal are, inter alia, to hear, determine and deal with all appeals … and all matters relating thereto;
  • The Tribunal has authority to determine not only the correctness of a decision made under Section 60 but also its validity; and
  • The Tribunal’s jurisdiction extends to jurisdictional matters.

On the issue of the Tribunal’s authority to make determinations relating to jurisdiction, the Tribunal held:

If a tariff classification decision made under Section 60 of the [Customs Act] is not correct on the merits, then it cannot stand.  Likewise, if it is not valid on jurisdictional grounds, it should not stand. As such, the Tribunal is of the view that the validity of a decision under section 60 is a matter “related” to the correctness of such a decision and, therefore, the Tribunal is authorized to “deal with” it by making ‘…such order, finding or declaration as the nature of the matter require ….”

The Tribunal stated “[t]he Tribunal will not countenance an unjust outcome.”  In the Groban case, the Tribunal held that the DASs were invalid because they had been issued more than 48 months after the deemed determination under subsection 58(2) of the Customs Act that occurred when the voluntary amends were filed.

This case is important because some aggrieved importers may incorrectly believe they have no legal redress when the CBSA makes an decision that is not a tariff classification, origin or valuation decision.

On February 5, 2013, Canada took a leap forward by tabling in the Senate amendments to the Corruption of Foreign Public Officials Act (CFPOA). Bill S-14 “An Act to Amend the Corruption of Foreign Public Officials Act” was introduced in the Senate to strengthen the teeth of the CFPOA. These amendments must pass the Senate and then the House of Commons in order to become law.

The CFPOA makes it a criminal offence in Canada for persons or companies to bribe a foreign public official in order to obtain or retain an advantage in the course of international business. The CFPOA has been law in Canada since 1998.
When the amendments to the CFPOA are passed, Canadian businesses will be subject to many of the rules in place in the United States and the UK.

The amendments contain a provision to entrench the nationality principle.  The Canadian Government will be able be able to prosecute Canadians and Canadian businesses for bribery undertaken on foreign soil.  The Government of Canada will exercise jurisdiction over Canadians and Canadian companies on the basis of nationality regardless of where the offending activity transpired. Even if there is no connection to Canada, the Canadian or Canadian company may be prosecuted.

The amendments contain a provision to phase out the facilitation payment exception. The CFPOA currently contains an exception that allows payments that are made to facilitate acts of a routine nature by foreign public officials. An example of a facilitation payment is a payment to a customs official to clear goods more quickly. Cabinet will fix a date in the future when such facilitation payments can no longer be made.  In other words, there will be one less basis to excuse payments made to a foreign public official.

The amendments clarify that all businesses are subject to the provisions of the CFPOA.  The words “for profit” in the definition of “business” are being removed.  This amendment removes an argument that NGOs could use. The amendment also removes an argument that business could attempt that the bribery does not count (that is not punishable) if was not taken in the context of a business venture.

The amendments include a new books and records offence similar to the U.S. Foreign Corrupt Practices Act. New Section 4 of the CFPOA provides that every person commits an offense who for the purpose of bribing a foreign public official in order to obtain or retain an advantage in the course of a business or for the purpose of hiding that bribery either:

(a) establishes or maintains accounts which do not appear in any of the books and records that they are required to keep in accordance with applicable accounting and audit standards;

(b) makes transactions that are not recorded in those books and records or that are inadequately identified in them;

(c) records non-existent expenditures in those books and records;

(d) enters liabilities with incorrect identification of their object in those books and records;

(e) knowingly uses false documents; or

(f) intentionally destroys accounting books and records earlier than permitted by law.

This offence will now be punishable by a maximum jail term of 14 years and is unlimited in terms of the amount of a fine.

The amendments also increase the maximum penalty for other infractions under the CFPOA.  The current maximum jail term is 5 years.  The new maximum jail term is 14 years.

For more information, please refer to the Government of Canada Backgrounder.

