Sequestration budget cuts only add to CBP’s focus on increasing revenues.

While much has been made in the press about the effect of the sequestration on U.S. Customs and Border Protection (CBP), with experts and even CBP officials anticipating longer lines at immigration check-points and longer times to clear cargo, the sequestration is only another thorn in the budgetary side of CBP. And CBP seems to want to share that pain with importers and travelers alike.

Some Historical Perspective

While CBP’s official mission statement discusses such noble (and critical) roles as guarding our nation’s borders and protecting us against terrorists and instruments of terror, it also mentions “ fostering our Nation’s economic security through lawful international trade and travel.” What do these words mean? Money.

Many people do not realize that the second act of the 1st Congress of the United States, passed on July 4, 1789, authorized the collection of duties and tariffs on imports. Twenty-seven days later, the fifth act of that first Congress established the progenitor of CBP to collect those duties. Congress created Customs (CBP) even before the Bill of Rights.

The reason for this Congressional urgency was money. In 1789, the nation desperately needed to pay the costs of the Revolutionary War. In fact, since 1789, with the exception of temporary taxes and bonds to fund little government projects like the War of 1812 and the Civil War, the sole source of revenue for the U.S. Government was customs duties. This was true for the first 124 years of our nation’s existence, up until the passage of the Sixteenth Amendment in 1913, which established the income tax systems we know today.

With collecting money so firmly rooted in its DNA, it stands to reason that when economic times get hard for CBP, it returns to its roots and its mission of “economic security.” And now with the sequestration, times are hard for CBP.

Sequestration Squeezes the Agency

Under current sequestration provisions, CBP will have to cut $754 Million, or roughly 6.5% of its budget. The Agency reports that an immediate consequence will be deep cuts in overtime pay for its CBP officers and staff. These cuts, combined with 12-14 day furloughs, means that fewer inspectors will be available at immigration checkpoints, and fewer officers will be available to clear incoming cargo. In addition, we can expect to see longer processing times for bonded-activity applications (like bonded warehouses and container freight stations) and for adjudications of protests and fines, penalty and forfeiture cases.

But these proposed and hypothesized cuts only tell half of the story.

As budgetary times have become harder for the Agency and perhaps in anticipation of the sequestration, we have seen a significant trend in those CBP fines, penalty and forfeiture cases as well as in its adjudication of rulings affecting duties and tariffs. The bottom line is that CBP is looking for more money from its enforcement measures.

Take offers-in-compromise, for example. In penalty cases, if an importer is unable to pay a proposed or levied penalty, the importer can make an offer-in-compromise to the Agency. The importer offers to pay a percentage of the penalty, and usually provides documentation (tax, sales, and banking records) describing the financial straits that render the importer unable to pay the full amount. In years gone by, depending on the circumstances, CBP has been willing to accept pennies on the dollar, often approving offers for 5% – 25% of the original penalty amount.

Recently, however, we have seen offers as high as 50% and 67% of a penalty amount refused by CBP, even though the importer in each case provided documentation that it has steadily lost money in each of the prior three years and didn’t have enough money in the bank to cover the full amount of the penalties. When pressed for additional information on these rejected offers, CBP sources confirmed that the Agency is seeking higher revenues these days. This same mindset explains the trends we have seen in recent months of reduced mitigation of liquidated damages and claims for higher initial penalties than would have been previously expected.

At the same time, we are seeing increased enforcement and revenue collection efforts across a variety of avenues. More and more CBP officers are screening both incoming and outgoing travelers for currency and monetary instrument reporting compliance. Also, the Agency has been challenged by Congress to better enforce antidumping and countervailing duty collection.

The bottom line for importers and travelers for CBP’s budget woes is this: it will take longer to get you and your products into the United States, and if you break any laws, the penalties will be higher and the levels of possible forgiveness will be lower. And if the current negotiations on the sequestration are any indication, we should expect this new status quo for the foreseeable future.

Decision holds interesting repercussions for trade violations and penalty amounts

On February 22, 2013, the U.S. Court of Appeals for the Eleventh Circuit vacated the smuggling and conspiracy convictions of two importers of allegedly tainted cheese products in the case of United States of America v. Yuri Izurieta and Anneri Izurieta (Case No. 11-13585). The decision created a circuit split over the scope of U.S. Customs and Border Protection (CBP) import bond regulations, yet also raised the possibility of a new line of attacks against CBP import penalties and liquidated damages.

