[UPDATE: Customs has issued new guidance to the ports concerning the use of the CF 28 and CF 29 and their respective impact on an importer's right to make a prior disclosure. That guidance is available here.]
When used effectively, a prior disclosure allows an importer to avoid most of the liability for civil penalties for past violations while at the same time correcting the erroneously reported information.
This benefit, however, is only available before Customs has initiated a formal investigation into the disclosed violation or prior to the importer having knowledge of that investigation. As a matter of policy, Customs has stated that it encourages importers to make prior disclosures of past violations. From the perspective of the government, a prior disclosure eliminates or reduces the expense of a formal investigation and provides for the collection of duties owed. Thus, both the importer and U.S. Customs and Border Protection benefit from prior disclosures.
Despite the stated policy, in 2010, the trade community perceived an effort by port-level Customs personnel to preclude prior disclosures by issuing Customs Form 28 “Request for Information” or the Customs Form 29 “Notice of Action” that purported to be a notice of the commencement of an investigation of the recipient importer. As will be seen below, the immediate concern may have been alleviated. Nevertheless, the legal question of what steps Customs and Border Protection must take to legally establish that an investigation has been commenced, thereby foreclosing prior disclosure perfection, remains subject to debate. This paper provides background on the disclosure process, Customs investigations, and the ability of importers to make valid timely prior disclosures. For cases where Customs denies the benefit of a prior disclosure, this paper concludes by discussing strategies for challenging that decision.
1.Background: Prior Disclosure as a Safe Harbor
Customs’ primary enforcement mechanism against negligent commercial importers or importers engaged in fraud is 19 U.S.C. § 1592(a), which provides:
Without regard to whether the United States is or may be deprived of all or a portion of any lawful duty, tax, or fee thereby, no person, by fraud, gross negligence, or negligence—
(A) may enter, introduce, or attempt to enter or introduce any merchandise into the commerce of the United States 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 . . . .
The maximum civil penalties applicable under this statute are:
A fraudulent violation of subsection (a) of this section is punishable by a civil penalty in an amount not to exceed the domestic value of the merchandise.
A grossly negligent violation of subsection (a) of this section is punishable by a civil penalty in an amount not to exceed—
(A) the lesser of—
(i) the domestic value of the merchandise, or
(ii) four times the lawful duties, taxes, and fees of which the United States is or may be deprived, or
(B) if the violation did not affect the assessment of duties, 40 percent of the dutiable value of the merchandise.
A negligent violation of subsection (a) of this section is punishable by a civil penalty in an amount not to exceed—
(A) the lesser of—
(i) the domestic value of the merchandise, or
(ii) two times the lawful duties, taxes, and fees of which the United States is or may be deprived, or
(B) if the violation did not affect the assessment of duties, 20 percent of the dutiable value of the merchandise.
To protect itself from these possible penalties, importers are entitled to, but not required to, file a prior disclosure, which is embodied in 19 U.S.C. § 1592(c)(4), which provides:
If the person concerned discloses the circumstances of a violation of subsection (a) of this section before, or without knowledge of, the commencement of a formal investigation of such violation, with respect to such violation, merchandise shall not be seized and any monetary penalty to be assessed under subsection (c) of this section shall not exceed—
(A) if the violation resulted from fraud—
(i) an amount equal to 100 percent of the lawful duties, taxes, and fees of which the United States is or may be deprived, so long as such person tenders the unpaid amount of the lawful duties, taxes, and fees at the time of disclosure, or within 30 days (or such longer period as the Customs Service may provide) after notice by the Customs Service of its calculation of such unpaid amount, or
(ii) if such violation did not affect the assessment of duties, 10 percent of the dutiable value; or
(B) if such violation resulted from negligence or gross negligence, the interest (computed from the date of liquidation at the prevailing rate of interest applied under section 6621 of title 26) on the amount of lawful duties, taxes, and fees of which the United States is or may be deprived so long as such person tenders the unpaid amount of the lawful duties, taxes, and fees at the time of disclosure, or within 30 days (or such longer period as the Customs Service may provide) after notice by the Customs Service of its calculation of such unpaid amount.