To date, there have been three convictions under the CFPOA:

  • Griffiths Energy International Inc. – On January 22, 2013, Griffiths Energy International Inc.pleaded guilty to a charge under the CFPOA related to securing an oil and gas contract in Chad. Griffiths acknowledged having committed to paying $2 million in cash and millions in shares in exchange for exclusive access to resources in two regions. After providing the Chad government with a $40 million signing bonus, Griffiths was awarded the resources rights. Griffiths will pay a total penalty of $10.35 million.
  • Niko Resources Ltd. – On June 24, 2011, Niko Resources Ltd. pleaded guilty to one count of bribery. Niko admitted that, through its subsidiary Niko Bangladesh, it provided the use of a vehicle (valued at $190,984) in May 2005 to AKM Mosharraf Hossain, then the Bangladeshi State Minister for Energy and Mineral Resources, in order to influence the minister in his dealings with Niko Bangladesh. In June 2005, Niko Resources Ltd. paid travel and accommodation expenses for the same minister to travel from Bangladesh to Calgary to attend the GO EXPO oil and gas exposition, and paid approximately $5,000 for the minister to travel to New York and Chicago to visit his family. Niko Resources Ltd. was fined $9.5 million and placed under a probation order, which puts the company under the court’s supervision for three years to ensure that audits are completed to examine the company’s compliance with the CFPOA. The Canadian Trade Commissioner Service has placed a hold on providing services to Niko during the period of court supervision.
  • Hydro-Kleen Group Inc. – On January 10, 2005, Hydro-Kleen Group Inc., pleaded guilty to one count of bribery of a U.S. immigration official who worked at the Calgary International Airport.  Hydro-Kleen was ordered to pay a fine of $25,000.  The U.S. immigration officer pleaded guilty in July 2002 to accepting secret commissions. He received a six-month sentence and was subsequently deported to the United States.

Originally published by the Journal of Commerce in December 2012

What happens in the regulatory arena over the next year depends in great measure on how disciplined Congress becomes. For example, where will budget cuts hit the various regulatory agencies?  Will new laws be enacted which require agencies to take on significant new responsibilities but provide no additional funding, staffing or equipment? Will we see a miscellaneous tariff bill, new free trade agreements or trade promotion agreements? Will the Trans-Pacific Partnership or the EU-US free trade agreement be realized?

On the agency side, will Customs finally get a permanent Commissioner? David Aguilar has done an excellent job, but the position is a political one and being a political appointee brings with it certain access and credentials that are markedly different than those of a career officer, no matter how good he or she may be.

With FDA, the question is the timing of the Food Safety Modernization Act implementation. Many deliverables are seriously behind schedule. The trade remains concerned about what the Voluntary Qualified Importer Program will look like and its cost.

Another area of keen interest is how export reform finally plays out. Will Congress get to the point where the needed legislative changes are enacted, or are we left to see only the changes which result from executive orders?

These questions point to one overarching theme for 2013 – the potential exists for lots of change on many fronts, but another and equally important overarching theme for 2013 is more enforcement by more agencies resulting in higher fines and the expanded use of criminal prosecutions. The recently published Foreign Corrupt Practice Act guidelines did nothing to undermine the trade community’s long-held conclusion that internal controls and strong, effective compliance programs are critical to a company’s survival regardless of its size or area of inquiry.

Originally published by the Journal of Commerce in November 2012

The 2012 election is over with – thank goodness! It was an election long on attack ads and generalities, short on well-articulated positions, and generally one of the most negative election cycles the country has seen in a very long time. Much hand-wringing will occur regarding the issues facing the lame-duck Congress, including sequestration/budget cuts, entitlements, the debt ceiling, tax rates, Hurricane Sandy relief, appropriations bills (for many governments agencies and departments), infrastructure funding, PNTR (permanent normal trade relations) for Russia, and cybersecurity which are among the most pressing issues, but there are many more which could be added to the list, such as mortgage debt forgiveness, online sales tax, online poker, Foreign Intelligence Surveillance Act reforms and unemployment benefits extension, to name just a few.