With the highly respected U.S. Court of International Trade Judge Jane A. Restrani sitting with the 11th Circuit by special designation, a three-member panel found that a certain class of U.S. import regulations are civil rather than criminal in nature. Therefore, the criminal convictions of the husband and wife failed for lack of subject matter jurisdiction.

The case focused on the actions of the Izurietas and their Miami-based company, Naver Trading, Corp. Over several years, the company imported several large shipments of cheese and other dairy products into the United States. The shipments were “conditionally released” upon importation, that is, CBP and the U.S. Food and Drug Administration (FDA) allowed the shipments to move to Naver’s warehouse, but ordered the merchandise to be held at the warehouse pending further review and testing by the FDA. When the FDA tests came back indicating that the products were contaminated with Salmonella, E. coli and Staphylococcus aureus, the FDA ordered the products to be either destroyed or re-exported under the supervision of CBP.  The Izurietas failed to do so, however, and admitted that almost 5,000 kilograms of imported cheese that contained both E. coli and Staphylococcus aureus had been sold into the United States.

The FDA Office of Criminal Investigation, aided by special agents from U.S. Immigration and Customs Enforcement (ICE) investigated and referred the case for criminal prosecution to the U.S. Department of Justice. The Izurietas were tried, convicted, and sentenced in June 2011.

The defendants appealed to the 11th Circuit arguing violations of their Sixth Amendment rights to confront witnesses, improper statements made by the prosecutor over the course of trial, and faulty calculations underlying their sentences. The Appeals Court, however, saw a different issue in the case, which it raised sua sponte.

Six of the seven counts in the original indictment against the Izurietas alleged violation of 18 U.S.C. § 545, which is the statute barring smuggling into the United States. The operative language of the statute reads:

Whoever fraudulently or knowingly imports or brings into the United States, any merchandise contrary to law, or receives, conceals, buys, sells, or in any manner facilitates the transportation, concealment, or sale of such merchandise after importation, knowing the same to have been imported or brought into the United States contrary to law. . .
Shall be fined under this title or imprisoned not more than 20 years, or both. (18 U.S.C. § 545 (emphasis added).)

In this case, the “law” alleged to have been violated was a CBP regulation governing the conditional release of food, drug, device, cosmetic and tobacco products. Section 141.113 of Title 19, Code of Federal Regulations, allows for the conditional release of such products; however, subsection (c)(3) requires:

If FDA refuses admission of a food, drug, device, cosmetic, or tobacco product into the United States, or if any notice of sampling or other request is not complied with, FDA will communicate that fact to the CBP port director who will demand the redelivery of the product to CBP custody. … [A] failure to comply with a demand for redelivery made under this paragraph (c) will result in the assessment of liquidated damages equal to three times the value of the merchandise involved[.] (19 C.F.R. § 141.113 (c)(3).)

The court held that the regulation at issue “sets forth the terms of the contract between the importer and Customs by delineating the obligations of the importer upon conditional release and the damages for a breach of those contractual obligations.” When the Izurietas breached their contract with the Customs, the court held that criminal charges could not arise because “that law is civil only, and in particular reflects contractual requirements.” The court went on to state, “While some regulations may fall under the criminal prohibitions of 18 U.S.C. § 545, the text of 19 C.F.R. § 141.113(c) along with the comments issued during its promulgation certainly indicate to the average person that liability is strictly civil and monetary, capped at most at three times the value of the merchandise secured by bond, and is not aimed at punishment.”

Having found that only civil, contractual violations occurred, the 11th Circuit vacated the criminal convictions of the Izurietas under the smuggling charges, and vacated the accompanying conspiracy charge noting, “The indictment was sufficiently unclear as to whether any crime was charged such that the average person could easily read [the conspiracy count] as actually charging only a conspiracy to commit non-criminal acts.”

“We disagree with the conclusion of our sister circuit …”

The Izurieta case is noteworthy in many respects, not least of which is that the court’s opinion sets up a split among the Circuits regarding the interpretation of the “contrary to law” provision of 18 U.S.C. § 545.

