Webinar – Tuesday, June 11, 2019

12:00 – 1:00 pm EDT

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In recent years, there has been a steady rise in the number of lawsuits brought under the False Claims Act (FCA) alleging that importers have concealed obligations to pay duties to U.S. Customs and Border Protection. The increase in the number of qui tam suits filed by whistleblowers, combined with the current administration’s protectionist policies, suggests that U.S. importers could face increased FCA risks for years to come.

This webinar will provide an overview of the FCA and the “reverse false claim” theory of liability that applies in duty evasion cases where an importer is alleged to have made false statements about tariff classification, country of origin, or the value of goods. The presenters will analyze recent enforcement trends, discuss considerations for responding to a government FCA investigation, and share practical steps that importers can take to mitigate risks.

Continuing Legal Education (CLE) —
We will provide a certificate of attendance and other materials to use in seeking continuing education credits.

This webinar is pending for California & New York CLE credit. California attorneys may claim self-study CLE credit for watching the recording of this webinar.

SPEAKERS

·       Frances Hadfield, Counsel, New York

·       Jason Crawford, Counsel, Washington, D.C.

·       Allegra Flamm, Associate, Washington, D.C.

Questions? Contact: Tricia Wyse (twyse@crowell.com)

 

In HQ H301075, Customs and Border Protection (CBP) reviewed the classification of a “smart” coffee table called “Sobro.” The product comes in the form of a coffee table  with the following dimensions: 43.1 x 22.8 x 17.5 inches.  Its construction material (i.e., wood, metal, plastics, or other) was not specified in the request, although the importer stated it is equipped with a tempered glass tabletop with an integrated touch-panel control.  The Sobro comes equipped with:

  1. A refrigerated drawer (adjustable  from 37 – 54 degrees Fahrenheit);
  2. Two storage drawers;
  3. A wireless Bluetooth speaker;
  4. Two USB ports;
  5. Two 120V outlets;
  6. An AUX IN connector; and
  7. LED lighting.

GRI 3(b) provides guidance for mixtures, composite goods, and goods put up in sets for retail sale.  For purposes of this rule, Explanatory Note IX to GRI 3(b) provides that, “composite goods made up of different components shall be taken to mean not only those in which the component are attached to each other to form a practically inseparable whole but also those with separable components, provided these components are adapted one to the other and are mutually complementary and that together they form a whole which would not normally be offered for sale in separate parts”.

CBP determined that the Sobro was a composite good, because it consists of furniture of Chapter 94, incorporates a “refrigerator” of Chapter 85, and electrical components, such as a Bluetooth speaker, power outlets, and USB connectors.

GRI 3(b) provides that composite goods must be classified according to the material or component that imparts the article with its “essential character.” CBP determined that the essential character of the Sobro is that of furniture.  Although there are additional functions, namely lighting, charging and refrigerating, CBP believes the product functions, essentially, as a piece of household furniture with additional features that supplement or enhance its usefulness in that regard.

The Sobro “smart” coffee table is classified in heading 9403, HTSUS, which provides for “other furniture and parts thereof”.  The specific subheading shall be determined by the Sobro’s constructed material, i.e., metal, wood, plastics, or other and in what environment the product is intended to be used.  The general rate of duty will is Free.

Certain products of China are classified under subheadings 9403, HTSUS, and unless specifically excluded, are subject to the additional 10% ad valorem rate of duty (raised to 25% for goods entered as of May 10, 2019).  At the time of importation, importers must report the Chapter 99 subheading in addition to its subheading.

 

On May 15, 2019, President Trump executed a new Executive Order (EO) likely to inject increased levels of scrutiny and uncertainty throughout the vast and interconnected web of government contract supply chains. The new EO, entitled “Securing the Information and Communications Technology and Services Supply Chain,” comes during a period of escalating trade tensions with China and following a breakdown of trade talks earlier in the week. The EO sets the stage for restricting commercial business with a significantly broader block of Chinese companies like Huawei (already subject to a federal procurement ban) in an effort to stem “malicious cyber-enabled actions” within U.S. networks.

