Saturday, July 28, 2012

Customs Business vs. Compliance

Corporate compliance is tricky enough without having to worry about whether the compliance person is actually committing a violation simply by doing his or her job. This actually comes up because the law regulating customs brokers requires that no one engage in "customs business" on behalf of another party without having a broker's license. This makes perfect sense when thinking about an independent professional conducting business on behalf of others for money. That person should be licensed.

On the other hand, importers can manage compliance on their own. The law requires that importers act with reasonable care and define that, in part, as having internal customs experts. Corporate importers do this by having compliance managers to oversee import (and export) operations.

The problem is that many companies are part of families of related entities.  Often, there is a corporate parent and multiple subsidiaries and possibly subsidiaries of subsidiaries. Usually, these companies are separate legal entities.

As you may have noticed, the economy has not been great. Many companies have reacted by working hard to consolidate resources and eliminate redundancy. On way to do that is to set up shared services. Where subsidiary A and subsidiary B both need import compliance managers, it might make sense to have the same person perform that task for both companies. But, according to Customs and Border Protection, an unlicensed employee of subsidiary A cannot conduct customs business on behalf of related subsidiary B because doing so is acting as a customhouse broker without a license.

Customs and Border Protection, I must admit, has gone pretty far by limiting the definition of "customs business." As it stands now, corporate compliance people can do almost all background tasks related to import compliance. There is a grey line that separates compliance work like tariff classification and identifying dutiable assists from customs business. When the compliance person starts signing documents for submission to Customs (e.g., filing entries, responding to CF28's, etc.) that is customs business.

I am thinking about this for two reasons. The first is this ruling in which Customs mostly reaffirmed its position that unlicensed compliance professionals cannot engage in customs business for a party related to their employer. But, this ruling includes a couple wrinkles. First, the compliance professional was an officer of a number of the related entities and an employee of another. According to Customs, serving as a duly elected officer of the corporation is sufficient to allow that officer to conduct customs business on behalf of the related companies. But, Customs also held that the officer could only conduct customs business as an officer of the related parties during hours of the day that are non-concurrent with his or her employment for the other company. I think that means there must be certain hours of the day during which the employee status officially ends. As a practical matter, that may be an unworkable result, but I don't know the companies involved  and they may move forward in some compliant way.

I think it is pretty clear that Customs sees the value of in-house compliance professionals. So, it seems that Customs feels constrained by the current law and regulations. Otherwise, it would  probably do everything it can to encourage companies to hire compliance professionals to perform customs business, including letting them serve as shared resources.

Well, it turns out that this may be the time for Customs to act. It is currently undertaking a complete review of the regulations governing customs brokers. One way to fix this might be to eliminate the restriction on conducting customs business for related parties. The other way to do this might be to encourage corporation to have their internal compliance professionals be licensed brokers. To do that, Customs really needs to look at the current testing process. This is probably a topic for another post, but the current process, which has a pass rate usually less than 10% and recently had a 1% pass rate, indicates that something is fundamentally wrong with either the test itself or the people who show up to take it. Either way, something needs to change so that smart, prepared people are both encouraged to take the test and can pass it. With more licensed brokers in corporate compliance jobs, HR departments will have to jump through fewer hoops to comply.

I mentioned that there were two things that prompted this post. Besides the Ruling, the other is  news that the Business Alliance for Customs Modernization ("BACM") made similar comments about the definition of customs business during one of CBP's webinars on the re-write of the regulations. So, there are others out there worried about this as well.


Anonymous said...

As a Licensed Customs Broker and in-house International Compliance Manager, so understand needing a clearer definition of "Customs Business". There are a lot of gray areas working with subsidiaries and other related partners, and generally agree with your analysis.

After speaking with counsel on the topic, it was suggested that either the company creates its own customs brokerage entity (which I know occurs at other businesses as well), or that I am a paid employee by all the companies (something else I have done in other companies). Do you find these are the most common way for a licensed broker to get around these issues? I so happen to be in law school, and would think this would also alleviate some of these requirements as an attorney. I would love you opinion on the matter as well. Thank you.

Larry said...

What you are asking for is dangerously close to practicing law, which I don't do here on the blog. I can tell you this. Yes, companies have made arrangements under which the compliance person is an employee of multiple business entities. Some companies have also created entities solely for the purpose of acting as licensed brokers. Either will work. One new worry, based on the ruling cited in the post, is whether you can work for two or more entities during overlapping time. Regardless, this is a hassle and needs to be fixed. Personally, I would interpret the law and pass a regulation extending the definitions of employer and importer to cover related companies, provided that both the parent company and the non-employer companies authorize the representation by the compliance person. That might not work, but it is a starting point.

Sarah said...

: I think also of note is a recent tendency on the part of businesses to cut corners, particularly finding loopholes in duty charges as of late.

Anonymous said...

I was one of the victims to take the recent Customs Broker Exam which had a pass rate of 1% Unfortunately I was not one of the 1% but I definitely agree that Customs needs to re-evaluate the test. There is just too much material and not enough time to look up the answers. Wish me luck as I take the next exam in October!