The 11th Circuit panel referred to a Ninth Circuit case in which that court adopted a relatively narrow interpretation of the smuggling statute. The court in United States v. Alghazouli, 517 F.3d 1179 (9th Cir. 2008), decided that regulations are included within the definition of a “law” for purposes of 18 U.S.C. § 545 only if there is a statute (a “law”) that specifies that violation of that regulation is a crime. Alghazouli, 517 F.3d at 1187.

The court in Izurieta also took notice of a Fourth Circuit case, United States v. Mitchell, 39 F.3d 465 (4th Cir. 1994). In Mitchell, the court adopted a more expansive reading of 18 U.S.C. § 545, stating, “[i]t has been established in a variety of contexts that properly promulgated, substantive agency  regulations have the ‘force and effect of law.’” Mitchell, 39 F.3d at 468 (citing Chrysler Corp. v. Brown, 441 U.S. 281, 295-96 (1979)).  The 4th Circuit then went on to apply a three-prong test (under Chrysler) to determine whether the regulation at issue in Mitchell had the “the force and effect of law.”

Finally, the Eleventh Circuit gave a nod to the First Circuit, which addressed this issue in United States v. Place, 693 F.3d 219 (1st Cir. 2012). The Izurieta court noted, however, “Because the appellant in [Place] made only an “all-or- nothing” argument that no regulations could be included within the scope of  ”law” under 18 U.S.C. § 545, the First Circuit decided not to address ‘this delicate point.’” Place, 693 F.3d at 228 n. 12.

Examining the sum of these precedents and calling to mind the deliberations of Goldilocks in the three bears’ house that day, the 11th Circuit decided in Izurieta to reject both the narrow reading of the 9th Circuit and the “sweeping result” which would occur from the “breadth of the Fourth Circuit’s three-prong approach, derived from a non-criminal context.” Instead the court decided – correctly, in our opinion – to examine the true nature of the regulation and opt for lenity, or kindness, “especially where a regulation giving rise to what would appear to be civil remedies is said to be converted into a criminal law.”

Important Ramifications for International Trade Enforcement Measures

In addition to the circuit split, the Izurieta case potentially opens the door for a new line of attacks on Customs’ and other regulatory agencies’ fines, penalties, and liquidated damages. In calling the CBP regulation “civil only” and contractual in nature, the question arises as to the applicability of the tenets of contract law to such governmental regulations.

The CBP regulation at issue in this case (19 C.F.R. § 141.113) is similar in language and intent to many other CBP and other government agency regulations. CBP regulations for import bonds under 19 C.F.R. § 113.62, et seq., has provisions such as “(a) Agreement to Pay Duties, Taxes, and Charges,” (f) Agreement for Examination of Merchandise,” and “(m) Consequence of default.” All of these provisions are very civil and very contractual in nature. In fact, most of the regulatory provisions for which CBP assesses “liquidated damages” – for violations of bond provisions, failure to files timely export information (15 C.F.R. § 30.24), violation of airport security regulations (19 C.F.R. § 122.181, et seq.) and violation of CBP-bonded warehouse and other customs-bonded facilities (Treasury Decision 99-29 and multiple regulations) – are decidedly civil and contractual in nature.

Thanks to Izurieta, it can now be argued by importers and others in the trade community in the Eleventh Circuit that violation of any of these types of civil, contractual regulations cannot result in criminal prosecution. Yet more interestingly, if these regulations are civil and contractual in nature would contract law provisions apply to the liquidated damages, fines and penalties that result from these provisions?

For example, if an importer enters incoming merchandise by filing entry documents with CBP, but is late in paying the duties that are due on that merchandise, the importer can be cited with a violation of the import bond provision (19 C.F.R. §§ 113.62(l)(4), and 113.62(a)(1)) and can be assessed liquidated damages in an amount of double the unpaid duties. In light of Izurieta, we would have to now ask, are these civil damages reasonable?

In a 2009 decision in the case of Country Inns & Suites By Carlson, Inc. v. Interstate Properties, LLC, 329 Fed. Appx. 220, No. 08-16850 (11th Cir., May 12, 2009), the Eleventh Circuit examined the validity of liquidated damages in a contract dispute arising under Florida law. The court held that the test under Florida law as to when a liquidated damages provision will be upheld should be applied to the case. Under Florida law, liquidated damages are enforceable when:

First, the damages consequent upon a breach must not be readily ascertainable. Second, the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages. (Lefemine v. Baron, 573 So. 2d 326, 328 (Fla. 1991).