Drawing upon authorities available under the International Emergency Economic Powers Act of 1977, the EO prohibits any commercial “transaction” determined by the Secretary of Commerce to involve “information and communications technology or services” designed, developed, manufactured, or supplied by entities owned, controlled, or subject to the jurisdiction of a “foreign adversary,” thereby posing “unacceptable risk to the national security of the United States.” This analysis requires a broad analysis including risk to the “U.S. critical infrastructure or the digital economy of the US.” On the same day President Trump executed the EO, the Department of Commerce announced that it would take a separate but related action in adding Huawei and 70 of its affiliates to the “entity list,” effectively prohibiting Huawei from acquiring items or technology from U.S. suppliers without authorization from Commerce.

In assessing the potential reach and impact of the supply chain EO, it is important to note that:

  • The scope of technologies and services covered by the EO is exceedingly broad, defined to include “any hardware, software, or other product or service primarily intended to fulfill or enable the function of information or data processing, storage, retrieval, or communication by electronic means, including transmission, storage, and display.”
  • Though intended initially to target Huawei and its affiliates, the EO contemplates that additional countries and entities considered foreign adversaries may be identified through regulations to be issued by Commerce within 150 days.
  • Those regulations may also identify particular technologies subject to the new prohibitions, and establish procedures through which otherwise prohibited transactions or technologies may be permitted through the issuance of “licenses.”
  • The EO also identifies enhanced roles and responsibilities for the Department of Homeland, Department of Justice, and the Director of National Intelligence.

Much of the focus will now turn to Commerce and its development of regulations to implement the sweeping language of this new EO.

Webinar on May 17, 2019

Starts: 12:00 PM (EDT)
Ends: 12:30 PM (EDT)

Join the Crowell & Moring trade team for a 30-minute update on the U.S.-China trade negotiations, the imposition of tariffs, and the continued escalation of tensions from the White House.  Hear the latest on President Trump’s potential next steps, the status of the product exclusion process for Lists 1, 2, and 3, and how to respond to the recent announcement of List 4, covering virtually all the remaining U.S. imports from China.

Professionals from our legal, policy and political team will discuss potential strategies for companies affected by the Trump tariffs and how to respond – at the White House and before the Office of the U.S. Trade Representative, in the halls of Congress, and in China.  This will be a brief, to-the-point webinar, to be followed by additional analysis and engagement strategies as the Trump tariff war with China continues over the coming weeks and months.

Contact: Tricia Wyse (twyse@crowell.com)

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On May 13, 2019, the Chinese Customs Tariff Commission of the State Council (CTCSC) issued CTCSC Announcement [2019] No. 3 announcing China’s retaliatory measures in response to the United States’ latest increase of Section 301 tariffs from 10% to 25% on $200 billion worth of Chinese imports.

According to the CTCSC Announcement [2019] No. 3, 2493 items would be hit with a new additional tariff of 25%, 1078 items will be subject to additional 20% tariff, 974 items will be subject to additional 10% tariff, and the additional tariff on the 595 items will remain unchanged at 5%. China’s retaliatory tariffs will come into effect as of June 1, 2019.

Of note, one important tariff relief measure was also announced by the CTCSC. In the CTCSC Announcement [2019] No. 2, the CTCSC released a long-awaited process to obtain product exclusions for particular products classified within covered tariff subheadings from the additional duties in effect on certain products originated from the U.S..

Eligible Parties to Submit Exclusion Requests

Product exclusion requests can be submitted by “interested persons,” which include “companies in China” that are impacted by the retaliatory tariffs on covered U.S.-origin products, such as importers, manufacturers, users, and trade associations, or chambers representing such companies. Subject to the CTCSC’s further clarification, “companies in China” usually would be interpreted to include not only wholly owned Chinese companies, but also WFOEs (Wholly Foreign-Owned Enterprises) or joint ventures registered in China by foreign companies. Companies are encouraged by the CTCSC to have relevant trade associations or chambers to file exclusion requests on their behalf.

Eligible Products

Only products that fall within the lists of products subject to China’s retaliatory tariffs in effect would be eligible for exclusion from the retaliatory tariffs. Products for which China has terminated or suspended imposition of retaliatory tariffs would not be within the scope of eligible products.

