Frozen River

News out of Sault Ste Marie: The river is thawing and it is no longer an appropriate way to enter the United States on snowmobile via Drummond Island.

And I though that only happened in the movies.

CAFC Decision in Double Invoicing Case

The Federal Circuit has issued a decision on the merits in United States v. Inn Foods, Inc.  There had been a previous decision on jurisdiction, which was followed by a trial at the Court of International Trade and then this appeal on the substance.

The initial issue is whether Inn Foods' invoicing practice amounts to fraud.  Inn Foods had been receiving an invoice from growers in Mexico that had a relatively low sales prices on it.  Subsequent to entry, Inn Foods created a second invoice at something more similar to market value, retaining the original invoice number, and paid at that higher amount.  

Superficially, this looks like a standard-issue double-invoicing scheme.  But, in the age of reconciliation, is it really more like a provisional pricing mechanism?  It might have been possible to make that argument had Inn Foods adjusted its entries accordingly.  It didn't and the loss of revenue was approximately $624,000.  Based on testimony and evidence indicating both knowledge and an intent to conceal the true material facts, the Federal Circuit affirmed the finding of fraud.

The more interesting issue has to do with entries made after Inn Foods started adding a disclaimer to the entries.  In essence, the disclaimer said "Value for for customs clearance only."  Inn Foods asked that liquidation of the entries be withheld until the importer was able to audit the transaction and provide the correct transaction value.

Rather than treat this as a remedial effort, the Court held that the use of the disclaimer was itself evidence of an intent to conceal the ongoing fraud.  There were a number of reasons for this.  First, the invoices were not merely erroneous, they continued to be prepared in a manner that was knowingly false.  Second, no "audit" was necessary as Inn Foods had both invoices and knew the amount that should have been declared.  Finally, after adding the disclaimer, Inn Foods never corrected its entries.

A fact that needs to be stated is that Inn Foods was not the importer of record for this merchandise.  That was a related party called SeaVeg.  Inn Foods and SeaVeg were operated by the same personnel at the same physical address.  The two companies were separate legal entities but were subsidiaries of the same parent company.  Because Inn Foods was considered to have aided or abetted the fraud, it was understood to be liable for the penalty.   But, an open question was whether it could also be required to pay to withheld duties.

The duty recovery statute is 19 USC 1592(d), which refers back to violations of 1592(a).  The Court held that 1592(d) has a broader purpose than simply recovering unpaid duties from the nominal importer.  Rather, it is intended to "restore" the funds to the U.S. from any source liable for the payment either as importer or via subsection (a) and an aider  or abettor.  Thus, Inn Foods, while not the importer, became liable for the duties as a result of its participation in the fraud.

CAFC Rules on Soybean Residue

In law school, my Torts professor told me that "He who fails to toot his own horn will go untooted." I can't remember the context, but it applies to what follows.

The Federal Circuit has decided Archer Daniels Midland v. U.S. and reversed the Court of International Trade on the classification of a material known as deodorizer distillate or DOD. The merchandise is what remains after raw soybean oil is distilled to make it suitable for consumption and sale. If you make soybean oil, you cannot avoid producing some of this as a residue.

There were four classifications in play:

• Vegetable pitch
• Other products of the chemical or allied industries
• Residual products of the chemical or allied industries
• Waste of the chemical or allied industries

Personally, I am a big fan of the "pitch" argument. Pitch is the the sticky junk left after distilling vegetable matter. So is DOD. According to the Explanatory Notes, pitch is used in applications like waterproofing fabric, sealing roofs, etc. We latched on to the "etc." part and argued that even though DOD is not used in similar applications, it was still described by the common and commercial meaning of the term "pitch." The Court of Appeals disagreed.

Moving on, the Court found that DOD was clearly within the meaning of the term "residual product." Consequently, the issue was whether the Government's arguments to exclude it from Heading 3825 were persuasive. There were a couple arguments, but the primary one was that the Explanatory Notes to 3825 list five specific items and those are the only items intended to be covered by the subheading for "residual products."