In our hypothetical case of the late-paying importer above, CBP may assess liquidated damages of double the unpaid duties even if the duty payment is only one day late. Looking at the second prong of the test from Lefemine, the actual damages to CBP of a late duty payment are, at best, the opportunity costs of that late payment. In most contractual settings, such late payment fees are a small percentage (1% or 1½% per month) of the unpaid amount. In a duty bill of $100,000, however, the liquidated damages could equal to $200,000. Such CBP-levied damages clearly violate the Lefemine test and would be thrown out in a Florida court, and now apparently, in the 11th Circuit as well.

The implications for the potential application of Izurieta are enormous. The Eleventh Circuit includes the major international ports of Miami, Fort Lauderdale, Tampa, Jacksonville, Atlanta, and Savannah to name a few. The ports of the 11th Circuit saw over $150 Billion in imports during 2011, almost 10% of the total in the United States. The liquidated damages, fines and penalties to CBP arising from these ports are similarly great. The question after the holding in United States of America v. Yuri Izurieta and Anneri Izurieta is now whether these monetary damages can now be sustained.

As the last of forgetful but doting husbands, boyfriends, and lovers runs out to buy their special someone flowers on this Valentine’s Day, the inspectors at U.S. Customs and Border Protection (CBP) are breathing a sigh of relief.

Although final numbers for this season are not yet in, during the period of January 1 through February 14, CBP will see the importation of almost 1 billion stems of cut flowers from around the world, mostly from Central and South America.  During the 2012 Valentine’s season, CBP processed over 842 million stems, and levels of imports were expected  to rise between 7% and 9% this year due to the increasingly healthy U.S. economy.  Most of these cut flowers are coming through CBP inspection sites at Miami International Airport, which saw 716.7 million stems (or ~85% of the total imported cut flowers nationally) imported between January 1 and February 14, 2012.  The flowers come mostly from Colombia (about 67% of the total), followed by Ecuador, with approximately 23% of the total.

With the flowers coming from these locations, many might assume that CBP is looking for illegal narcotics.  And while some drugs are found in shipments, what CBP is really looking for is bugs.

Every year, mixed in among the roses, mixed bouquets, and dianthus (the biggest imports) are invasive, harmful pests such as Tetranychus sp. (mites), Aphididae (Aphids), Agromyzidae (Miner Flies) and Noctuidae (moths).  In 2012, CBP intercepted approximately 2,500 shipments infested with these pests.  Most often, the shipments are fumigated and the flowers continue on their way.  However, some other plants and flowers are intercepted and destroyed at the border.  Chrysanthemums, gladiolas, and orange jasmine from Mexico (which carries the Asian citrus psyllid, a dangerous pest that destroys citrus crops), as well as most flowering plants in soil are prohibited from entering the United States altogether.

Were it not CBP’s pest interdiction efforts, the U.S. Department of Agriculture estimates that billions of dollars in damage to U.S. crops, including vegetables, grains, and flowers, could be done by these pests.  In addition to bugs, CBP is also on the look-out for diseases.  Current CBP interdiction efforts are underway to prevent funguses called “Chrysanthemum White Rust” and “Gladiolus Rust” from entering the U.S.  These diseases, if they gained a toe hold in the United States, could severely damage the domestic flower industry.

So as you pass by the flower shop or roadside-stand filled with blooms, remember that CBP inspectors have played their role to ensure that nothing will “bug” your loved one this Valentine’s Day.

Just one day before President Barack Obama embarked on the first-ever trip to Burma by a sitting U.S. president, on November 16, 2012, the U.S. government removed most import restrictions on goods from Burma. This joint effort between the Department of State and the U.S. Department of Treasury will waive portions of the Burmese Freedom and Democracy Act of 2003 to allow most Burma-origin goods into the American market for the first time in nearly a decade. These actions will be implemented by General License No.18 authorizing all Burma-origin imports except for jadeite, rubies, and any commodities specifically designated on U.S. black lists.

