U.S. Customs and Border Protection (CBP) issued a Federal Register Notice on April 20 regarding the renewal of the Generalized System of Preferences (GSP), a preferential trade program that allows the eligible products of designated beneficiary developing countries to enter the United States free of duty.

The renewal takes effect on April 22. The new expiration date for GSP is December 31, 2020.

The notice states, “As of April 22, 2018, the filing of GSP-eligible entry summaries may be resumed without the payment of estimated duties, and CBP will initiate the automatic liquidation or reliquidation of formal and informal entries of GSP-eligible merchandise that was entered on or after January 1, 2018, through April 21, 2018, and filed via ABI with SPI Code “A” notated on the entry.

Requests for refunds of GSP duties paid on eligible non-ABI entries, or eligible ABI entries filed without SPI Code “A,” must be filed with CBP no later than September 19, 2018.”

 

On March 26, 2018, the U.S. Court of International Trade (CIT) dismissed U.S. Customs and Border Protection’s (CBP) attempt to collect $4.5 million in penalties against a Canadian textile company, Tricots Liesse 1983, Inc. (Tricots).  U.S. v. Aegis Security Insurance Co. and Tricots Liesse 1983 Inc., Slip. Op. 18-29.

Tricots produces quality knit fabrics and sells its fabrics to high-end U.S. swim and active wear producers. Fabric imports made from NAFTA yarn are duty free under the rules of origin (ROO) and fabric imports made from non-NATA yarn are duty free if the Canadian government issues Tariff Preference Level (TPL) certifications under the TPL quota program.  Tricots attempted to correct certain past NAFTA ROO claims by filing a disclosure with CBP and submitting TPL certificates issued by Canada.  However, CBP rejected Tricots’ disclosure and corrections saying the TPL certifications were untimely.  CBP issued Tricots an administrative penalty and duty demand, but did not provide Tricots an opportunity for an oral hearing during the administrative proceedings as required by statute.  After CBP filed suit against Tricots in the CIT to collect the $4.5 penalty and duties, Tricots filed a motion to dismiss the penalty claims because CBP failed to exhaust administrative remedies.

The CIT held that “[t]he facts demonstrate that, despite Tricots’ efforts, Customs did not follow the statutory injunction to provide the company with a ‘reasonable opportunity’ to make oral representations ‘seeking remission or mitigation of the monetary penalty’ following issuance of the notice of penalty, and thus did not provide Tricots with the statutorily required opportunity to be heard.”   The court added, “Accordingly, Customs failed to perfect its penalty claim and thus is barred from bringing it.”  The CIT found that the hearing was necessary before the government could bring its penalty claims in the CIT. The court rejected CBP’s arguments that Tricots failed to show it suffered “substantial prejudice” because of the government’s failure to hold a meeting where Tricots could make its arguments in person.  Now the court must decide if it should also dismiss CBP’s claims for duties.

This decision should help importers by ensuring that they receive a full and fair administrative hearing before CBP imposes a penalty.

Tricots is represented by Crowell & Moring attorneys John Brew, Frances Hadfield and Ade Johnson.

The 7th round of NAFTA negotiations took place in Mexico City from February 25-March 5 with relatively little fanfare as the talks were overshadowed by President Trump’s comments that his administration would impose Section 232 tariffs on aluminum and steel imports. Following the close of the round, President Trump issued Presidential Proclamations announcing the tariffs on March 8.

Officials are nearing completion of chapters on telecommunications and technical barriers to trade and closed discussions on good regulatory practices, administration and publication, and sanitary and phytosanitary measures (SPS). The three parties also agreed to a specific chapter dedicated to energy, which the U.S. previously opposed.

On the more difficult issues, some discussions are taking place but the path to completion remains unclear.

  • Autos rule of origin: Officials reportedly continued discussions over Canada’s proposal on the rule of origin for autos, which would incorporate intellectual property and technology in determining country of origin. However, the U.S. has still not given any sign it will move away from its initial proposal requiring a regional content requirement of 85 percent and a U.S.-originating content requirement of 50 percent.
  • State-to-state dispute settlement: Mexico and Canada have proposed modifying the rules for selection of panelists in state-to-state dispute settlement. However, it remains unclear whether the U.S. will agree to a form of binding dispute settlement.
  • Investor-state dispute settlement (ISDS): Canada and Mexico have initiated bilateral discussions on ISDS without the United States. The Unite States has not shown signs of seeking any ISDS commitments thus far beyond the “opt-in” system it initially proposed.
  • Procurement: Similar to ISDS, Canada and Mexico are discussing bilateral options for liberalizing procurement access for their respective markets. The U.S. has thus far not engaged in these discussions.