Specifically, interested parties may request exclusion from China’s retaliatory tariffs for the following products:

List 1 (Batch 1), covering 545 items (worth $34 billion), the retaliatory tariff rate for which is 25%, effective as of July 6, 2018. 28 lines of auto and auto part products on this list will be excluded;

List 1 (Batch 2), covering 333 items (worth $16 billion), the retaliatory tariff rate for which is 25%, effective as of August 23, 2018. 116 lines of auto and auto part products on this list will be excluded;

List 2 (Batch 1), covering 2493 items, the retaliatory tariff rate for which was 10% as of September 24, 2018, but will be increased to 25% as of June 1, 2019;

List 2 (Batch 2), covering 1078 items, the retaliatory tariff rate for which was 10% as of September 24, 2018, but will be increased to 20% as of June 1, 2019;

List 2 (Batch 3), covering 974 items, the retaliatory tariff rate for which was 5% as of September 24, 2018, but will be increased to10% to be effective on June 1, 2019; and

List 2 (Batch 4), covering 662 items, the retaliatory tariff rate for which was 5% as of September 24, 2018, and will continue to be 5% as of June 1, 2019. 67 lines of auto and auto part products on this list will be excluded.

The products subject to the retaliatory tariffs imposed in response to the U.S.’ additional duties under Section 232 were not included within the current lists of products eligible for exclusion.

 Exclusion Request Process and Timeline

Exclusion requests shall be filed via http://gszx.mof.gov.cn, the website of the Tariff Policy Research Center of the Chinese Ministry of Finance. This website is not accessible at this point for request submissions.

Generally, the CTCSC will accept and review exclusion requests in two stages. In stage 1, the CTCSC will start to accept exclusion requests for List 1 products as of June 3, 2019, and the deadline for filing List 1 product exclusion requests will be July 5, 2019. In stage 2, the CTCSC will accept exclusion requests for List 2 products from September 2, 2019 to October 18, 2019. However, the CTCSC has not imposed a deadline for making determinations on such requests and stated only that it will publish approved exclusion lists according to relevant exclusion procedures.

Each request must identify a specific product under a specific 8-digit Chinese HS code. Interested parties seeking to exclude products under two or more 8-digit Chinese HS codes are required to submit a separate request for each product. The CTCSC will review and investigate each exclusion request on a case-by-case basis. In making its determination on requests, the CTCSC may consult with relevant experts, trade associations and governmental departments.

If a company has submitted information to a trade association or chamber and the trade association or chamber has filed a collective exclusion request for a particular product, the company may not file a separate request for the same product.

No response and reply procedures were provided in the CTCSC Announcement [2019] No. 2 for relevant parties to provide comments in support or opposition of relevant exclusion requests.

Rationales for Exclusion Requests

Interested parties must provide relevant facts and data to support the rationale for their requested exclusions. The CTCSC will consider various rationales for granting a product exclusion on a case-by-case basis. However, the CTCSC notes the following necessary rationales for the requests:

  • Difficulties in seeking alternative sources of the subject product;
  • Severe economic harm to the requester as a result of the imposition of additional duties on the subject product; and
  • Significant negative structural impacts on relevant industries (including impacts on industry development, technological progress, employment, environmental protection and so on) or any other severe social consequences.

Effects of A Successful Exclusion

Granted requests will be effective for one year as of the implementation date of relevant exclusion lists; no additional duties would be imposed on concerned products during this one-year period.

Chinese importers may, within six months of the publication date of the relevant exclusion lists, apply to China Customs for the refund of additional duties imposed by the Chinese government if certain “refund conditions” are met. No further guidance was provided on the definition or scope of “refund conditions.” The CTCSC Announcement [2019] No. 2 also did not specify whether the exclusion would be retroactive to the effective date of the relevant retaliatory tariff lists. However, according to the Regulations of the People’s Republic of China on Import and Export Duties, where an importer discovers that it paid any import taxes in excess of that required by law, it may apply to China Customs for a refund within one year of the date of payment of such taxes. It is not clear at this stage whether any special rules would apply to products subject to the U.S.-China trade dispute. Where China has terminated or suspended imposition of additional duties on concerned products before the publication of exclusion lists, no duties imposed would be refunded to importers.