This lifting of certain trade restrictions marks the latest of several efforts by the United States and the international trade community to reintegrate Burma into the global marketplace, following severe trade restrictions that were initially placed on the country in the late 1980s for its government’s violent responses to opposition groups.

Canada, for example, lifted its ban on trade and investment in Burma in the Spring of 2012, including prohibitions on imports, exports, investment, the docking and landing of ships and aircraft, and the provision or acquisition of financial services.  It should be noted, however, that Canada has maintained an arms embargo and prohibitions against designated Burmese persons. Similarly, European foreign ministers approved a one-year suspension of the E.U. economic sanctions against Burma.

While companies have urged the present administration to formulate a plan to lift trade restrictions across all sectors of the Burmese economy, the U.S. is slightly more reluctant to move as swiftly as Canada and the E.U. in lifting Burmese sanctions. The Obama Administration has expressed intentions to pursue a calculated step-by-step process to reward the leaders in Burma for further reforms and to give the U.S. the flexibility to slow the process if Burmese reforms are delayed or reversed. As of April 4, 2012, the U.S. had lifted restrictions only on certain financial transactions in support of humanitarian, religious, and other non-profit activities authorized by the U.S. Department of Treasury.

The United States has recognized and rewarded Burma’s continued democratic and humanitarian reforms including the country’s April elections, release of political prisoners, increased press freedom and cease-fire agreements with armed ethnic groups. While the U.S. acknowledges these progressive steps, the most recent lift of import restrictions is a change in enforcement and not a full repeal of the legal framework that has authorized U.S. sanctions against Burma for almost 25 years. In a joint statement released by the U.S. Departments of State and Treasury, the agencies noted that “the U.S. government is closely monitoring and supporting Burma’s progress on reform, and the core authorities underlying our sanctions remain in place[d]espite positive changes, [we] remain concerned about corruption, remaining political prisoners, continued military ties to the Democratic People’s Republic of Korea and ethnic conflict.”

In a statement by House Ways and Means Committee Chairman, Dave Camp (R-Michigan), he noted, “While we’ve seen positive developments in Burma over the past few months, much work remains ahead. I encourage the Burmese Government to continue on its forward-looking trajectory and implement significant political and economic reforms in order to foster a truly free and prosperous Burma.” Democratic Senator Max Baucus (Montana) echoed these thoughts stating, “Burma has made real progress advancing democracy, but we need to maintain pressure to guarantee it continues.”

The President’s visit to Burma, an unthinkable prospect just two years ago, marked a “pivotal moment in Burmese history that embraced the progress that has been made and further encouraged the government and its people to move forward with their transition to democracy” said Deputy National Security Advisor for Strategic Communications, Ben Rhodes on a November 15th conference call regarding the presidents visit. Hopefully, the lifting of trade restrictions will be mutually beneficial for U.S. foreign relations and policy, Burmese domestic political infrastructure, and global trade as a whole.

Fuerst Ittleman David & Joseph, PL, has significant experience in trade law, sanction compliance programs, and in counseling our clients as to the best means to reap the benefits of changes in U.S. policies.  Contact us today for a free consultation.

On October 22, 2012, the United States Court of Appeals for the 4th Circuit affirmed a Federal District Court decision that a federal ban on the trafficking of certain culturally significant articles was proper and did not unfairly prevent the importation of rare coins from China and Cyprus.

Historically, the United States has taken significant steps to thwart the theft, excavation, and illicit export of culturally significant articles into and out of other countries. In 1970, the United Nations Educational, Scientific, and Cultural Organization (“UNESCO”) held a conference in which it developed an international system to protect countrys culturally significant articles. The Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property (the “Convention”) was spawned from this conference. The Convention promulgated rules that afforded state parties the ability to request that other signatories to the Convention implement import and export controls to protect the requesting states cultural property from theft and illicit export.

The U.S. Congress subsequently ratified these rules in 1972, and ten years later under President Reagan, domestically implemented the Convention through the Cultural Property Implementation Act (“CPIA”). The CPIA give the U.S. government the authority to place import restrictions on certain articles of cultural property at the request of a Convention signatory. The scope of these restrictions is limited under 19 U.S.C. §2601 to, among other criteria, “archeological or ethnological material of the State Party” that “was first discovered within, and is subject to export control by, the State Party” requesting import restrictions. The authority to determine and list restricted articles initially resided with the President and Secretary of Treasury, but has since been delegated to the Assistant Secretary of State for Educational and Cultural Affairs.

