Mitigating 232 Penalties - I'm Back

I realize I have been gone for a while. The first Trump Administration generated enough compliance work, litigation, and general chaos to keep me too busy and too stressed to do many things. One such thing was writing this blog. I did it mainly because I enjoy the process, and it forced me to stay on top of cases from the Court of International Trade and Court of Appeals for the Federal Circuit. Explaining those decisions in what I intend to be an approachable style helped me understand them.

Over the past year, I have at times considered restarting the blog and never found the time or inspiration. Apparently, that has changed. 

You may have noticed that the second Trump administration is off to a fast start in the trade space. We have new 10% tariffs on goods from China and 25% tariffs on an expanded list of steel and aluminum products. The 232 exclusion process has been shuttered. Reciprocal tariffs are being floated, as are potential tariffs on cars, pharmaceuticals, and chips. 

Source: Wallpaperaccess.com

What stirred me to write is a section at the end of the Steel EO from February 10. The section of concern is paragraph 12, just before the Annex. The section reads:

CBP shall prioritize reviews of the classification of imported steel articles and derivative steel articles and, in the event that it discovers misclassification resulting in non-payment of the ad valorem duties proclaimed herein, it shall assess monetary penalties in the maximum amount permitted by law and shall not consider any evidence of mitigating factors in its determination. In addition, CBP shall promptly notify the Secretary regarding evidence of any efforts to evade payment of the ad valorem duties proclaimed herein through processing or alteration of steel articles or derivative steel articles prior to importation. In such circumstances, the Secretary shall consider the processed or altered steel articles or derivative steel articles for inclusion as derivative steel articles pursuant to clause 5 of this proclamation.

The aluminum order does not contain that limitation on the consideration of mitigating factors. 

The consideration of mitigating factors was written into the law by Congress. It shows up at 19 U.S.C. § 1592(b)(2), which says “Such person shall have a reasonable opportunity under section 1618 of this title to make representations, both oral and written, seeking remission or mitigation of the monetary penalty.” 

In Section 1618, Congress made the Commissioner of Customs the final decision maker on the penalty amount. The law says the “Commissioner of U.S. Customs and Border Protection, if he finds that such fine, penalty, or forfeiture was incurred without willful negligence or without any intention on the part of the petitioner to defraud the revenue or to violate the law, or finds the existence of such mitigating circumstances as to justify the remission or mitigation of such fine, penalty, or forfeiture, may remit or mitigate the same upon such terms and conditions as he deems reasonable and just, or order discontinuance of any prosecution relating thereto.” 

The traditional way of thinking about this is that an Executive Order cannot undo that grant of authority. Congress would need to do that. The language in the EO is an example of what some lawyers believe is the "unitary executive." Under that approach, the President is in control of the Executive Agencies and Congress cannot limit that authority. Whether that works or not will surely be litigated if there is an effort to assess a significant penalty.  The President issued a statement today extending his control to so-called independent agencies. That order states only he and the Attorney General may determine the correct interpretation of laws for the agencies. The question of Presidential control over Executive Department and independent agencies is certainly headed to the Supreme Court.

Keep in mind that the steel EO does not limit the Court, which will independently set any penalty and will consider mitigating factors based on the evidence presented to it. 

Assuming Customs follows the EO and the maximum penalty is going to be assessed, the Order says it will be the “maximum amount permitted by law.” That raises the question of what is the maximum penalty?

The maximum amount is set in 19 U.S.C. § 1592(c) and depends on the circumstances, even in the absence of mitigation. In the case of a violation that occurs as a result of negligence, the maximum penalty without mitigation is 2x the unpaid duties, taxes, and fees. The importer is also required to pay the lost revenue with interest. If the violation resulted from gross negligence, the maximum permitted is 4X the lost revenue along with the payment of the withheld revenue and interest. Gross negligence means that the importer was willfully or knowingly careless, failed to follow directions, or had other aggravating factors. For fraud, the maximum penalty is an amount not to exceed the domestic value of the merchandise. Note that domestic value is entered value plus duties, transportation, and a profit. Nothing in the EO does away with considerations of culpability when setting the maximum penalty. If an importer proves simple negligence, the maximum penalty allowed by law is 2X and cannot be elevated to fraud levels. 

An important point is that § 1592(c)(4) further limits the maximum penalty when the importer voluntarily discloses the circumstances of the violation and tenders the loss of revenue plus interest.. The amount is higher for fraud cases. That is the "prior disclosure" process, which is probably familiar to anyone who has read this far. The EO may or may not have lasting impact on penalties under Section 232. It will, however, likely spur prior disclosures by companies that discover potential violations. Paying the duties and interest is often better than fighting about whether there is really a violation.

Speaking of that, this is a good time to remind everyone that a penalty can only be assessed when there is a violation. A violation means the importer (or another interested party) made a material false statement or omission regarding the entry of the merchandise as a result of negligence, gross negligence, or fraud. The reverse is that a mistake of fact or clerical error is not a violation if the importer acted with "reasonable care." That means it is incredibly important to document your critical entry processes (e.g., classification, valuation, rate of duty determinations). You should have a "reasonable care" document showing how you arrived the information reported to CBP on the entry. Relying on the supplier or a person not familiar with the relevant requirements is not sufficient. When enacting the Reasonable Care standard, Congress noted that evidence of reasonable care includes consultation with internal and external experts and seeking rulings from Customs. Experts in this circumstance include brokers, accountants, and lawyers familiar with the requirements. So everyone should go pull some entries and see if you have trace the data back to records demonstrating reasonable care. Whether the result is right or wrong, the exercise of reasonable care is an important step in avoiding penalty cases and the questions that sparked this whole post.

This was fun. I'll have more to follow.