The CTCSC Announcement [2019] No. 2 provides that, under the following two situations, the refund conditions are deemed to be met:

  • The products on an exclusion list were excluded on the basis of relevant Chinese HTS codes; and
  • The products on an exclusion list are part of the products covered under relevant Chinese HTS codes, and China Customs is administratively capable of granting the refund, i.e., when supplementary Chinese HTS codes are provided for the products on the exclusion list.

Please note, requesters will be held responsible for the accuracy of the information submitted by them. Requests will not be considered by the CTCSC if any false information was provided. The information submitted by requesters will be used for exclusion purposes only, and will not be disclosed to any third parties without the consent of the requesters. Please note, however, that the information will be released upon the request of the government or requirement of laws or policies.

Crowell & Moring has extensive experience in advising U.S. and China multinationals from various industries on the application of special tariff and trade issues, including product exclusion issues. Please do not hesitate to contact us should you have any questions.

In a soon to be published Federal Register Notice, the U.S. Trade Representative (USTR) announced a proposed additional ad valorem duty of up to 25 percent on products from China with an annual trade value of an estimated $300 billion. The proposed product list (“List 4”) is located in the Annex to the notice and covers 3,805 full and partial tariff subheadings. The USTR indicated in a press release that these proposed tariffs cover “essentially all remaining imports from China.”

USTR is seeking public comment and will hold a public hearing. The schedule is listed below.

Date Event
June 10 Due date for filing requests to appear and a summary of expected testimony at the public hearing
June 17 Due date for submission of written comments
June 17 Public Hearing
7 days after the last public hearing Due date for submission of post-hearing rebuttal comments (post-hearing rebuttal comments are to be limited to rebutting or supplementing testimony at the hearing)

USTR is requesting comments with respect to any aspect of the proposed action, including:

  • The specific tariff subheadings to be subject to increased duties, including whether the subheadings listed in the Annex should be retained or removed, or whether subheadings not currently on the list should be added.
  • The level of the increase, if any, in the rate of duty.
  • The appropriate aggregate level of trade to be covered by additional duties.

Also, the USTR “requests that commenters address specifically whether imposing increased duties on a particular product would be practicable or effective to obtain the elimination of China’s acts, policies, and practices, and whether imposing additional duties on a particular product would cause disproportionate economic harm to U.S. interests, including small- or medium-size businesses and consumers.”

The notice describes the process for submitting comments. The docket number for this action on regulations.gov is USTR 2019-0004.

 

Companies are allowed to submit comments with Business Confidential information which will not be viewable by the public.

In a soon to be published Federal Register Notice, the United States Trade Representative (USTR) is modifying its May 9, 2019 notice increasing tariffs on Section 301 List 3 goods from 10 percent to 25 percent on May 10.

The May 9 notice included an “on water” exception for items exported to the United States that were in transit before May 10 (i.e., they are not subject to 25 percent tariffs).

The modification from USTR states all Section 301 List 3 items must enter the United States by June 1, 2019 in order to receive the 10 percent tariff. All goods entering the U.S. after that will be subject to the higher 25 percent rate.

 

 

 

 

In NY N303699, Customs and Border Protection reviews the classification of the Temi S1 Personal Computer Robot (Temi PC). It is described as a mobile and fully functional automatic data processing (ADP) machine. The Temi PC is comprised of a tablet PC permanently mounted onto a motorized pedestal-type chassis. The tablet is a 10.1 inch LCD display with a touchscreen, an RK3288 processor, 2 GB system memory, 16 GB storage, Bluetooth and Wi-Fi connectivity, multiple cameras and a microphone, and various USB, HDMI, audio, etc. outputs. The tablet runs on the Android operating system (OS). Users have full control to add, change, and remove apps.

The Temi PC chassis is a 3.2 foot high pedestal consisting of a motorized base with navigation controller, numerous cameras and sensors, batteries, 60 W motors, and LIDAR for navigation and object avoidance. The chassis receives its commands from the mounted tablet, and is mobile in that it has the ability to navigate rooms autonomously while providing the users with a traveling computing platform. Users can call for the Temi PC by issuing voice commands, as well as instruct it to follow the user around.