The CPIA provides the following exceptions for articles being imported into the United States that have been determined to be covered by the Act:

1. the articles are accompanied by formal documentation certifying that the item was lawfully exported;
2. there is satisfactory evidence that the article was exported from a State Party at least ten years prior to arriving to the United States and the importer owned it for less than one year before it arrived in the United States; or
3. there is satisfactory evidence that the article was exported from the State Party before the import restrictions took effect.

Also, if the date of export from the State Party is not known, a statement expressing belief that the article meets one of the exemptions may suffice.

In September 1998, Cyprus formally requested the imposition of import restrictions on certain categories of articles that jeopardize the national cultural patrimony of Cyprus. The import restrictions were permitted and further extended to include certain coins of Cypriot origin in 2007. In May 2004, China also made formal requests to the United States for the imposition of import restrictions on categories of Chinese archeological material from the Paleolithic to the Qing Dynasty. The United States also permitted these restrictions and in 2009 extended said restrictions to certain types of Chinese coins.

In April of 2009, after these restrictions had taken effect, the Ancient Coin Collectors Guild (the “Guild”) purchased twenty-three (23) ancient Chinese and Cypriot coins from a London dealer. According to the dealers documentation, the coins were minted in China or Cyprus and each coin had no recorded provenance. The coins were subsequently detained by U.S. Customs and Border Protection (“CBP”) for allegedly violating CPIA and associated regulations. Interestingly enough, rather than attempting to establish that the coins were lawfully admitted under one of CPIAs exceptions, the Guild decided not to provide CBP with any supporting documentation and, in the alternative, waited until forfeiture proceedings were initiated to bring a claim against CBP and the U.S. Department of State in Federal District Court.

What was initially an import/export dispute with CBP quickly turned into a dispute regarding the balance of powers between the different branches of the federal government. In its court filings, the Guild claimed that both CBP and the Department of State acted ultra vires, a Latin phrase that means “beyond the powers” and which has been coined (no pun intended) in the legal context to describe actions where an entity exceeds the authority which it has been expressly granted. The Guild based its ultra vires claims on the fact that both agencies overstepped their authority by not including a more detailed accounting of specific items covered under the CPIA import restrictions in violation of the Administrative Procedures Act (“APA”), and First and Fifth Amendments of the U.S. Constitution.

Unfortunately for the Guild, the Fourth Circuit recognized that it is well settled, with respect to foreign affairs, that the federal judiciary is generally not empowered to second-guess the Executive Branch. The court also found that, with respect to these types of import restrictions, the Executive Branch has broad discretion in negotiating agreements with foreign states under 19 U.S.C. §2602(a). Based upon the broad powers of the Executive and the agencies proper compliance with the APA, the court affirmed the district courts dismissal of the Guilds claims on these arguments.

Additionally, the Fourth Circuit pointed out that Congress had provided administrative procedures through which importers could challenge CPIA seizures and forfeitures under § 2609. In its case, the court ruled that the Guild was not stripped of its due process rights, but rather decided to purposely forego its potential administrative remedies in order to challenge the governments claims and prove that the coins were not subject to forfeiture.

Furthermore, as a legal strategy, it may have been of greater value for the Guild to focus its efforts on trying to prove that the coins were outside of the confines of the CPIA import restrictions. Generally, importers of antiques and culturally significant items are advised to assemble formal documentation of lawful entry prior to import and to complete significant due diligence into their prospective imports origin, age, and chain of custody to avoid possible import violations. The court noted in its opinion that proving the coins are beyond the scope of CPIA in the administrative process may be the Guilds only remaining legal recourse.

Here at FIDJ our attorneys have significant experience in disputing seizures of cultural items, antiques and artifacts. If you believe that your importation of culturally significant or ethnological materials has been improperly seized or may qualify for one of the CPIA exemptions, feel free to contact the Customs and Trade Law practice group at FIDJ.

