Secret Agent Man
How many times have you thought, or heard someone express the thought, that if you structure your transactions to avoid being importer of record, you can avoid most customs liability? That comes up a lot. People think it is beneficial to let the seller be the importer or even have the broker take care of that responsibility.
Customs lawyers generally tell clients to shake that thought out of their heads. I say "generally" because there may be situations where it makes sense. Remember, this is just talk, it is not specific legal advice (it is not legal advice at all). Often, the reason we tell buyers that using a third party as the importer of record is not a liability shield is because of the possibility that Customs might treat the buyer as "aiding or abetting" the importer if something goes wrong. Worse yet, the buyer could be a co-conspirator in a criminal enterprise. None of that is good.
The Court of International Trade recently issued an opinion basing third-party liability on a different theory. But, no matter how you slice it, the buyer discovered that it was not able to hide behind the importer when it came to liability. The basis for this decision was that the importer was an agent acting for and on behalf of the buyer. The case is United States v. Pan Pacific Textile Group, (Slip Op. 05-107).
The facts are a bit convoluted . The defendant was importing apparel using a customs broker. Eventually, the broker offered a better way to structure the transaction. Under the new structure, the broker would be the importer of record and the buyer would pay a flat-fee for the service including duties. The result was a significant savings to the buyer. This, of course doesn't make much sense since the broker was absorbing more liability which would generally result in more cost to the buyer, not less. Apparently, the buyer either did not think this was strange or went along with the scheme.
The bad news for the buyer is that the broker's great idea was to fraudulently misdeclare the merchandise as something with a lower duty rate and no quota requirements. While this did result in lower duties and costs at the time of entry, it is, of course, profoundly illegal.
So, how did the buyer get to be held liable for the unpaid duties? The Court of International Trade applied basic concepts of agency law. These are the same rules that make an employer liable for the acts of the employee. In this case, the broker was an agent and the buyer was the principal. The broker's bad acts were held to be the bad acts of the buyer. The fact that the agent's bad acts were not authorized and were, in fact, illegal was not enough to prevent the fraud from being imputed to the principal. The Court held that even though the broker had clearly been acting in its own interest rather than fully for the benefit of the buyer, because the buyer benefited, it could be held liable for the duties.
This means that buyers of imported goods cannot use a third party importer as a shield against duty liability. This does not mean that every buyer of imported goods is potentially liable for the importer's fraud. It does mean, though, that where buyers specifically structure transactions to come through a third-party importer, that buyer might be legally in charge of the transaction and, therefore, liable if something goes wrong. Keep this in mind when drafting your purchase orders and logistics contracts.
By the way, the question of whether the buyer is also liable for a penalty, remains open. A trial will likely be held on that question.
Customs lawyers generally tell clients to shake that thought out of their heads. I say "generally" because there may be situations where it makes sense. Remember, this is just talk, it is not specific legal advice (it is not legal advice at all). Often, the reason we tell buyers that using a third party as the importer of record is not a liability shield is because of the possibility that Customs might treat the buyer as "aiding or abetting" the importer if something goes wrong. Worse yet, the buyer could be a co-conspirator in a criminal enterprise. None of that is good.
The Court of International Trade recently issued an opinion basing third-party liability on a different theory. But, no matter how you slice it, the buyer discovered that it was not able to hide behind the importer when it came to liability. The basis for this decision was that the importer was an agent acting for and on behalf of the buyer. The case is United States v. Pan Pacific Textile Group, (Slip Op. 05-107).
The facts are a bit convoluted . The defendant was importing apparel using a customs broker. Eventually, the broker offered a better way to structure the transaction. Under the new structure, the broker would be the importer of record and the buyer would pay a flat-fee for the service including duties. The result was a significant savings to the buyer. This, of course doesn't make much sense since the broker was absorbing more liability which would generally result in more cost to the buyer, not less. Apparently, the buyer either did not think this was strange or went along with the scheme.
The bad news for the buyer is that the broker's great idea was to fraudulently misdeclare the merchandise as something with a lower duty rate and no quota requirements. While this did result in lower duties and costs at the time of entry, it is, of course, profoundly illegal.
So, how did the buyer get to be held liable for the unpaid duties? The Court of International Trade applied basic concepts of agency law. These are the same rules that make an employer liable for the acts of the employee. In this case, the broker was an agent and the buyer was the principal. The broker's bad acts were held to be the bad acts of the buyer. The fact that the agent's bad acts were not authorized and were, in fact, illegal was not enough to prevent the fraud from being imputed to the principal. The Court held that even though the broker had clearly been acting in its own interest rather than fully for the benefit of the buyer, because the buyer benefited, it could be held liable for the duties.
This means that buyers of imported goods cannot use a third party importer as a shield against duty liability. This does not mean that every buyer of imported goods is potentially liable for the importer's fraud. It does mean, though, that where buyers specifically structure transactions to come through a third-party importer, that buyer might be legally in charge of the transaction and, therefore, liable if something goes wrong. Keep this in mind when drafting your purchase orders and logistics contracts.
By the way, the question of whether the buyer is also liable for a penalty, remains open. A trial will likely be held on that question.
Comments