The problem for the Government was two fold. First, the statutory language in the HTS has no limitation built into it. It just says "residual products." If it was intended to cover only five items, they should have been listed by name. Because there is no limitation, the subheading must mean something more than that. Second, the Explanatory Notes themselves are oddly written in that there is no explanation as to what to make of the list of examples. Is it exclusive or is it illustrative? There is not way to tell.

The Court decided to apply the language in the HTS without reference to the Explanatory Notes. That is consistent with a few prior cases including Airflow Technologies and Michael Simon Design. The CAFC reaffirmed its prior holdings that where the Explanatory Notes are inconsistent with the plain language in the tariff schedule, they get no weight.

Ignoring the Explanatory Notes, the most specific description of DOD is as a residual product, which is more specific than "chemical product." Hence, the Court of International Trade was reversed.

Personally, I am happy to see this decision. Not just for the client's sake. I also agree that we must be cautious about over reliance on the Explanatory Notes. The tariff must be interpreted in a way that maximizes the predictability and uniformity of classifications. I think that if Jane and Joe Importer are expected to be able to classify merchandise in the ordinary course of business, then the primary focus must be on the plain language of the HTSUS. Any interpretation that moves limitations or meaning into the tariff from the Explanatory Notes should be disfavored in the absence of a showing of ambiguity in the HTSUS.

I think this is particularly true because there is an inherent lack of transparency in that the Explanatory Notes are not publicly available without a paid subscription. If the Explanatory Notes are even remotely required for legal compliance, they should be made available to the public free of charge. [Are you with me? Do we storm Brussels with pitchforks and torches?] Reasonable care should not require an outlay of money just to know the rules. ADM, as part of a series of cases that refocuses the Court of International Trade on the text of the tariff schedule, therefore, is as much about soybean deodorizer distillate as it is about government transparency and the rule of law.

Or, I might just be happy about the outcome.

Gary Locke is new Sec. of Commerce

FYI, the Senate has confirmed former Washington governor Gary Locke to be the new Secretary of Commerce.   Antidumping lawyers, please update your pleading templates.  

Here is the official notice.

They Play Rough in Cincinnati

Someone in Cincinnati is peeved.  Customs and Border Protection has seized a shipment of guns improperly labeled as "toys."  The shipment contained 60 functional shot guns and 177 pistols that are capable of only firing blanks.  If those pass for toys in Cincinnati, that town is far rougher than I had thought.  

Note to Adam and Andi in the land of not-particularly-special chili but surprisingly good ice cream: you might want to go into the business of selling bullet proof vests.

And, while we are on seizures, how did I miss this story, which includes a frozen monkey head?

Sailing + Trade in One Post!

When I go sailing, the only border I cross is between Illinois and Wisconsin.  Sailors in Florida have far more options that require worrying about customs and trade issue.  

Yesterday, I was quoted in the Sarasota Herald Tribune about the prospects for U.S. sailors who want to sail to Cuba to participate in a regatta.  As I told the reporter, its entirely possible to do.  But, and its an important point, anyone who wants to do that needs to go through the right process and seek a specific license from the Office of Foreign Assets Control.  What's involved is an application under 31 CFR 515.567 involving public performances, athletic, and other competitions.  

I know some are probably thinking that rich yachtsmen and women in ascots and Henri Lloyd foulies don't qualify as "athletes."  Two things: First the definition is not all that strict.  Second, watch this:

Where to Find Me

I'm talking at the International Trade Club of Chicago this Friday.  More info is here.  The topic will be free trade agreement compliance.  Rather than the now fairly standard NAFTA presentation, I am going to focus on Chile and Morocco as models for discussion.  That should make things more interesting.  I'm also going to spend some time on verifications, just to make it as scary as possible.