The person asserting lack of knowledge of the commencement of a formal investigation has the burden of proof in establishing such lack of knowledge. For purposes of this section, a formal investigation of a violation is considered to be commenced with regard to the disclosing party and the disclosed information on the date recorded in writing by the Customs Service as the date on which facts and circumstances were discovered or information was received which caused the Customs Service to believe that a possibility of a violation of subsection (a) of this section existed.
Consequently, prior disclosure is a possible safe harbor for compliance-minded importers who, after making an entry, discover that the entry contains a material false statement or omission. Absent disclosure, if discovered by Customs, the violation might result in a penalty of two times the duties owed plus interest for simple negligence or four times the duty plus interest for gross negligence. With a valid prior disclosure, the importer is required to pay the withheld duties and fees. The penalty is limited to interest on the withheld amount. To be valid, the disclosure must be made prior to, or without knowledge of, the commencement of a formal investigation of the disclosed violation.
The recent controversy centered on whether and under what circumstances a Customs Import Specialist may preclude a prior disclosure by giving the importer notice of an investigation on a CF28 or CF29. An Import Specialist is the official most directly responsible for determining the admissibility and tariff treatment of imported merchandise. According to a job description posted by Customs, an Import Specialist enforces “the statutory and regulatory requirements of Customs and Border Protection and other federal agencies by determining the admissibility of merchandise and making other import-related decisions and judgments. [The Import Specialist performs] tariff classification and appraisement work to assess customs duties on commercial imports, screen incoming entry document packages for the full range of entries pertaining to an established line of merchandise, and appraise imported articles or products.” The Import Specialist, therefore, is often the first CBP official to have any reason to question the information the importer provided to the agency. If an Import Specialist suspects a violation, he or she might reasonably decide that it is appropriate to notify the importer of an ongoing investigation and, as a result, create the possibility of collecting significant civil fines. On the other hand, the Import Specialist is not an investigative Agent and is arguably not the appropriate party to commence a formal investigation.
The Import Specialist’s primary tools for communicating with importers are the CF28 and CF29. The CF28 is a request for information. Often, an Import Specialist will use the CF28 to request additional information to determine the nature of the merchandise, its appraised value, or country of origin. A CF29 notifies the importer of some action taken or proposed to be taken with respect to the entry of merchandise. For example, the Import Specialist might disagree with the classification applied by the importer and liquidate the entry at a different rate of duty. The controversy that gave rise to this paper is whether and if so in what circumstances CBP can use the CF28 or CF29 to notify an importer of the commencement of an investigation and, therefore, preclude a valid prior disclosure.
2. The Legislative History of Prior Disclosure
Congress first gave importers the opportunity to submit a prior disclosure in the Customs Procedural Reform Act of 1978. As a foundational point, the presence of prior disclosure in the law indicates a congressional intent that importers be permitted to make disclosures in appropriate circumstances. Thus, Customs’ application of the law should be consistent with this expression of congressional intent.
There is, however, nothing in either the 1978 law or the legislative history indicating when an importer is deemed to have knowledge of an investigation, which would preclude disclosure protection. Nor does the 1978 law or legislative history explain how and under what circumstances a formal investigation is commenced.
Customs filled that gap through regulations first published as Treasury Decision 79-160. In that publication, Customs addressed the commencement of a formal investigation. With respect to a case referred by an Import Specialist or other Customs officer, the investigation was said to commence “on the date the matter was referred to the Office of Investigations.” Similarly, in the case of referral by an Import Specialist or other Customs officer requesting a value, classification, or other technical investigation, the investigation was deemed commenced on the date recorded in writing by an investigating agent as the date on which the agent discovered facts and circumstances causing the agent to believe there was a violation. In all other circumstances, the investigation was deemed commenced upon the creation of some written document either by the Office of Investigation or by an investigating agent.