There was no joint statement following the March round. U.S. Trade Representative (USTR) Robert Lighthizer noted progress made on relatively non-controversial chapters but warned that “time is running very short” for the negotiations.

NAFTA talks could be further complicated by President Trump’s action to impose Section 232 tariffs on imports of steel and aluminum, effective March 23. President Trump’s March 8 Presidential Proclamations on the tariffs initially exempts imports from Canada and Mexico, but appears to suggest that the exemptions are conditioned on ongoing discussions to address transshipment through both countries.

Meanwhile, statements by USTR Lighthizer and President Trump have suggested that the aluminum and steel tariffs could be used as a bargaining chip during NAFTA negotiations. Canada and Mexico have insisted that the discussions are on separate tracks.

The next NAFTA round is tentatively scheduled for the week of April 8 in Washington D.C.

 

During the long-anticipated sixth round of talks in Montreal to update NAFTA, from January 23-29, negotiators made progress in some issue areas while avoiding any major clashes that might have led to U.S. withdrawal from the existing agreement. Officials advanced discussions on digital trade, sanitary and phytosanitary measures, and technical barriers to trade to near completion while closing a chapter on anti-corruption measures.

Following the round, U.S. Trade Representative (USTR) Robert Lighthizer acknowledged progress in these areas, while highlighting the importance of the need to make progress on the “core issues” of greatest interest to the United States. These core issues, which could include the rules of origin for automobiles as well as other difficult issues (i.e., investment, procurement, dispute settlement and the U.S. proposal for a five-year “sunset clause” in the agreement), are ultimately what the U.S. will judge as determining the success or failure of the talks.

Despite some initial constructive engagement, however, negotiators remain far from resolving these issues. Canada responded to a few U.S. proposals during the round:

  • On the rule of origin for autos, Canada reportedly proposed expanding the formula for calculating regional and national content values to include intellectual property and new technologies. Lighthizer rejected this approach in his closing remarks, finding it to be the “opposite” of U.S. interests because it would lead to less regional content than the status quo. The initial U.S. proposal would increase the regional value content for automobiles from the current 62.5 percent to 85 percent, with 50 percent reserved for U.S.-origin content.
  • On investor-state dispute settlement (ISDS), Canada proposed a mechanism that would exclude the U.S., while maintaining mutual protections only for Canada and Mexico. While it is unclear whether USTR will favor this approach, U.S. industry groups will likely be opposed.
  • On the “sunset clause,” Canada made a counterproposal of a five-year review process for the agreement, without the threat of automatic termination.

Canada also proposed departing from a proposed rule that would require the NAFTA parties to automatically extend to one another the same level of market access for services as each commits to in future trade agreements—the so-called “MFN-forward” rule that Canada had already agreed to in TPP. Lighthizer said in his closing remarks that the proposal was “unacceptable” and referred to it as a “poison pill.”

The Trump Administration overall appears to be signaling that negotiations are likely to proceed without disruption at least through the next round, which will take place in Mexico City from February 26-March 6.

While officials initially set a target date of concluding talks by March 31, there are hints that negotiations could last beyond that date, even perhaps after Mexico’s general election on July 1. President Trump said on January 11 that he could be flexible on the timetable, and U.S. Secretary of Agriculture Sonny Purdue testified to the House Agriculture Committee on February 6 that he expects talks to be extended beyond March but completed before the end of the year.

Members of Congress representing agricultural interests continue to press the Trump administration to conclude an agreement that will “do no harm” to the U.S. agricultural sector, which has benefitted from expanded access to Canada and Mexico under NAFTA. These Members would prefer to see the negotiations extended beyond March, provided that the overall result remains favorable for U.S. agribusiness.

If importers did not have enough to worry about in the new trade protectionist environment – higher duties from dumping, subsidy, section 201 and section 232 cases and increased enforcement – now they also may have to contend with the increased risks of whistleblower cases brought under the False Claims Act (FCA).  31 U.S.C. §§ 3729-33.  The FCA has been around for more than 150 years, but recently, has been successfully used to allege underpayment of duties.  Actions under the FCA can be brought directly by the Department of Justice (DOJ) or by a private party, known as a relator, seeking recovery on behalf of the U.S. government in a qui tam action. There are strong incentives for relators to file qui tam suits in light of the statute’s treble damages and penalties and its provision allowing relators to receive a share of up to 30 percent of any recovery. Qui tam actions are filed under seal, and before the case is unsealed to the public, the government is given an opportunity to investigate and determine whether or not it will intervene in the action.  In some cases, the government’s investigation can last not just months but years, often involving extensive one-sided discovery that DOJ is granted under the FCA.  And, even when the government declines to intervene, a relator can still independently proceed with the litigation.  Only if the government affirmatively moves to dismiss the qui tam could the relator not proceed, something that DOJ has historically been extremely reluctant to do.