There is little reason to think the lame duck Congress will get through but one or two of these significant issues if we are lucky, and is most likely to focus on band aid solutions rather than considered resolution. On top of the constant bickering between the parties, add the final outcome in the House was 242 Republican seats and 193 Democratic seats. The Senate split was 53 (Democrats), 45 (Republicans) and 2 (independents).  The number of seats per party in each Congressional house has not changed much from 2010, although the holders of some of those seats will be different. As such, some old faces will be gone, and some new ones will come into the pictures. The staffs of the losers will be looking to be hired elsewhere and it is the staffers that do much of the serious work. The combination of all this, plus the short time left until the next session of Congress starts on January 3rd, does not portend well for serious discussion or reasoned solutions. Since so many pundits will comment on what is next nationally, including asking when we might see a candidate nominated and confirmed as Commissioner of Customs, it is worth spending a bit of time talking about what is happening at the state level.

No, this will not be a diatribe about whether one party is gaining more gubernatorial seats than the other or which party is exercising the greatest influence in which state legislative house. Rather, just as so many social issues are being brought to the state level for solution, we are also seeing the attempt to have laws enacted at the state level which seem to deal more with commercial issues of national consequence. For example, in 2011, the California State Legislature brought us the California Transparency in Supply Chains Act of 2010, which put the burden on large corporations to police their supply chains so as to combat human trafficking. The just concluded 2012 election brought us Proposition 37 which was entitled the “California Right to Know Genetically Engineered Food Act”. Proponents argued some 50 countries, including Japan and the European Union, require sellers of genetically engineered foods to appropriately label their foods, so why not require that of California sellers? Opponents pointed out the law was poorly written and exempted only selected foods and, frankly, made no sense in how it would be applied.  The measure was defeated by some 550,000 votes (53.1% vs. 46.9%, with about 9,000,000 votes cast). Why talk about a proposition which was defeated? Simply put, because the proponents are already talking about putting similar measures on the ballot in two years in states as diverse as Washington, Oregon, Vermont and Connecticut, and perhaps yet again in California. There is also talk about the opposition seeking to insert language in the Farm Bill to narrowly limit the authority of federal agencies to regulate genetically engineered crops, while proponents seek to pressure FDA to take regulatory action. So, if proponents cannot get what they want at the federal level, why not try the state level?

At this point, FDA has no labeling requirements for genetically engineered food, although if a product contains specific allergens, FDA exercises its jurisdiction. At the same time, the USDA imposes limitations if the genetically engineered crop causes harm to other plants. There are concerns about resistance to pesticides and quality issues with genetically engineered crops, but as far back as 1992, FDA said there is no difference between genetically engineered and natural plants when it comes to quality.

So, why the hullabaloo surrounding this proposal? Regretfully, these types of proposals are typically written so as to favor specific parties within an industry. In the case of Proposition 37, it was clear the organic community got together and flexed its muscles, but in so doing, the short-comings of its proposal became evident. The proposal started by saying if a crop was genetically engineered, it should be so labeled and could not say it is “natural”, “naturally grown”, “naturally made” or “all natural”. So far, that seemed logical. However, when you looked at the exemptions, the biases of the supporters were glaring. Specifically, an animal fed or injected with genetically engineered feed was exempt. Similarly, a crop or raw agricultural commodity or food was exempt if it was not “knowingly or intentionally” genetically engineered, or had not been “knowingly or intentionally” commingled with food that may have been genetically engineered. Alcoholic beverages were also exempt, as were processed foods (at least until July 1, 2019) provided no genetically engineered ingredient accounted for more than 0.5% of the total weight or the processed food did not contain more than 10 such ingredients. Organic foods would be exempt, as would medical food and any food not packaged for retail sale and intended for immediate human consumption or which is served, sold or otherwise provided for in a restaurant or other food facility.  Retailers were given the burden of compliance but could rely on declarations from others in the supply chain, and those others would have record keeping responsibility, but does anyone doubt such a set-up is rife for mischief? Further, anyone, state or local authorities and consumers, could sue for violations, so more class action cases could result and attorneys’ fees and injunctive relief are possible.