Taken together, it is clear that Customs viewed its investigative role as distinct from the inspection and release of merchandise. Rather than permit the Import Specialist to unilaterally commence a formal investigation, Customs required that the Import Specialist refer the facts for investigation. This indicates that a request for information or notice of action from an Import Specialist without the involvement of an investigative Agent could not preclude a prior disclosure as the law was understood in 1978.
In 1984, Customs further amended the regulations concerning prior disclosure. In the narrative section discussing the commencement of a formal investigation, Customs discussed the fact that investigative notes, rather than a formal document, may be sufficient evidence to find that an investigation was commenced. Specifically, Customs stated that “More determinative of the commencement of an investigation of a specific violation is whether the investigatory record shows that information was received which would cause an investigative agent to believe that the possibility of a violation under 19 U.S.C. 1592 existed.” Once again, this confirms Customs’ understanding that the commencement of an investigation involves an investigative Agent rather than an Import Specialist.
Also in 1984, Customs added 19 C.F.R. 162.74(g) to the regulations to address those cases in which it makes a penalty claim without a formal investigation. In those cases, the claim may only be asserted by the issuance of a pre-penalty notice, penalty notice, by the seizure of the merchandise, or by orally notifying the arriving passenger. Of most relevance to commercial importers is the penalty or pre-penalty notice. Both of these documents are distinct from the CF 28 and CF 29 documents Import Specialists use to communicate with importers. In contrast, the Pre-Penalty Notice and Penalty Notice are affirmative statements that a violation has been found, rather than an inquiry directed at further clarifying the correct treatment of the merchandise (i.e, a CF28) or a statement of the proposed treatment of the entry (i.e., a CF29).
Implicit in the requirement that an Import Specialist issue a formal notice of a penalty is the recognition that an investigation of a possible violation includes a determination that the violation may have resulted from negligence, gross negligence, or fraud. The identification of an error in entry documents or a disagreement between the importer and Import Specialist does not rise to the level of evidence of negligence. This regulatory change allows an Import Specialist to initiate a penalty case only by a formal written notice. This is distinct from the initiation of an investigation, which remains a formalized procedure involving Agents trained in the identification of negligence and fraud. Thus, the 1984 regulation limits an Import Specialist’s ability to preclude an investigation to those situations in which the apparent violation is clear on its face and no investigation is necessary or contemplated. That is distinct from the initiation of an investigation which may or may not result in the issuance of a penalty notice.
The situation began to change in 1986 when Customs amended the regulations via T.D. 86-119. This amendment clarified that notice from an Import Specialist or other Customs official of the commencement of a formal investigation creates the presumption that the importer had knowledge of the commencement of the investigation. Consequently, that notice would, absent proof of a lack of knowledge, be sufficient to preclude a prior disclosure.
In this notice, Customs made two other important points. First, the Import Specialist or other official providing the notice must do so “having reasonable cause to believe that there has been a violation of § 592 . . . .” Further, Customs stated that the notice in any form, including an oral statement from an Import Specialist, would be sufficient to create the presumption of knowledge. Second, and very important to this discussion, Customs responded to a comment by stating that the notice of the commencement of a formal investigation is sufficient to create the presumption of knowledge even where the notice is provided prior to the actual commencement of the alleged investigation. As will be seen below, this is probably an incorrect reading of the regulation.
3. The Customs Modernization Act of 1993
The Customs Modernization Act further amended § 1592. The most relevant change was a statutory definition of the commencement of an investigation by Customs. Section 621(4)(B) of the Act provides that:
For purposes of this section, a formal investigation of a violation is considered to be commenced with regard to the disclosing party and the disclosed information on the date recorded in writing by the Customs Service as the date on which facts and circumstances were discovered or information was received which caused the Customs Service to believe that a possibility of a violation . . . existed.