Traditionally, FCA suits have been based on allegations that a party improperly received payment from the government, but importers must also be aware of the potential exposure associated with the “reverse” FCA provision of the statute, which imposes liability on any person who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”  31 U.S.C. § 3729(a)(1)(G).  Under the statute, the knowledge element can be established by (1) actual knowledge (2) deliberate ignorance; or (3) reckless disregard.  See § 3729(b)(1).

Importers have become targets of reverse FCA claims associated with duty evasion in part because a recent case from the Third Circuit.  United States ex rel. Customs Fraud Investigations, LLC v. Victaulic Co. The Third Circuit held that a failure to mark country of origin could be actionable under a reverse FCA theory of liability if a company knowingly imported unmarked products in an effort to evade custom duties.  839 F.3d 242 (3d Cir. 2016).  The court found that Victaulic had an established obligation under 19 U.S.C. § 1484(a)(1) to disclose to Customs and Border Protection (CBP) the fact that its goods were unmarked or improperly marked and if Victaulic knowingly failed to notify the CBP of its pipe fittings’ non-conforming status, this could give rise to reverse false claims liability for the unpaid marking duties.  In May 2017, Victaulic filed a petition for a writ of certiorari but the Supreme Court denied the petition this past October, leaving Victaulic to defend itself in the district court. While that case has not reached a judgment, the concern for importers is clear given the court of appeals’ validation of such a theory under the FCA.

Other recent cases have targeted companies importing goods that are subject to antidumping and countervailing duties. In 2016, Z Gallerie LLC paid $15 million to settle whistleblower FCA allegations that it masked the type of furniture it imported from China in order to avoid extra dumping duties. Basset Mirror Company paid $10.5 million to settle a similar case on furniture from China just this past month.  The rise in FCA cases related to import duties was highlighted in the recent Wall Street Journal article, in which it stated that the DOJ collected $4.7 billion in fiscal 2016 and $3.7 billion as a result of False Claims suits brought by whistleblowers in fiscal 2017.

These cases, combined with increased duties as a result of numerous unfair trade proceedings, create a perfect storm – encouraging both FCA plaintiffs’ lawyers and whistleblowers alike to cash in on a company’s failure to comply with import laws.  FCA claims are not limited to marking or dumping matters.  Cases may be brought if importers incorrectly value or classify imported goods, or make incorrect duty free claims based on a free trade agreement.

With all this troubling news, there are steps that importers may take to mitigate the risks or defend against an FCA claim. First, importers should establish strong internal compliance programs. Even if internal controls fall short of ensuring 100% compliance with import laws, a strong compliance program can be important evidence if an importer is forced to defend an FCA suit because the plaintiff (whether DOJ or a relator) must establish that an importer acted with the requisite knowledge—i.e., the plaintiff must show that the noncompliance occurred because the importer acted with actual knowledge or at least reckless disregard.  The existence of robust internal controls could be essential in helping an importer overcome a finding of reckless disregard.  Second, and related to having a strong compliance program, taking steps to investigate, identify, and disclose to the government any errors made could foreclose FCA liability in other ways, too.  For instance, if a company makes a disclosure concerning a potentially improper practice and the agency response is to take no formal action, that may show that the practice is not material to the government’s decision to pay or the potential obligation for the company to pay (in the case of import duties).

The materiality of alleged false statements or claims has been receiving enormous scrutiny recently in the wake of the Supreme Court’s landmark FCA decision in 2016 in Universal Health Services v. Escobar, 136 S. Ct. 1989 (2016), with agency approval or failure to disapprove of allegedly fraudulent conduct repeatedly being cited in dismissing actions for failing to show materiality.  Moreover, if a company discloses to the government their practices or interpretations with respect to regulations they are subject to, what is known as the government knowledge bar can also foreclose a finding of FCA liability.  In short, while there is often no sure-fire way to avoid mistakes in transactions involving government dollars, there are various proactive measures a company can take to help prevent mistakes from turning into a case of alleged fraud.

The Federal Circuit in Pleasure-Way Industries, Inc. v. United States, 2017-1190 (Fed. Cir. 2018), recently confirmed that importers of motorhomes may not receive duty reductions for vans exported to Canada that were converted to motorhomes and returned to the US. In this case, the importer (Pleasure-Way) claimed that the 2.5% duty applicable to motorhomes (HTS subheading 8703.33) should only be assessed on the costs of converting vans into motor homes in Canada, and should not be assessed on the entire cost of the motorhome according to Harmonized Tariff Schedule of the United States (HTSUS) subheading 9802.00.50 (goods re-entered into the US after repair or alteration in Canada or Mexico).