What this proposal did was exempt such food as beef, chicken, cheese, beef, wine, liquor and food sold at restaurants, but not pet food. It was estimated as much as 2/3 of the food sold and consumed in California would fall under one of the exemptions. This outcomes leads to the obvious question – what are you regulating and why?

While there may be some merit to proposing that genetically engineered food be so labeled, and assuming a more even-handed proposal were put forth, is this really a topic which a state should regulate? Isn’t this more properly addressed at the national level? If you have a series of patch-work laws which are somewhat different in each state (or even identical), doesn’t that run afoul of the Commerce Clause of the U.S. Constitution which leaves to the federal government the regulation of interstate commerce? Yes, states have a public health interest, but surely, it will not come as a surprise to anyone much of the food sold on the shelves of California grocery stores is imported (whether from China, Chile, Mexico or Florida), so if California (or another state) has its own rules, would sellers avoid that market? What happens if the seller does not meet the state-mandated marking requirement, e.g., a farmer sells his food product intended for sale in say Idaho, but the owner of the Idaho market makes a deal with his buddy in California to sell him that food. Who is going to be responsible for relabeling it? Who will have to satisfy the record keeping requirements? Who bears the cost?

While it may well be that some of the issues facing our country are better left to the states, food labeling is clearly not one of them, so beware of what may be on your ballot next time!

Originally published by the Journal of Commerce in October 2012

The Securities and Exchange Commission (SEC) issued the long-awaited conflict minerals regulations on September 12, 2012. See http://www.gpo.gov/fdsys/pkg/FR-2012-09-12/html/2012-21153.htm for the full text. They take effect on November 13, 2012 and cover products that include tantalum, tin, gold or tungsten. The goal of the law is to end human rights abuses in the Democratic Republic of the Congo (DRC) by governing the trade in what are described as conflict minerals. Specifically, the affected countries also include Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia, all countries which have some internationally recognized border with the DRC (referred to as “covered countries”). Recognizing the disruption these changes will cause, in limited circumstances described in more detail below, the SEC is allowing a temporary provision for the first two reporting years for all issuers and a total of four (4) years for small companies.  These new regulations apply to all companies which file with the SEC, whether foreign or domestic.

The SEC began by creating a new reporting form, Form SD. The taxonomy file has been released for comment, see http://www.sec.gov/info/edgar/edgartaxonomies_d.shtml. The Form SD is to be filed starting in 2014 to cover the calendar year 2013, and will be due each year on May 31, regardless of the company’s fiscal year.

As was perhaps to be expected given the controversy the deliberative process garnered, the SEC published regulations which are more general in some places than industry might have liked.  The starting point for any publicly traded company is to figure out if it is covered by these regulations. So, does your company manufacture or contract to manufacture goods which contain conflict minerals? This is an area where the SEC was very general, leaving the analysis to turn on the facts of a given company’s situation. The SEC defined “contracting to manufacture” as based on whether the company has some actual influence over the manufacturing of the given product. The SEC was quick to add a company is deemed to not have influence over manufacturing if it only affixes its brand, marks, logo or label to a generic product made by a third party; or services, maintains or repairs a product made by a third party; or specifics or negotiates contractual terms with the maker that do not directly relate to the manufacturing of the product.

Companies are now required to conduct a “reasonable” country of origin inquiry which must be performed in good faith and be reasonably designed to determine whether any of the minerals originate in the covered countries or are from scrap or recycled sources. Scarp and recycled minerals are treated differently, see below for more details.