CBP indicated that it believes the Temi PC is a composite machine. It gives users the ability to perform general computing functions while also operating as a semi-autonomous robotic machine. In addition to issuing voice commands for the physical movement of the Temi PC, users may also send voice commands to the tablet for actions such as placing a video call, playing music, dictating a news or weather report, and more. Apps that can run on the tablet consist of mail, games, office productivity, web communication, and more. CBP found that the function of the tablet establishes the principal function of the Temi PC and the features provided by the chassis are secondary to the features provided by the tablet. This is in accordance with Section 16 Note 3:

Unless the context otherwise requires, composite machines consisting of two or more machines fitted together to form a whole and other machines designed for the purpose of performing two or more complementary or alternative functions are to be classified as if consisting only of that component or as being that machine which performs the principal function.”

With regard to Note 5(A) to Chapter 84, HTSUS, which governs the classification of ADP machines, CBP affirmed that the item meets Note 5(A) to Chapter 84.

CBP determined that the applicable subheading for the Temi S1 PC is 8471.41.0150, HTSUS, which provides for “Automatic data processing machines and units thereof; …: Other automatic data processing machines: Comprising in the same housing at least a central processing unit and an input and output unit, whether or not combined: Other.” The general rate of duty is Free.

 

 

On May 6, 2019, the Department of Justice (DOJ) announced the release of formal guidelines for cooperation credit in False Claims Act (FCA) cases. While the guidelines do not quantify the credit that companies can receive, they do identify steps that companies can take to earn credit.

The guidelines identify remedial measures and forms of cooperation that have long been recognized as best practices by FCA practitioners, and bear some resemblance to DOJ’s guidance in other areas of white collar enforcement. Ultimately, the guidelines will be applied subjectively according to the discretion of DOJ attorneys handling a particular case. Nonetheless, by setting forth concrete examples of what DOJ values, the guidelines should be a helpful tool for companies facing FCA investigations.

Background

DOJ previewed much of the policy on cooperation credit over the last year in speeches discussing the various FCA reform initiatives underway (discussed here and here). On May 6, 2019, DOJ formalized the guidance in Section 4-4.112 of the Justice Manual.

Emphasis on Voluntary Disclosure

In a press release announcing the issuance of the new guidelines, Assistant Attorney General Jody Hunt noted that voluntary self-disclosure is the “most valuable form of cooperation.” Companies that make proactive, timely, and voluntary self-disclosures about misconduct will receive cooperation credit from DOJ during the resolution of FCA cases. A company responding to a government inquiry can qualify for cooperation credit if it discovers and discloses additional misconduct beyond the scope of the government’s known concerns, further incentivizing companies to come forward with information uncovered during the course of an internal investigation.

Notably, the guidelines explicitly state that cooperation does not include the disclosure of information required by law, which calls into question the amount of credit a company would receive for disclosing to DOJ information that the company is required by statute or regulation to disclose to another agency.

Steps to Receive Cooperation Credit

Beyond self-disclosure, the new guidelines set forth actions companies can take to earn cooperation credit in an ongoing FCA investigation. These include:

  1. Identifying individuals substantially involved in or responsible for the misconduct.
  2. Disclosing relevant facts and identifying opportunities for the government to obtain evidence relevant to the government’s investigation that is not in the possession of the entity or individual or not otherwise known to the government.
  3. Preserving, collecting, and disclosing relevant documents and information relating to their provenance beyond existing business practices or legal requirements.
  4. Identifying individuals who are aware of relevant information or conduct, including an entity’s operations, policies, and procedures.
  5. Making available for meetings, interviews, examinations, or depositions an entity’s officers and employees who possess relevant information.
  6. Disclosing non-privileged information relevant to the government’s investigation gathered during the entity’s independent investigation, including the identification of specific sources of information (as opposed to a general narrative), and providing timely updates on the organization’s internal investigation into the government’s concerns, including rolling disclosures of relevant information.
  7. Providing facts relevant to potential misconduct by third-party entities and third-party individuals.
  8. Providing information in native format, and facilitating review and evaluation of that information if it requires special or proprietary technologies so that the information can be evaluated.
  9. Admitting liability or accepting responsibility for wrongdoing or relevant conduct.
  10. Assisting in the determination or recovery of losses caused by the organization’s misconduct.

