Friday, September 22, 2006

Firday Q&A

Today I spoke at a seminar put on by the International Trade Club of Chicago. The topic was internal reviews and prior disclosures. Three hours listening to me seems like a lot, but I think it went well enough. I took a new approach on my PowerPoint slides. It is a long story, but I am convinced that in the hands of the unskilled (like me), PowerPoint can suck the life out of a presentation. I've been doing some reading about this and I tried to emulate Stanford professor Lawrence Lessig today. Basically, I had no bullet points, no charts, no slide transitions, and no fancy fonts; just a few key words for each thought. Anyway, I think it was OK. I'll have to keep practicing the method.

We had lots of good questions. Rather than find a search engine phrase for my Friday question, I'll just give you some from the meeting this morning.

Why do I have to worry about privilege for an internal review?

Because you may not want to turn the results over to Customs when they come knocking. That's it.

Customs often starts an audit by asking about prior reviews and to see the results. If you do a review as part of normal management activity (which you should), the results are non-privileged. If the review is done under the direction of counsel for the purposes of securing legal advice, the results can be privileged. Note that the underlying business information is not privileged. What is protected is the direction from counsel on what to look at, the final report that conveys the results to the lawyer, and the lawyer's advice on what to do about it. If you think there is a problem, it pays to make an appointment with your in-house legal staff and see if they think they want to initiate the review. The prospects of getting some of it protected by privilege may be appealing.

Can I still do a disclosure after an audit starts?

Yes. You can make a disclosure up to the time Customs records that it has received information indicating that a violation has occurred. That is the official initiation of an investigation. You can make a disclosure after that, provided you can prove you had no notice of the investigation. It is often hard to prove a negative, but it can be done. To make matters worse, certain things create a presumption that you knew about an investigation. Those things include: inquiries from a Special Agent, a pre-penalty notice, or a seizure of merchandise.

An audit, including a Focused Assessment, is not an investigation and does not give you reason to believe an investigation has been commenced. So, if you happen to be sitting with an auditor going over some data and watch the auditor get all excited about some terrible error, go ahead and get that disclosure in. You still have the right to do it.

Can a disclosure ever make things worse?

Yes, in at least two ways. First, if your disclosure is incomplete or in some way invalid, it will not protect you. Instead, it will serve as a tip to Customs that something is wrong and they should start an investigation. Word to the wise: don't make a disclosure casually. It needs to be done right.

Also, if you make a disclosure of error X covering the past five years and then continue making error X for the next five years, you are looking at least at a gross negligence penalty. In the worst case, it could be fraud because once you made the disclosure, you knew it was wrong and continued to knowingly provide false information. That is bad.

On that happy note, Happy New Year to those of you on that calendar.


rp said...

consistent w/this theme of priveledge, what if I as a CHB and employee of the company, find out about the error. Also let's say that inhouse counsel gave me the directions to conduct the audit but counsel also gave me written instructions not to disclose, do I as a CHB still have a duty to disclose to CBP?

My concern here is that CBP may come after me as a CHB. Am I protected? If not, what can I do?

Disclosure: this is a fictitous scenario and only for arguendo...

Larry F. said...

Funny you should ask. I got almost exactly the same hypothetical question from a broker at the presentation.

This is my off the cuff non-advice on which you should not rely.

As a licensed CHB, you have a duty to maintain the confidential nature of your client's information. This is stated in the Regulations at sec 111.24. The records must only be disclosed to the client, the surety, and Regulatory Audit. Under sec. 111.27, broker records are subject to audit.

That said, I am not aware of (there are intentional waffle words there), any affirmative obligation on a broker to disclose violations by the importer. That would mean you don't have a duty to disclose a violation by your employer or client to CBP.

If anyone knows of a case or other source that is to the contrary, I'd like to know about it.

rp said...

That's nice to know. I too agree with your "off the cuff" sentiments. However I've been told by another broker to the contrary. Though their rationality for thier opinion is not based on law but on their interpretation of the regs.

BTW, I have a habit of reading CIT & CAFC cases (thank you Internet) from the web (a great source of legal info) and just finish reading the Brother appeal. I see that your firm handled this. To be honest, I was perplexed to see the CAFC ruled in that fashion and thought that CIT did rule correctly. But after reading the opinion, I see the CAFC's reasoning and makes perfect sense. Touche to your law firm!