So, if a company knows the minerals did not originate or are scrap or recycled sources; or has no reason to believe the minerals may have originated in a covered country or may not be from scrap or recycled sources; then it must disclose its determination, provide a brief description of the inquiry it performed and the results, and report these details on the Form SD. In addition, the company is required to make the description publicly available on its Internet website and provide the link on its Form SD.

On the other hand, if the inquiry determines the company knows or has reason to believe the minerals may have originated in a covered country and the company knows or has reason to believe the minerals may not be from scrap or recycled sources, then the company must undertake a reasonable due diligence to determine the country of origin and chain of custody of the minerals and file a Conflict Minerals Report as an exhibit to the Form SD. Additionally, as before, the company must make the report available on its website and provide a link on the Form SD filing.

The outcome of the due diligence could be a finding the minerals are “DRC Conflict Free”, which could mean they originate from a covered country but did not finance or benefit armed groups; then the company must obtain an independent private sector audit of its Conflict Minerals Report; certify it obtained such an audit; include the audit report as part of its Conflict Minerals Report and identify the author.

A “not found to be DRC Conflict Free” determination could also be the outcome. In such a case, in addition to the audit and certification requirements, the company must also describe on its Conflict Minerals Report, the products manufactured or contracted to be manufactured and covered by the finding; the facilities used to process the conflict minerals in those products; and the specific efforts to determine the mine or location of origin.

The temporary provision mentioned above relates to an outcome where the findings is “DRC Conflict Undeterminable”. Companies will be given two years to get their supply chains in order (unless they are small companies which will have a total of four (4) years). During this period, if the company is unable to determine the origin of the minerals or if from a covered country, whether the minerals financed or benefited armed groups in those countries, the products are considered DRC Conflict Undeterminable.  In such a case, the company must describe the following in its Conflict Minerals Report: its finding the products it manufactures or contracts to manufacture are DRC Conflict Undeterminable; the facilities where they are produced, if known; the origin of the conflict minerals, if known; the specific efforts undertaken to determine the mine or location of origin; the steps taken or which will be taken to mitigate the risk that its necessary conflict minerals benefit armed groups, and any steps to improve due diligence, since the end of the period covered by the most recent Conflict Minerals Report.

Regarding recycled or scrap minerals, if the company’s conflict minerals are from these sources rather than from mined sources, the company’s products containing such minerals are considered DRC Conflict Free even if originating from covered countries. Only in the case of recycled or scrap sources is a company not required to obtain an independent private sector audit.

Beside not providing a clear definition of what is meant by “contracting to manufacture”, in terms of the due diligence requirement, the SEC was equally unclear, saying only the due diligence measures must conform to a nationally or internationally recognized framework such as that developed by the Organisation for Economic Cooperation and Development (OECD).  At this juncture, the OECD has only issued a due diligence program for gold.  As a result, the SEC goes on to say, until a due diligence framework is developed for the other minerals, companies are required to describe the due diligence measures they exercise in determining the source of their conflict minerals.

This leaves us to be guided by the OECD gold supplement. It makes the following recommendations:

1)  Adopt and commit to a supply chain policy for identifying and managing risks for gold potentially from conflict-affected and high-risk areas;

2)  Structure internal management systems to support supply chain due diligence;

3)  Establish a system of transparency, information collection and control over the gold supply chain;

4)  Strengthen company engagement with suppliers;  and

5)  Establish a company and/or mine level grievance mechanism.

There are then additional specific recommendations for each entity in the supply chain.  For exporters, the OECD recommends:

A)  Assign a unique internal reference number to all inputs and outputs, by bar, ingot and/or batch of gold accepted and produced, and affix and/or imprint that reference number on all outputs in such a manner that tampering or removal will be evident;

B)  Coordinate and support physical security practices used by other upstream companies. Promptly report any indications of tampering with shipments and unseal and open shipments only by authorized personnel;

C)  Preliminarily inspect all shipments for conformity to the information provided by the supplier on the types of gold… Verify weight and quality information provided by the gold producer and/or shipper, and make a business record of such verification. Report any inconsistency between initial inspection of a shipment and information provided by the shipper promptly to internal security and those responsible in the company for due diligence, with no further action until the inconsistency is resolved;

D)  Physically segregate and secure any shipment for which there is an unresolved inconsistency; and

E)  Seek to deal directly with legitimate artisanal and small-scale gold producers or their representatives where possible in order to exclude gold offered by persons that exploit them.

