What to Take from 2018: Suppliers Lie
This is part 2 of the Univar discussion. For the evidence issues, see part 1.
If you know me or have ever heard me speak about customs penalty cases, you may know that I am forever frustrated by the disconnect between exporter dishonestly and importer liability. In my personal view, there are many cases in which a naïve or careless importer is left holding the penalty bag when an unscrupulous exporter lies about the true nature of the product or the relevant law. How many times does an importer need to ask the exporter to confirm the country of origin, composition, or other relevant fact before the importer can legally rely on those representations? In an age of on-line e-commerce transactions in which seller and buyer may never meet IRL, what is the responsibility of the importer?
Those are rhetorical questions because the law is clear on this. My frustration with the law is real, not rhetorical. Let’s look at the facts of United States v. Univar USA, Inc. (Slip Op. 18-157)
to see how it played out. What follows is my commentary on reasonable care; it is not intended to represent the Court’s analysis. It is the kind of analysis--fired by suspicion and powered by 20/20 hindsight--that CBP uses in enforcement actions.
Univar is the leading chemical distributor in the United States. Thus, it can be presumed to be familiar with the industry and the relevant regulations. Prior to 2003, it purchased and imported the sweetener saccharin from China. In 2003, saccharin from the People’s Republic of China became subject to antidumping duties under case number A-570-878.
After the antidumping duties were imposed, Univar sought out a non-Chinese supplier of saccharin. This indicates that Univar understood the importance of country of origin with respect to the antidumping duties and the total landed cost of the product.
Univar eventually found a supplier claiming to make the product in Taiwan. It received a price quote including shipments from Taiwan. Univar also assisted the supplier in securing necessary FDA clearance to export saccharin to the US. The FDA registration listed an address in Taiwan as the point of production. In 2004, a representative of Univar visited Taiwan to inspect the supplier. The supplier stated that it owned a factory in Taiwan, but the Univar representative visited a factory in Taiwan owned by a different company at a different address. A month later, Univar started imports from the new supplier.
Sometime in 2004, Univar sought to have its saccharin certified as kosher. This process involves having a rabbi (technically, a mashgiach) visit the production site and inspect for compliance with kashrut. There was an apparently successful certification visit in 2005 to the location identified in the FDA documentation. On three subsequent rabbinical visits, the mashgiach was not permitted to inspect the plant for various reasons including a shut down, a flood, and construction, all of which seem suspiciously convenient.
This case involves 36 entries Univar made between 2007 and 2012. In each entry, Univar declared Taiwan to the country of origin. For each entry, it had a certificate of origin issued by the relevant chamber of commerce in Taiwan, as authorized by the Taiwan Board of Foreign Trade. Such certificates of origin are routinely issued without much effort at confirmation.
In 2008, Univar engaged a well-known licensed customs broker to undertake a compliance audit. In its report, the broker told Univar that it had a good culture of compliance and that a “good importer” need not visit a foreign supplier prior to purchasing from that factory.
If that were the entire story, would that pass muster as reasonable care? The supplier said it had a factory. It was visited at least once by the kosher certifying authority. The local Chamber of Commerce issued an officially sanctioned certificate of origin. Shipments to the US came from Taiwan. The broker hired to assess compliance was satisfied. The only problem seems to be that subsequent visits by rabbis were not successful.
Let’s add more context.
First, keep in mind that the antidumping duty order created an incentive for Chinese suppliers to transship and misrepresent the origin of their product. Univar is a large chemical company with experience in the trade and it was aware of the dumping order. That is important context.
Moreover, shortly after it started importing from Taiwan, a domestic producer notified Univar of its suspicions that the supplier was transshipping from China. When questioned, the supplier pointed to the 2004 site visit, which was actually to a different location operated by a different company. Next, Univar allowed the domestic company to conduct a chemical analysis of a sample. The domestic company concluded that the product had been made in China. Univar discounted this conclusion as based on a false understanding of what was happening in China.
Also in 2004, a representative from PepsiCo, a Univar customer, contacted the company questioning whether the saccharin was made entirely in Taiwan or was further processed from China-origin material. By 2006, Univar was aware of rumors that it was purchasing saccharin that originated in China. In 2007, a Univar employee asked a sourcing agent whether Univar might be receiving China-origin saccharin that was being repacked in Taiwan. Finally, in 2008, the president of another company trying to resell Univar’s saccharin reported to Univar that it was having trouble reselling the merchandise because the alleged producer did not actually manufacture in Taiwan.
Now what do you think? Was Univar acting with reasonable care throughout the period? Does any one of these facts represent a point at which Univar should have stopped claiming the product to be from Taiwan?
That question is harder than it might seem. There was a long separation of events between 2004 and 2008. It is not clear exactly who in the company knew what and who was responsible for compliance. Was this information conveyed to the broker and to the internal compliance staff?