On October 3, 2012, two companies and 11 individuals of an alleged Russian military procurement network operating in the United States and Russia were indicted in the U.S. District Court for the Eastern District of New York. The individuals, who work for a Texas-based export company and Russia-based procurement firm, are alleged to have illegally exported high-tech microelectronics to Russian military intelligence agencies. These high-tech microelectronics are subject to U.S. Department of Commerce dual-use export controls due to their potential use in an array of military systems such as radar and surveillance systems, detonation triggers, and weapons guidance systems.

In a coordinated effort, the U.S. Department of Commerce Bureau of Industry and Security (“BIS”) also issued an amendment (found here) to the Export Administration Regulations (“EAR”) to add 165 foreign persons and companies to the Entity List which identifies specific licensing requirements independent of those required under the EAR. These 165 foreign persons and individuals were alleged to have received, transshipped or facilitated the export of microelectronics to Russia and have “been determined by the U.S. government to be acting contrary to the national security or foreign policy interests of the United States.”

The indictment alleges that since October 2008, Alexander Fishenko, the president of the Russia-based procurement firm Apex Systems, LLC (“Apex”), and the Texas-based export company, Arc Electronics, Inc. (“Arc”), along with ten other defendants engaged in a “surreptitious and systematic conspiracy to obtain advanced microelectronics from the U.S. and to export those high-tech goods to Russia, while carefully evading the government licensing system set up to control such exports.”

According to the indictment, Apex functioned as a certified supplier of military equipment for the Russian government. The defendants often provided false end user information in connection with the purchase of goods, concealed their status as exporters, and falsely classified goods as having civilian end uses so as to induce manufacturers and suppliers to sell them the highly sought after microelectronics. Arcs website, for example, falsely claimed to be a traffic light manufacturer when it manufactured no goods and operated exclusively as an exporter. In another instance it is alleged that one of the defendants instructed the Russian procurement company to “make sure that” the end-use certificate indicated “fishing boats, and not fishing/anti-submarine ones” before they start working.

Each individual defendant in the case faces a maximum of 5 years incarceration for the conspiracy charges, 20 years for substantive International Emergency Economic Powers Enhancement Act (“IEEPA”) and Arms Export Control Act (“AECA”) charges, and an additional 20 years for obstruction of justice changes. In addition Fishenko faces a possible additional sentence of 20 years for money-laundering conspiracy charges and an additional 10 years for acting as an unregistered agent of the Russian government. Both Arc and Apex face up to $500,000 in fines for conspiracy counts and $1,000,000 in fines for the substantive IEEPA and AECA counts.

The involvement of Arc, Apex, Fishenko, and the 10 remaining individuals in the alleged Russian military procurement scheme offers proof of suspect activity that has the potential to result in significant incarceration and monetary penalties for these parties. But what about the additional 160+ individuals and companies “ which include suppliers, re-exporters, and transhippers “ which, to their detriment, may have relied on Fishenkos alleged fraud, misclassification of goods, and claims that his exports were for civilian end uses? They now find themselves on the EAR Entity List on the basis of Section 744.11 for acting contrary to the national security or foreign policy interests of the United States. And as such, these individuals and businesses find themselves subject to additional BIS license requirements and limited ability to apply license exceptions for exports and re-exports.

While at this stage there is no way to prove for certain the level of knowledge or active involvement of these 160+ individuals and businesses, we can expect that at least some of them were not fully aware of the nature of Fishenkos business operation and intended Russian military end uses of its high-tech exports.

Exporters, re-exporters, transshippers, and all parties involved in export-related transactions must implement effective export compliance procedures to help insulate themselves from situations such as this, situations in which they can be accountable for their passive involvement in illegal export activities. An effective compliance program and inquiry into products intended end uses prior and throughout the shipment process can provide crucial insight into the legitimacy of an exporters operation.

Furthermore, as set forth in Supplement 1 and 2 of Part 766 of the EAR, an effective compliance program is entitled a high level of consideration with respect to mitigation of actual and suspected violations of the EAR. Exporters, re-exporters, and transhippers are encouraged to complete their due diligence with respect to all of their shipments by implementing proper export controls. While even the most effective export compliance plan may not identify business activity that is a result of fraud or conspiracy (such as in the alleged Russian military procurement network mentioned above), the presence of an established export compliance program may provide BIS sufficient proof of passively involved shipping companies attempts to comply with U.S. export control law. This proof may be just enough to keep unsuspecting businesses off of the Entity List and/or mitigate EAR violation penalties issued by BIS.