Today I was interviewed by a reporter from the Sarasota Herald Tribune.  So, I guess you can look for me there as well.

The C-TPAT Bait and Switch

I have absolutely no doubt that C-TPAT, the Customs-Trade Partnership Against Terrorism, makes America a safer place. Every participating importer, carrier, warehouse, foreign manufacturer, etc. agrees to take reasonable steps to insure the safety of the supply chain. This means, for example, limiting the access to shipping containers, using secure container seals, and vetting truck drivers. Logic dictates that C-TPAT makes it more difficult for a terrorist organization to slip weapons, components of weapons, or even people into the supply chain of an unknowing importer. I am glad that Customs has this program and I appreciate the efforts of the voluntary participants.

My problem is the way Customs sells the program. I've had the opportunity to sit through lots of C-TPAT recruitment sessions and they all proceed along the same lines. First and foremost, there is the reminder that the horrors of September 11 are the origin of C-TPAT. This, of course, puts the audience into a somewhat angry, hawkish, patriotic mood, which is the natural reaction to being reminded of a recent terror attack on our home soil.

That is followed by images from London, Madrid, and now Mumbai.

We all agree; terrorism is evil.

But then there is a shift in the presentations. Customs shows the audience pictures from field enforcement seizures. These are mostly images from drug seizures. The pictures are very interesting and demonstrate the determination that drug cartels have to get their product into the U.S. We are shown modified modified gas tanks partly filled with drugs, individuals used as drug mules, and shipping containers with false walls behind which drugs are stashed.

Customs also shows graphic images involving human smuggling. A famous picture is of a woman literally hidden inside the dashboard of a car. In another, a man has somehow molded himself into a car seat. A slide shows seized explosives found in a child's backpack.

Lastly, to bring the message home, we see video. At a recent presentation, I saw video of an improvised explosive device engulfing what appeared to be a U.S. Army vehicle in Iraq or Afghanistan. The video was shot from inside the vehicle. It ends with an image of a shattered windshield and the sound of machine gun fire. A second video was introduced with a slide showing a U.S. land border crossing but then cuts to video of a checkpoint that again appears to be in Iraq or Afghanistan. A large truck approaches the checkpoint and then explodes in a huge fireball and massive shock wave.

We all understand the possible human horror and economic havoc that an attack in a U.S. port or inland point could produce. Everyone wants to work to prevent that. The companies taking voluntary part in C-TPAT understand the risks and have enlisted in the home front effort in the war on terror.

So why, does Customs and Border Protection have to sell C-TPAT so wrongheadedly? Not one of the shocking images used in these presentations appeared to be of a commercial shipment in which the importer was not part of the conspiracy. The driver of the car clearly knew the woman was in the dashboard. The person accompanying the child across the border knew the explosives were in the backpack. These are not the threats that C-TPAT is intended to and most likely does in fact address.

C-TPAT focuses on commercial shippers and reduces the risk that an unknown or unauthorized third party uses that supply chain as a means of delivering a weapon of mass destruction. That is wholly different than a drug cartel using a poor person as a human drug mule.

If Customs really wants to effectively sell C-TPAT to companies not presently participating and wants participating companies to understand the value of their commitment, it should change its pitch. CBP needs to better recognize that it is usually speaking to a sophisticated business audience that wants to help Customs in its counter-terrorism role. If there are examples of Customs and Border Protection interdicting drugs, weapons, or people from commercial shipments where the importer was not involved in the criminal activity, those are the examples the trade needs to see. As it is, I fear CBP is undermining its own credibility. Personally, I watch these presentations and come away with the distinct impression that Customs is playing a bait and switch game.

C-TPAT is an important element in our national anti-terrorism strategy. It should not take much to sell it as such. By having companies voluntarily secure their own supply chain, CBP has the opportunity to focus its resources on the risky shipments. That needs to be the message. As it is, CBP is just showing pictures that don't seem to relate to the audience.