The new guidelines also underscore the importance of remedial measures taken in response to FCA violations, including:

  1. Demonstrating a thorough analysis of the cause of the underlying conduct and, where appropriate, remediation to address the root cause.
  2. Implementing or improving an effective compliance program designed to ensure the misconduct or similar problem does not occur again.
  3. Appropriately disciplining or replacing those identified by the entity as responsible for the misconduct, either through direct participation or failure in oversight, as well as those with supervisory authority over the area where the misconduct occurred.
  4. Any additional steps demonstrating recognition of the seriousness of the entity’s misconduct, acceptance of responsibility for it, and the implementation of measures to reduce the risk of repetition of such misconduct, including measures to identify future risks.

Credit for Disclosure, Cooperation, and Remediation

According to the guidelines, DOJ attorneys are to determine the amount of cooperation credit based on four factors:

  1. The timeliness and voluntariness of the assistance.
  2. The truthfulness, completeness, and reliability of any information or testimony provided.
  3. The nature and extent of the assistance.
  4. The significance and usefulness of the cooperation to the government.

Consistent with the policy articulated in DOJ’s November 2018 announcement on corporate-cooperation credit in civil and criminal cases (previously discussed here), the new guidelines make cooperation credit available on a sliding scale, with maximum credit available to companies that identify all individuals substantially responsible for wrongdoing, provide full cooperation with the government’s investigation, and take remedial steps designed to prevent and detect similar wrongdoing in the future. A company that does not qualify for maximum credit may still receive partial credit if it meaningfully assists the government’s investigation by engaging in conduct qualifying for cooperation credit. See § 4-3.100(3). Conversely, DOJ will not award any credit to a corporation that conceals misconduct by members of senior management or the board of directors.

When a company’s conduct warrants cooperation credit, DOJ attorneys have discretion to reduce the damages multiplier and the penalties to be assessed (which currently range from $11,181 to $22,363 per claim). A company’s maximum cooperation credit may not exceed an amount that would result in the government receiving less than full compensation for its losses, including the government’s damages, lost interest, costs of investigation, and the relator’s share of the recovery. Accordingly, even if a company receives maximum credit, DOJ will not settle for less than single damages. Given the FCA’s lengthy statute of limitations and the long duration of many investigations, the lost interest and investigation costs can be significant. The guidelines indicate that a company that receives maximum cooperation credit may avoid treble or double damages and fines, but would still be required to pay actual damages and costs.

The guidelines also indicate that cooperation credit can have an impact beyond a reduction in penalties and damages. For example, DOJ has the ability to notify a relevant agency (e.g., a suspension and debarment official or Health and Human Services Office of Inspector General) so that the agency may consider the defendant’s cooperation when evaluating its administrative options. DOJ may also publicly acknowledge the entity’s cooperation or assist in resolving pending qui tam litigation with the relator.

Focus on Compliance Programs

A key takeaway from the new guidelines is the importance of compliance programs, not just as a prophylactic measure to prevent the submission of false claims, but also as potential evidence that a false claim was not knowingly submitted to the government.

Since 1986, the statute has defined “knowingly” as acting with actual knowledge, deliberate ignorance, or reckless disregard of the truth or falsity of the information. Reckless disregard has long been considered the lowest bar for proving knowledge under the FCA, and courts have equated the standard to a form of gross negligence. Notably, footnote 1 of the guidelines states that DOJ may take into account the nature and effectiveness of a compliance program in evaluating whether any violation of law was committed knowingly. In other words, having the appropriate internal controls may help establish that false claims were presented to the government by mistake or in error and not as the result of reckless disregard.

In light of the newly released guidelines, having a robust compliance program may be even more valuable—both in an effort to prevent the submission of false claims in the first instance and also as evidence to defeat allegations that any potential false claim was knowingly submitted.

Published today in the Federal Register is the United States Trade Representative (USTR) notice increasing tariffs on Chinese goods worth $200 billion (also known as “List 3”) from 10 percent to 25 percent effective May 10, 2019.

Photo by Vidar Nordli-Mathisen on Unsplash

Unlike past Section 301 notices of this type, this contains an “on water” exception.

The annex to the notice reads the effective date includes goods (i) entered for consumption, or withdrawn from warehouses for consumption, on or after 12:01 a.m. eastern daylight time on May 10, and (ii) exported to the United States on or after May 10.

Thus, goods that were exported to the United States and were in transit before May 10 are not subject to this action.