Add to that the fact that the address provided to the FDA for the factory turns out to be a residential apartment building. Given that fact, it is not clear how the first rabbinical visit was conducted. Finally, the government of Taiwan had not issued any required licenses to manufacture saccharin, though there is reason to believe at least one unlicensed producer was operating.
We’ll come back to compliance. At this point, it is fair to say that there was enough in the record to establish that a reasonable jury could find that Univar had made material false statements as to the origin of the saccharin. Consequently, the Court of International Trade denied the motion for summary judgment. Thus, the resolution of this case will likely require a trial.
The important point for compliance professionals is to learn from Univar and use it an example of how to respond to compliance concerns. What we know is that suppliers have incentives to lie and that the law punishes importers who do not act reasonably to ferret out the lies. Suppliers rarely have to worry about being subject to a penalty. Even is a civil suit against the supplier for commercial fraud in its home country is often impractical.
Below, with the benefit of hindsight and experience, are some things importers might consider when onboarding a new supplier and periodically re-certifying the supplier. None of these are technically required and not one alone would necessarily have prevented the penalty case against Univar. Nevertheless, when dealing with a product where there is an incentive to transship to avoid duty or quota, or where the exporter claims to be a legitimate exporter of branded merchandise, keep these points in mind.
If you know me or have ever heard me speak about customs penalty cases, you may know that I am forever frustrated by the disconnect between exporter dishonestly and importer liability. In my personal view, there are many cases in which a naïve or careless importer is left holding the penalty bag when an unscrupulous exporter lies about the true nature of the product or the relevant law. How many times does an importer need to ask the exporter to confirm the country of origin, composition, or other relevant fact before the importer can legally rely on those representations? In an age of on-line e-commerce transactions in which seller and buyer may never meet IRL, what is the responsibility of the importer?
Those are rhetorical questions because the law is clear on this. My frustration with the law is real, not rhetorical. Let’s look at the facts of United States v. Univar USA, Inc. (Slip Op. 18-157)
to see how it played out. What follows is my commentary on reasonable care; it is not intended to represent the Court’s analysis. It is the kind of analysis--fired by suspicion and powered by 20/20 hindsight--that CBP uses in enforcement actions.
Univar is the leading chemical distributor in the United States. Thus, it can be presumed to be familiar with the industry and the relevant regulations. Prior to 2003, it purchased and imported the sweetener saccharin from China. In 2003, saccharin from the People’s Republic of China became subject to antidumping duties under case number A-570-878.
After the antidumping duties were imposed, Univar sought out a non-Chinese supplier of saccharin. This indicates that Univar understood the importance of country of origin with respect to the antidumping duties and the total landed cost of the product.
Univar eventually found a supplier claiming to make the product in Taiwan. It received a price quote including shipments from Taiwan. Univar also assisted the supplier in securing necessary FDA clearance to export saccharin to the US. The FDA registration listed an address in Taiwan as the point of production. In 2004, a representative of Univar visited Taiwan to inspect the supplier. The supplier stated that it owned a factory in Taiwan, but the Univar representative visited a factory in Taiwan owned by a different company at a different address. A month later, Univar started imports from the new supplier.
Sometime in 2004, Univar sought to have its saccharin certified as kosher. This process involves having a rabbi (technically, a mashgiach) visit the production site and inspect for compliance with kashrut. There was an apparently successful certification visit in 2005 to the location identified in the FDA documentation. On three subsequent rabbinical visits, the mashgiach was not permitted to inspect the plant for various reasons including a shut down, a flood, and construction, all of which seem suspiciously convenient.
This case involves 36 entries Univar made between 2007 and 2012. In each entry, Univar declared Taiwan to the country of origin. For each entry, it had a certificate of origin issued by the relevant chamber of commerce in Taiwan, as authorized by the Taiwan Board of Foreign Trade. Such certificates of origin are routinely issued without much effort at confirmation.
In 2008, Univar engaged a well-known licensed customs broker to undertake a compliance audit. In its report, the broker told Univar that it had a good culture of compliance and that a “good importer” need not visit a foreign supplier prior to purchasing from that factory.
If that were the entire story, would that pass muster as reasonable care? The supplier said it had a factory. It was visited at least once by the kosher certifying authority. The local Chamber of Commerce issued an officially sanctioned certificate of origin. Shipments to the US came from Taiwan. The broker hired to assess compliance was satisfied. The only problem seems to be that subsequent visits by rabbis were not successful.
Let’s add more context.
First, keep in mind that the antidumping duty order created an incentive for Chinese suppliers to transship and misrepresent the origin of their product. Univar is a large chemical company with experience in the trade and it was aware of the dumping order. That is important context.