UPDATE: Does this story about Union Pacific prove me wrong? No, because my point is about the way CBP markets the program, not the program itself. The story does show that Customs want carriers to be responsible for what is in their conveyances. I'm not sure what UP can do other than work with its Mexican partners to try and secure the rail yards. Given the environment in Mexico at the moment, I would not want to be the guy having to be on the lookout for drug smugglers.

Ron Kirk USTR

The former Mayor of Dallas has been confirmed as the new United States Trade Representative. Mr. Kirk's resume includes stints as a legislative aid to Senator Lloyd Benson and Texas Secretary of State.

Mexico Retaliation List

Thanks to a number of people who sent this list to me. Here is a link to the Spanish-only list.

Mexico retaliates

I've been wondering when Mexico would finally take some action regarding the long-standing refusal of the U.S. to permit Mexican domiciled truck drivers to operate in the U.S. Well, that shoe has dropped.

Apparently, 90 commodities are affected, but have not yest been listed. I'll pass that on when I have it. According to Reuters, the tariffs will not be imposed upon rice, corn, beans, or other products that are sensitive in the Mexican economy.

At API today

Today and tomorrow, I'll be tweeting updates from the American Petroleum Institute customs meeting.

www.twitter.com/customslawblog

Looked at materials from other speakers; need to change my presentation.

Credit for US Parts in Repairs

Customs and Border Protection is proposing to amend its regulations to create an incentive to use U.S.-origin parts in foreign repairs and alterations.  

Currently, the customs regulations (at 19 CFR 10.8(d)) require the deposit of duties based on the full cost of the repair including the value of domestic and foreign components.  The proposed change will eliminate the reference to domestic components.  The intention is to allow an exclusion from dutiable value for the cost of U.S.-origin articles used in the repair or alteration and creates an incentive to seek out U.S.-origin parts for use in foreign repair and alteration operations.

A similar change was proposed for 19 CFR 10.9 relating to foreign processing.

This could be a boon to U.S. parts manufacturers where the finished article is dutiable when returned to the U.S.

Counterfeit Packaging

I just got off the phone with a reporter asking about legal and technological strategies  the pharmaceutical industry can be using to fight counterfeits.  I talked about recording trademarks with Customs and Border Protection, educating the agency on what to look for, conducting investigations to find the source, etc.  On the technology front, we talked about taggants, holograms, and RFI ID.  

What strategies does your company use?

My Inky Regrets

I like swag.  I’m always happy to come out of a conference with a useful item like an umbrella, flash drive, or corkscrew.  My firm has swag of its own.  My favorite swag is a set of three beanbag balls that make up a juggling kit.  The idea here is that compliance professionals have lots of responsibilities and, therefore, need to be able to keep several balls in the air at the same time.  Rest assured that if I see any of our competitor firms jump on this bit of cleverness, I’ll make a public spectacle of them.

Speaking of swag, I feel I may need to apologize to some of my friends out there.  But, as you will see, you have had your revenge.

We have very nice pens with “Barnes/Richardson”, our tag line (which I hate), and web address printed on them.  These pens write extremely well and have a nice hefty feel.  They use a cartridge of liquid blue ink and a ball point.  I have given these pens to hundreds of people.  Sometimes, we include them with our very nice little note pads.

Today, on the plane home from the terrific ICPA conference, my Barnes pen let me down.  No, that is not strong enough.  My Barnes pen failed me spectacularly.  I was using it to do a crossword puzzle.  While I paused to work out “Marlon’s cereal credo,” ink poured dramatically onto the page.  Looking at my hand, I was horrified to see that it looked as if I had recently been fingerprinted in the old-school fashion. 

Taking in the carnage, I saw two blue spots still expanding on the pocket of my white dress shirt.  Another spot was growing just above my belt.  My favorite Jerry Garcia tie had taken a hit as well. 