For downstream companies, the OECD recommends:

F)  Request suppliers provide the identification of the upstream gold refiner/s for gold-bearing materials and products, either by direct sourcing or via marks imprinted on a refined gold product if available, or from information provided by other downstream product suppliers on bullion banks.

G)  If gold refiner/s are identified, request verification that the refiner/s has conducted due diligence in accordance with this Supplement. Where possible, seek reference to recognized audits by Industry Programmes or Institutionalised Mechanisms that incorporate in their auditing protocols the standards and processes contained in the Guidance; and

H)  Pass on information on the identification of the upstream gold refiner/s for gold-bearing materials and products to downstream customers.

It seems reasonable to expect that companies will be governed by these guidelines regardless of the conflict mineral in questions, but at the same time, these recommendations seem to be common sense security protocols that would be the types of measures companies would regularly have in place to better manage their supply chain and lower the risk of pilferage.

Even the SEC admits it may cost “billions” for companies to comply, so whether or not your company is publicly traded, it is reasonable to expect that any company which touts itself  as concerned about human rights and states publicly one of its goals is seeking comply with all human rights laws can expect to draw attention to itself and so we are left to ask – could these conflict minerals regulations lead to more shareholder derivative, class action or other types of lawsuits?  It certainly could lead to reputational damage, but no doubt, it will be very expensive for companies to comply. Perhaps this is why supplier changes began even before the final regulations were published.

Originally published by the Journal of Commerce in August 2012

Last month, the L.A. County Bar’s Customs Law Committee had a meeting with the local U.S. Attorney.  Perhaps the most interesting point which resulted was agreement among all parties that not enough prosecutions are taking place regarding purely import/export trade fraud cases. While this might, at first, seem an odd thing for lawyers to be saying, there really is some logic to it – and it’s not a matter of creating more work for the lawyers.

To get the attention of an industry, people need to be regularly reminded there are serious consequences when the laws or regulations are violated. If those consequences are not reinforced, internal controls and due diligence become more and more lax, generally unintentionally, but every once in a while, somebody does it on purpose. It’s really no different than what happens at home. If you let a small child misbehave, over time, that bad behavior becomes more pronounced and difficult to correct. Similarly, if the clerk administering the petty cash gets away with stealing $50 this week, in the not too distant future, that amount becomes $100, $250 and so on.

In the purely import/export arena, there have been only a handful of cases in the recent past which involved criminal prosecutions for purely trade-related violations.  The most recent one that comes to mind involved an importer who undervalued goods. The loss of revenue was less than $500,000 but the owner of the company ended up in jail. How often have you heard of that happening lately?

There is the very recent accusation by New York state authorities against Standard Chartered Bank over a practice called “wire stripping” which is asserted to have allowed Iranian money to be laundered through American banks. Wire stripping is a process whereby information about the source or routing of the wire is removed so there is nothing identifying the instructions and funds as having come from a sanctioned country. The authorities claim the bank took this action because it wanted to collect millions of dollars in fees.  There is also an assertion one of the bank executives wrote an email questioning why the Americans thought they could tell the rest of the world with whom to deal!  Supposedly the FBI is investigating, but you have to wonder – where is OFAC in all of this?

Another illustration of  the types of cases being brought are the anti-trust settlements with the airlines and air freight forwarders in the U.S., Japan and Europe. These were also the outcome of international trade activities, but were not prosecuted for purely import or export violations.