Moreover, shortly after it started importing from Taiwan, a domestic producer notified Univar of its suspicions that the supplier was transshipping from China. When questioned, the supplier pointed to the 2004 site visit, which was actually to a different location operated by a different company. Next, Univar allowed the domestic company to conduct a chemical analysis of a sample. The domestic company concluded that the product had been made in China. Univar discounted this conclusion as based on a false understanding of what was happening in China.
Also in 2004, a representative from PepsiCo, a Univar customer, contacted the company questioning whether the saccharin was made entirely in Taiwan or was further processed from China-origin material. By 2006, Univar was aware of rumors that it was purchasing saccharin that originated in China. In 2007, a Univar employee asked a sourcing agent whether Univar might be receiving China-origin saccharin that was being repacked in Taiwan. Finally, in 2008, the president of another company trying to resell Univar’s saccharin reported to Univar that it was having trouble reselling the merchandise because the alleged producer did not actually manufacture in Taiwan.
Now what do you think? Was Univar acting with reasonable care throughout the period? Does any one of these facts represent a point at which Univar should have stopped claiming the product to be from Taiwan?
That question is harder than it might seem. There was a long separation of events between 2004 and 2008. It is not clear exactly who in the company knew what and who was responsible for compliance. Was this information conveyed to the broker and to the internal compliance staff?
Add to that the fact that the address provided to the FDA for the factory turns out to be a residential apartment building. Given that fact, it is not clear how the first rabbinical visit was conducted. Finally, the government of Taiwan had not issued any required licenses to manufacture saccharin, though there is reason to believe at least one unlicensed producer was operating.
We’ll come back to compliance. At this point, it is fair to say that there was enough in the record to establish that a reasonable jury could find that Univar had made material false statements as to the origin of the saccharin. Consequently, the Court of International Trade denied the motion for summary judgment. Thus, the resolution of this case will likely require a trial.
The important point for compliance professionals is to learn from Univar and use it an example of how to respond to compliance concerns. What we know is that suppliers have incentives to lie and that the law punishes importers who do not act reasonably to ferret out the lies. Suppliers rarely have to worry about being subject to a penalty. Even is a civil suit against the supplier for commercial fraud in its home country is often impractical.
Below, with the benefit of hindsight and experience, are some things importers might consider when onboarding a new supplier and periodically re-certifying the supplier. None of these are technically required and not one alone would necessarily have prevented the penalty case against Univar. Nevertheless, when dealing with a product where there is an incentive to transship to avoid duty or quota, or where the exporter claims to be a legitimate exporter of branded merchandise, keep these points in mind.
- Understand how trade rules impact suppliers and assume suppliers will lie to take advantage of the rules. This applies particularly to origin but can also go to the identity of the producer and exporter (which is relevant for ADD/CVD deposit rates), the material used to make the item, the method of production, etc.
- Remember that transshipment is a common practice, especially when an antidumping or countervailing duty order is imposed. This also includes the 301 duties applicable to China. Suppliers in countries subject to the order who suddenly have a source in a country not covered by the order are likely lying.
- When switching to a supplier in a new country, check the trade data to see if there is a history of exporting the product to the US. If you are the first person to ever buy it from the new country, be doubly suspicious.
- Confirm the existence of the production facility. A site visit by an employee or agent is the best confirmation. As a starting point, also check the address in Google Earth or a similar service. Does it look to be a factory capable of making the product?
- Confirm that the business at that address is actually associated with the supplier. To do this ask to see business licenses, corporate documents, and other indicia of legal status.
- Once it is established that the business exists and is located at that facility, confirm it has the machinery, equipment, and personnel necessary to make the product. If the process requires machine tools, ask to see them either in a site visit or (at a minimum) in photographs. Digital photographs of machinery and equipment should confirm via metadata the date and location at which they were taken. You should confirm that the machines are functional, are owned by the supplier or at least held by long-term lease, and that workers know how to operate them.
- Ask to see records showing that there are sufficient production employees at the plant to make the product.
- While you are at it, you can check that the employees are there legally. They should be of the required age to work and not there as prison or forced labor. Do this by demanding to see identification and work papers as well as private conversations with employees.
- Confirm that the plant has an inventory or supply of the raw materials necessary to make the product. The inventory of raw materials should pre-date the production of exports to you and should be sufficient to make the material. A pound of steel wire in inventory is not a good sign if you ordered half a ton of wire hangers.
- Finally, if the goods are branded or have certifying marks (including, for example UL, HDMI, USB, Bluetooth, etc.), ask to see the license from the mark holder permitting the supplier to manufacture and export the product. It is not sufficient to get a letter saying that such a license exists. Remember, suppliers lie. If the supplier says it purchased the goods from a third party, get the identity of that third party and ask for confirmation that it is properly licensed. Many trademark holders have online means of verifying that marks are legitimate, use those resources. See, e.g., HDMI Adopters and UL Verify.
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