Not clear on what to do, I made my way to the plane’s lavatory to try and engage in some damage control and to toss out the damned pen.  In my head, I could hear my mother’s voice saying “Blot, don’t rub!”  Blot I did; with a dry and then wet paper towel.  This was apparently a bad idea.  It had the unwelcome effect of accelerating the stain’s evil spread.  In the mirror, I looked like the victim of a drive-by shooting on the planet of the blue blooded lawyers. 

A flight attendant had seen me headed for the lavatory and gave me some more towels and a can of club soda.  Tools in hand, I worked my way back to my seat.  Like an indigo Hester Prynne, I had been marked on my chest for some sin I must have recently committed.  I worked the club soda magic on the tie.  Thankfully, it may still be wearable. 

After pouring a third of a can of Schwepp's onto my shirt (and, therefore, on to myself), I gave up.  My shirt seems to be a loss.  I will see what magic Clorox can work.  There is work I need to do and I certainly was not helping my shirt.

Buckling my seatbelt released another round of inky horror.  My hands were suddenly freshly blue, like I had been wrestling a squid.  The pen had also dripped on the seatbelt buckle.  There was ink on the surface and deep inside on the spring.  Moving the mechanism pushed ink out like a blue squirt bottle.  Luckily, I was flush with paper towels, so I cleaned up further. 

What could I possibly have done to deserve this?  Was it leaving ICPA early?  It’s just that I have work to do.

At this point, I feel compelled to say, “I am not making this up.”  I took these pictures with my phone while still on the plane.

Having cleaned up—again—I slumped in my seat, chin down, staring at the mess on my chest.  Pressure seemed to build in my head.  Visions of myself walking through O’Hare with a shirt resembling a blue-on-white leopard skin did not make me happy.  Instead, my chest tightened and stomach felt unsettled.  I know I’ll live, but I have two clean-ish shirts right in the overhead.

Have you ever tried to open a suitcase and retrieve a shirt in the aisle of a 757?  It takes some doing.  It also takes some contortions to change your shirt a plane lavatory.  But that is what I did.  As I write this, I am sitting back in my seat with blue fingers and a clean shirt.  I feel better.

But the question remains, why did this happen?  Superficially, I think the blame has to fall on the pen not being capable of handling rapid changes in atmospheric pressure.  Why now?  This pen has been on six flights in the past 30 days.  Obviously, something else is to blame.

That’s me.  I am always to blame.

I realize now that many of the people I was happy to see at the ICPA conference likely had received one of these pens in the past.  How many had I inked?  What shirts, briefcases, and purses have I damaged?  How many of my clients, friends, and colleagues are mad at me because of an 80-cent piece of swag?  Enough, I gather, that their collective anger caused me the bad karma I have just endured.

And so, we are even.  I am sorry.  You have my very inky regrets.

At ICPA

Semi-live tweeting from ICPA today and tomorrow. Follow along at www.twitter.com/customslawblog.

Wanted: Commissioner of Customs and Border Protection

Dear President Obama and Secretary Napolitano:

We understand that this is a busy time for both of you.  Nevertheless, we would appreciate just a moment of your time to talk about one important decision you need to make: naming the next Commissioner of U.S. Customs and Border Protection.

Customs and Border Protection can trace its roots to an act signed by President Washington on July 31, 1798 as a means of raising revenue for our new nation through the collection of customs duties.  After the Internal Revenue Code became the main source of tax income , Customs role evolved into one that included trade policy and consumer protection.  In 2003, still in the wake of the attacks of 9/11, the then- Customs Service was transferred to the Department of Homeland Security along with the U.S. Border Patrol and other border enforcement agencies.  Today, CBP is an important agency that plays a complicated role in both America’s national security and its financial well being.  Consequently, the person who assumes the role of Commissioner will need to have his or her feet firmly planted in two different—and sometimes competing—environments.  Given the difficulty of finding just the right person for the task, we respectfully suggest some characteristics to consider.