On its face, this would appear to give wide latitude to any Customs and Border Protection official to unilaterally commence an investigation by writing down facts indicating a violation. That official would then be able to provide notice to the importer of the commencement and, as a result, preclude the filing of a prior disclosure.
Congress, however, did not leave Customs and importers without further guidance. In the legislative history to the Mod Act, the House Committee on Ways and Means emphasized the need for formalized processes and centralized recordkeeping in relation to investigations. These appear to be intended specifically to protect the right to prior disclosure against overzealous attempts to impose civil penalties.
For example, the Committee stated that Customs should have a “clearly defined and objective standard by which to measure when a formal investigation has commenced.” To accomplish that, the Committee expressed the expectation that Customs would generate “a formal document or electronic transmission that will serve as evidence . . . of the formal opening of an investigation.” That document was expected to be maintained by the Office of Enforcement or another central unit of Customs. If a pre-penalty notice were to be issued to an importer, the Committee expected Customs to include this written document as an exhibit to the notice. Thus, Congress expected a formalized procedure for opening investigations involving the development of a clear written record of the commencement, centralized recordkeeping, and detailed notice to the importer.
Related to the procedural aspects of the commencement of a formal investigation is the requirement that the basis for the commencement be reasonable. Absent a threshold of reasonableness, an Import Specialist theoretically could preclude prior disclosures simply by opening prophylactic investigations and sending unsupported notices to importers. Obviously, this would have a chilling effect on importers coming forward with disclosures. The fear of this type of action is what motivated much of the recent concern among the bar and importers.
4. Case Law on Disclosures
Few cases have discussed the preclusive effect of notice of an investigation on an attempted prior disclosure. In United States v. Ford Motor Company, Ford defended against a penalty claim by asserting that it had made a prior disclosure before the actual commencement of the investigation. According to the opinion, a Customs Agent met with Ford October of 1990. That meeting resulted in a notation in the Record of Investigation. Importantly, the Court noted that record did not specifically identify Ford as the target of an investigation. Consequently, the Court found that the meeting did not constitute the commencement of the investigation. The Court cautioned, however, that in some circumstances, a meeting with a Special Agent and the discussion in that meeting might be enough to show the commencement of an investigation. In this case, the Court found the first contemporaneous notes by the Agent that indicated a possible violation by Ford was in March of 1991. The subsequent arrival of a customs summons in June of that year, according to the Court, should have eliminated any ambiguity as to whether an investigation had commenced. Thus, Ford had notice of the investigation by that date. Because Ford’s attempted disclosure did not occur until August of 1991, the disclosure was untimely.
On appeal, the Federal Circuit reviewed the evidence relating to the claimed prior disclosure. The Court specifically noted that certain statements in the report of Investigation indicate that Customs initiated the investigation later in August after Ford’s possible disclosure. Despite that, the Federal Circuit found that the Agent’s notes as early as March, while ambiguous, indicated the commencement of an investigation. Consequently, the Federal Circuit found that the Court of International Trade’s decision was not clearly erroneous.
5. The Recent Controversy
At the highest levels of the agency, Customs and Border Protection encourages importers to make prior disclosures. The agency understands that disclosure is permitted by law. Beyond that, the prior disclosure process protects the revenue of the United States by encouraging the payment of withheld duties and allows for the assessment of interest to make the U.S. whole.
Despite that, Customs remains a law enforcement agency and it will pursue civil penalties in appropriate circumstances. It remains possible, therefore, that an Import Specialist, Inspector, or other Customs official could feel either pressure or simply the desire to preclude the filing of disclosures. Arguably, by pursuing civil penalties, the agency produces a greater deterrent against future violations by the affected importer. Moreover, collecting civil penalties produces revenue in excess of the duties and interests. Thus, there is a tension between encouraging disclosures and enforcing the law through civil penalties.