In the export arena, we have seen a few notable criminal convictions. The one that got the most press involved Professor J. Reece Roth who was convicted of conspiring with Atmospheric Glow Technologies, Inc. (AGT), of unlawfully exporting defense articles to China and wire fraud for defrauding the University of Tennessee as he concealed his actions from his then employer despite several opportunities to be forthright.

Roth’s problems arose in conjunction with a contract AGT won with the U.S. Air Force. AGT was a University spin-off. The Air Force contract involved developing a plasma actuator that was intended to reduce the drag on the wings of drones. Under the terms of the contract, Roth was prohibited from sharing sensitive data with foreign nationals.  Despite clear warnings, Roth took his laptop containing project plans to China with him. While there, he asked a colleague to send him an email with data about the project to the email account of a Chinese colleague. Upon receipt, Roth shared the contents with that Chinese colleague. Further deemed export violations arose because Roth had two foreign students working with him on the project – one Chinese and one Iranian – without government knowledge or approval.  The court imposed a 48 month sentence.

Now we hear about Chi Tong Kuok who pled guilty in San Diego to conspiracy to violate the export laws for attempting to buy sophisticated military equipment (e.g., communications, equipment and GPS gear used by the U.S. military) and send it to China. Kuok was originally found guilty of money laundering and smuggling. That conviction was overturned and a new trial ordered. Kuok wanted to mount a duress defense, meaning he was forced into his attempts by the Chinese government by way of threats to himself and his family. Under the plea deal, Kuok will face no more than 46 months in jail. He has already been in custody for three years. So, he likely settled as the fastest way to get out of jail. If the judge rejects the settlement, the guilty plea may be withdrawn and the trial proceeds.

There are any number of convictions for selling counterfeit goods, but then we have the one recent enforcement action involving import issues brought under the False Claims Act.  These sorts of suits are generally called qui tam actions.  They arise when a whistleblower provides the government with evidence of fraud against government contracts and programs. As often happens, the government takes a long time to act, so typically the whistle blower sues, in a sense on behalf of the government, in order to recover the stolen funds. As in most whistleblower contexts, if the lawsuit is successful, the whistleblower receives a portion of the recovery. In this case, the violation was misclassifying auto parts manufactured in China. The settlement was $6.3 million of which about $4 million was paid from assets which were seized. The related criminal proceedings led to one company pleading to a charge of entry of goods by means of false statements. The sentence was a probation of two years and a $25,000 fine.

What did the parties do? They misclassified the goods entering them as free of duty, but charging customers the correct 2.5%, thereby pocketing the difference. A total of 706 entries are said to be involved where the manifolds were entered as unfinished, when they were actually finished.  The duty calculated as evaded was $2,549,000.  The matter came to the government’s attention when a whistle blower filed the claim. The person was named in the HIS/ICE press release and if LinkedIn is to be believed, he was a Sales and Account Manager at the company!

What does the government need to do? We have to admit the seizure of goods is an effective tool, but this happens to individual shipments about which no publicity is permitted due to the Trade Secrets Act. So, while some in industry know about for example the importer of record issue related to fabric and garments, there have been no prosecutions. So perhaps hapless folks in the U.S. doing a friend or relative in China a favor have no idea what they are getting into when they agree to become importer of record.  Imagine how they dynamics might change if one or two people ended up in jail for getting into these schemes?

A few years ago,  one of the Ports publicized the penalty settlement with a company for NAFTA violations. On the one hand, the news was helpful in reminding companies about the importance of compliance. On the other hand, the fact the settlement was announced sent shockwaves through industry. If DDTC, OFAC and BIS can announce their settlements, you have to wonder why CBP cannot?

Whether one looks at the auto parts case or the recent DDTC settlement with United Technologies or any of the many recent Foreign Corrupt Practice Act case resolutions, these situations are proof again, people matter. You can have the best compliance program in the world. If it is not followed, things will happen and generally they are bad things. When was the last time your company performed a due diligence check-up?