Pleasure-Way is a manufacturer and seller of Class B motorhomes. Between January 2008 and September 2009, Pleasure-way bought 144 Sprinter vans and exported them for conversion into motorhomes which included fully plumbed bathroom and kitchen fixtures, water heaters, sleeping quarters, kitchen countertops with propane burners, microwave ovens, wall-mounted televisions, and refrigerators. The conversion also included installation of exterior features such as picture windows, porch lights, awnings, and running boards.

Under US law, “[g]oods re-entered after repair or alteration in Canada or Mexico” are only assessed duty on the costs of the repairs or alterations performed in Canada or Mexico. HTS subheading 9802.00.50. However, CBP regulations limit what constitutes qualifying “repairs or alterations” under this provision and state that the foreign activities must “not . . . create a new or commercially different good from[] the good exported from the United States,” and that the foreign activities must “not destroy the essential characteristics of . . . the good exported from the United States.” 19 C.F.R. § 181.64(a). The regulations also state that goods are not eligible for reduced duty treatment if the goods “are not complete for their intended use” when exported from the US to Canada or Mexico. 19 C.F.R. § 181.64(b).

Pleasure-Way had requested a ruling from CBP that the converted Sprinter Vans be classified under HTS subheading 9802.00.50. CBP initially granted the company’s request, but then changed its position. Based on the regulations, CBP determined that this provision does not apply to the motorhomes that were converted from vans. Pleasure-Way protested CBP’s decision and brought a case before the US Court of International Trade (CIT). The CIT ruled that Pleasure-Way was not entitled to lower duties because the operations in Canada created a new article of commerce and destroyed the essential character of the exported vans. The CIT relied on “changes to the pricing, the applicable tariff heading, the use, and the name of the vans.” Pleasure–Way Indus., Inc. v. United States, 38 I.T.R.D. (BNA) 1889, 2016 WL 6081818, at *6 (Ct. Int’l Trade Oct. 18, 2016).

The Federal Circuit affirmed the CIT decision and determined that Pleasure-Way, in changing the vans into motorhomes, created a commercially different good. The Federal Circuit focused on the CIT’s decision regarding differentiation in the marketplace. It determined that the motorhomes “no longer resembled the exported cargo vans,” and were “no longer classifiable as motor vehicles for the transport of goods.” The court also determined that the motorhomes were sold at “different price points than the exported vehicles.” Id. Therefore, the likely use and consumer base for the Sprinter vans as exported were broadly different from those for the motorhomes imported into the U.S. after leaving the Canadian conversion facility. Accordingly, the Pleasure-Way motorhomes were determined to be commercially different.

Importers may not take pleasure in this result – especially considering the fact that CBP had issued an affirmative ruling. Before investing in foreign operations based on duty reduction strategies, importers should understand that CBP has less than sixty days to revoke any previously issued ruling without notice and such revocation may be applied retroactively, provided the person to whom the ruling was issued has not acted in accordance with its terms and conditions. See, 19 C.F.R. §177.9(c) and §177.12(b); See also, HQ 963543, dated April 16, 2002. After having been in effect for sixty or more days, rulings become binding and may only be revoked prospectively after notice and comment procedures. 19 C.F.R. §177.12(b)(1)-(2)

On December 20, 2017, the Court of Justice of the European Union (CJEU) decided that a company may not use transaction value for customs valuation purposes when a transfer price consisted of both an amount initially invoiced and declared, and a flat-rate adjustment made after the end of the accounting period.

The Community Customs Code (CCC) and its related jurisprudence provides that customs value must be determined primarily according to the transaction value method, with the price actually paid or payable for the goods to be adjusted where necessary to avoid establishing an arbitrary or fictitious customs value. The CJEU found that uncertainty regarding future adjustments at the end of the accounting period made it impossible for the transfer price to be used as the transaction value for imports into the EU.

Please click here for more on this decision, as well as a discussion on how the U.S. continues to allow importers to use the transaction value method of appraisement.

Blockchains and distributed ledger technology (‘DLT’) are becoming increasingly prevalent in industry. A recent Juniper Research survey found that 56% of companies with more than 20,000 employees were either considering deploying, or were in the process of deploying, blockchain solutions.