Throughout 2010, members of the customs bar anecdotally noted a rise in the number of CF28s and CF29s from Import Specialists that included language indicating that an investigation had been opened. Some of these were relatively unclear inquiries stating that Customs was “investigating” and entry. In other cases, lawyers reported seeing communications stating more specifically that an investigation had been commenced and that a prior disclosure would not be accepted.
In response to this concern, the American Association of Exporters and Importers asked Customs to clarify its position. Customs responded with a letter to AAEI with a letter stating, in part:
As a matter of law, the Forms 28 and 29 may be considered a “commencement document” for prior disclosure purposes. As a matter of policy, the Form 29 can and will be used as a document commencing a formal investigation and providing notification to the importer. As a matter of policy, however, the CBP Form 28 alone should not be routinely considered a “commencement document.” CBP will be issuing clarifying guidelines that will set forth the circumstances in which the Form 28 may be so used.
Customs has not released the clarifying guidelines to the public. However, in a subsequent meeting with the Customs and International Trade Bar Association, Customs further clarified its position. According to reports of the meeting, Customs reaffirmed its long-standing position that it encourages prior disclosure. Further, Customs reportedly acknowledged that the CF28 is a tool Customs should use to request information, rather than make declarative statements regarding the status of an entry. However, Customs again asserted that the CF29 is a vehicle for notifying the importer of the status of an entry and may be used, in appropriate circumstances, to notify an importer of the commencement of an investigation. In that meeting, Customs informed the bar that it had sent further guidance to the Ports on this issue.
5. Strategy Considerations
Given this background, counsel to importers should be able to develop strategies for challenging Customs’ assertion that an importer is precluded from making a prior disclosure. That challenge might be raised administratively or, if necessary, as a defense in the Court of International Trade to a penalty demand in excess of interest.
There are two fundamental questions for an importer or importer’s counsel. First, has a formal investigation of the disclosed violations been commenced? This requires more than an unsupported notification from an Import Specialist. Rather, as the statute makes clear, an investigation may not be commenced until the agency receives “facts and circumstances” causing Customs to believe that a possibility of a violation exists. Second, Customs must record receipt of such information. Thus, for purposes of challenging the denial of the safe harbor of prior disclosure, the importer must probe Customs for documentary or other evidence indicating that it received and recorded information indicating the possibility of a violation. For example:
1.Are there contemporaneous notes indicating the receipt of the information?
2.Does Customs have records of internal or external correspondence concerning a violation?
3.When were meetings or conversations first held to discuss the violations?
4.Does the first written record of the investigation predate the attempted disclosure?
If the attempted prior disclosure predates any evidence of Customs’ receipt of the information causing it to believe that a violation occurred, the importer is entitled to the benefit of the prior disclosure. Even if the importer was technically on actual notice of an investigation that had not yet been formally commenced, prior disclosure should apply. This is because the statute permits an effective disclosure prior to the commencement OR without knowledge of the commencement. Given that the language is in the alternative, a prior disclosure made prior to commencement but after some attempted notice to the importer, should still be a valid prior disclosure.
An argument can be made that the commencement of an investigation without notice precludes an importer’s disclosure. This is because the statutory language is in the disjunctive. The statute says that a disclosure must be made “before, or without knowledge of, the commencement of a formal investigation of such violation.” It is possible to interpret that language as meaning that either the commencement of the investigation OR the importer’s knowledge of the commencement of that investigation will preclude the disclosure. The problem with this interpretation is that it makes knowledge irrelevant after an investigation has been commenced. A reading of the statute that gives no meaning to some of the language is generally not a correct reading. However, by allowing the importer to make a disclosure so long as the importer has no knowledge of the commencement of the investigation, the date of commencement is arguably irrelevant as the importer may still make a valid disclosure until it receives knowledge of the investigation.
Looking at the statute as a whole, this conflict is easily resolved. First, the statute is written in the positive; indicating when a disclosure is permitted, not precluded. Thus, the correct reading is to say that the importer has the right to the benefit of a disclosure before either the commencement of the investigat