First, skepticism is a good thing.  It is not enough for a federal agency to have the power to regulate.  It also must have the wisdom to exercise that power for the benefit of the nation.  Before he or she approves a regulation, the new Commissioner should poll the appropriate officials and ask this simple question: Who benefits from this proposal?  If it is not immediately clear that a regulation improves security, facilitates legitimate trade, satisfies some Congressional mandate or is required by a court order, the new Commissioner should be very skeptical.

An example illustrates this point.  Last year, Customs announced an intention to change the way the country of origin of merchandise is determined.  Since 1940, the test applicable in most cases is to identify the country where the merchandise last underwent a change in name, character, or use.   Despite having a well understood test, Customs has proposed to implement a complicated test based upon the tariff classification of the finished good and the materials used to produce it.  This is the test currently used for NAFTA products and textiles.  Customs is now seeking to expand it to all products. 

The question is: why?  Clearly, this is not an issue of national security.  Does it facilitate legitimate trade?  That seems unlikely.  Depending on how Customs chooses to implement the rule, compliance may require that American companies gather significantly more data from suppliers, in some cases that will include the country of origin of production materials used by unrelated exporters.  Also, the proposed test will require changes to the regulations every time the corresponding tariff classifications change (which is not infrequently).  This puts a new burden on Customs.  The new rules will almost never result in higher (or lower) tariff rates, and the notion that there is a serious consumer preference for imports from one foreign source over another is dubious.    Customs says the tariff-shift test is more objective and has more predictable results.  Assuming that is true, which is arguable, is the benefit worth the disruption and expense?

Similarly, Customs announced an intention to prohibit the long-established practice of valuing imported goods based on the sale from a foreign vendor to a foreign re-seller, so-called “first sale valuation.”  Customs asserted that the purpose of this proposal was to conform to a legal interpretation from the World Customs Organization.  But, it is inconsistent with U.S. court decisions stretching back to the 1960s.  Although Customs may well have the power to implement this change, it has not been able to explain who would benefit from it.  The proposal met such vocal objection that Congress stepped in and put a hold on the change until 2011 after the ITC conducts a study.

Next, effective marketing skills are important.  In recent years, Customs has embarked on a number of programs that are designed to improve national security by reducing the risk of weapons of terrorism entering the country.  These programs include the Customs-Trade Partnership Against Terrorism, the Cargo Security Initiative, the 24-Hour Manifest Rule, and the newly rolled out Importer Security Filing.  Each of these programs and others has a role to play in helping Customs target risky imports. 

No one would advocate that Customs be less vigilant in its mission to secure the borders.  On the other hand, Customs needs to recognize that every new program it rolls out raises compliance costs for affected importers and exporters.  Even “voluntary programs” like C-TPAT pose concerns for companies that want to assist Customs in its efforts but face increasingly tight profit margins.  Thus, the new Commissioner should be able to stand in front of the trade with his or her sleeves rolled up, look them  right in the face, and explain why what Customs is asking for makes sense.  If it makes more sense as a security measure than as a business decision, Customs should say so and show that it appreciates the effort businesses are undertaking to assist in its security mission. 

Experience matters.  The last three Commissioners have all had significant law enforcement experience with the Secret Service, New York City Police Department, or DEA.  There is sound reason for seeking law enforcement experience in the top job at Customs.  But it should not trump business and management experience.  Facilitating legitimate trade requires a clear understanding of the pressures companies face in allocating resources to compliance, as well as the critical importance of trade to the country’s economic recovery.

The new Commissioner will be taking on a difficult job.  He or she will be tasked with managing trade and passengers at the nation’s sea ports, international airports, and land crossings.  The new Commissioner will also have to work closely with our trading partners, the U.S. intelligence community, and America’s businesses.  That is a tough job.  Filling it will require much thought and effort.  We all wish you the best of luck in your search.

This Rocks

I've occasionally been quoted in newspapers and elsewhere.  I've never been as happy about that as this use of my prose.