At its core, blockchain technology is essentially an engine for processing exchanges of information. It is not a static record. A blockchain is a type of distributed database that tracks transactions in assets and exchanges of information. It is a chronological sequence of verified transactions within a certain network. A ‘transaction’ can be the transfer of an asset, the creation of a new medical record, or the entry into a swap transaction. There is not just one blockchain, just like there is not one database. Different blockchains can be created for different needs, with different operating rules.

A distributed ledger is a distributed database that tracks transactions. Multiple participants have access to the same ‘golden record’ – there is no single official copy. The ledger automatically updates when new transactions take place, and so there is prompt verification of completed transactions across the system. Blockchain is an example of a distributed ledger, but distributed ledgers don’t have to be based on blockchain.

Application to Supply Chains

Supply chain management has long sought an efficient, accurate, and paperless process. A system that records each event, is transparent when it needs to be, confidential at other times, designed to meet the regulatory obligations around government filings, commercial demands, insurance claims, and on and on.

One of the touted merits of a DLT supply chain is that it would solve challenges such as provenance (diamonds), sourcing (origin claims), important admissibility issues (forced labor), and even emerging issues such as conflict minerals.

Role of DLT in Tackling Modern Slavery

Modern slavery is a complex crime and it is estimated that 46 million people worldwide are in some form of slavery. DLT could be a powerful tool to address gaps in supply chain data and increase the efficiency of data sharing helping to improve traceability and transparency of supply chain labor standards. For example, DLT could assist companies to verify the working conditions of people involved in production. Increased collection, analysis, and sharing of data would help companies to identify and prevent slavery and could assist law enforcement agencies in tackling this insidious crime.

In circumstances where there is greater focus than ever before on corporate transparency, tracking supply chains and ensuring human rights are protected is increasingly important. The UK Government released new guidance in October 2017 on the Modern Slavery Act 2015 (MSA) which suggests that even companies that do not reach the £36 million turnover threshold should consider voluntarily producing MSA statements and there has also been increased NGO oversight particularly of large UK companies. Blockchains and DLT could provide the traceability and trust that companies need to combat modern slavery while at the same time improving corporate transparency.

What’s next?

In 2018, you can expect to see more implementations, so now is the time to develop a blockchain strategy and to develop a risk profile so that you will be ready to take advantage of the benefits of this new technology.

Crowell & Moring Can Help

Exploring Blockchain

We provide in-house CLE programs and information sessions on blockchain and DLT, helping clients understand both the technology and the regulatory issues of implementing a blockchain or DLT solution, as well as promising use cases in specific industries.

Creating a Blockchain Strategy

We offer in-depth workshop sessions for companies considering implementing a blockchain or DLT network, including identifying regulatory hurdles to adoption, assisting with network diligence, negotiating network agreements, and addressing the full range of issues relating to joining a network.

Ready to Join a Network

And, once you are ready to join a network, our team works to negotiate the legal agreements and provide a deep-dive review of operating procedures, cybersecurity and privacy concerns, and regulatory issues that will impact your success.

On Friday, January 5, 2018, U.S. Customs and Border Protection (CBP), a component of the Department of Homeland Security, released the fiscal year (FY) 2017 statistics relating to warrantless searches of electronic devices at the border; they show a significant increase in border searches—30,200 in FY 2017, up from 19,051 in FY 2016 (which was itself up from 8,503 in FY 2015).

CBP also released a new policy directive governing such searches, replacing guidance from 2009. The updated policy clarifies the standard operating procedures for searching, reviewing, and retaining information found on electronic devices.

For more information on key components of this new policy, please see Crowell’s Client Alert.

Despite increased pressure from the U.S. and the UN Security Council, human rights groups estimate about 16 countries still host North Korean laborers. A recent estimate by the Korea Institute for National Unification in Seoul puts the number of North Korean workers overseas at around 147,000. Most work in China and Russia, but reports continue to surface of North Korean workers even in EU countries.

In Poland for instance, a recent New York Times report found North Korean workers in a number of industries, including agriculture, the manufacture of shipping containers, and even ship construction. The report also includes the names of companies – Armex (reportedly linked to a UN sanctioned company called Rungrado General Trading) and Wonye – that have allegedly been involved in supplying such workers.

It was not until October 2017 that the EU agreed to stop renewing work permits for North Korean labor. However, media reports indicate local governments in Poland continued to approve such permits after the EU’s decision. New legislation took effect in Poland on January 1, 2018, barring new foreign worker permits in Poland, but there is reportedly little coordination between provincial governments and the national government on these permits.

The increased focus on imports produced by North Korean labor in third countries – now subject to exclusion from the United States, as well as exposing U.S. persons to OFAC sanctions – creates a need for enhanced due diligence in supply chain operations. Reports like these can help companies identify such products and transactions, something that is generally very difficult to do.