Below we have provided some of the guidelines that BIS takes into account when assessing the effectiveness of a companies export compliance program:

• Whether the company has performed a meaningful risk analysis of the goods being exported and their intended end use
• The existence of a written compliance program that is communicated to others
• Whether senior management oversees export compliance program
• Whether the company screens customer transactions
• An existence of an internal system for reporting export violations
• Whether corrective action has been taken in response to export violations

The Customs and Trade Practice at Fuerst Ittleman David & Joseph, PL, has extensive experience in drafting customized export compliance manuals for a wide variety of business types and industry applications. If you want to strengthen your businesss export compliance procedures please feel free to email our offices at contact@fuerstlaw.com or phone 305-350-56909.

Introduction

As the price of healthcare continues to increase, healthcare practitioners have become more innovative and creative in their attempts to keep costs affordable for their patients. One technique which has increased in its popularity is doctors purchasing prescription drugs from foreign sources, particularly online pharmacies. However, while such techniques may provide for less expensive medical care, the importation of drugs from foreign sources can expose healthcare practitioners to a variety of criminal and civil penalties, and according to the FDA, can seriously endanger patients.

The risks associated with imported prescription drugs

For years, FDA has warned businesses and individuals about the risks associated with buying prescription drugs from foreign sources, specifically Canada. Recently, on September 28, 2012, the FDA issued a news release launching a national campaign called BeSafeRx that is designed to raise public awareness about the dangers of ordering prescription drugs from foreign unapproved sources. According to the FDA, the National Association of Boards of Pharmacy has found that less than three percent (3%) of online pharmacies meet the licensing requirements under federal law. A copy of the BeSafeRx announcement can be read here.

The FDA has taken the position that the dangers consumers face when purchasing foreign prescription drugs include consumption of expired, subpotent, contaminated or counterfeit drugs. Further, because foreign drugs may be manufactured for sale in non-English speaking countries, consumers may receive drugs without adequate directions for use. See South Florida Access to Affordable Prescription Drugs: Costs and Benefits of Alternative Solutions, Hearing before Subcomm. on Oversight and Investigations of H. Comm. on Energy and Commerce, 108th Cong. (2003).  Additionally, as many of these foreign drugs are produced in non-FDA approved facilities, the FDA cannot assure that they were manufactured in compliance with current good manufacturing practice (cGMP) standards. See generally, 21 U.S.C. § 360; 21 C.F.R. part 207.  Thus, per the FDA, consumers are exposed to numerous risks when purchasing drugs from internet pharmacies that dispense foreign drugs.

An example of the dangers consumers and healthcare practitioners face when importing foreign drugs played out earlier this year. In February, the FDA issued Warning Letters to numerous healthcare professionals that may have purchased counterfeit copies of the cancer drug Avastin from Canadian internet pharmaceutical distributors. According to reports, the fake Avastin, which was manufactured in unapproved facilities in Europe then distributed into the United States through Canadian internet pharmacy CanadaDrugs.com, contained no active cancer fighting ingredients. As a result of these events, healthcare practitioners who imported the counterfeit products may face criminal and civil penalties for having participated in adulteration and misbranding violations. See 21 U.S.C. § 351, 21 U.S.C. § 352.

More recently, on September 21, 2012, the FDA issued Warning Letters to over 4,100 identified websites that sell drugs or medical devices to American consumers. The Warning Letter, which was addressed to Canadadrugs, explained that these online pharmacy websites “offer unapproved and misbranded new drugs for sale” and requested each website to “immediately cease marketing violative drug products to United States consumers.” (To read the FDAs Warning Letter, click here.) Furthermore, the FDA sent notices to Registries, Internet Service Providers (ISPs), and domain Name Registrars (NDRs) informing them of the websites allegedly violative practices.

Additionally, on October 4, 2012, the FDA announced the details of Operation Pangea V, a global effort to combat the online sale and distribution of potentially counterfeit and illegal medical products. For the full text of the FDAs press release, please click here. In executing Operation Pangea V, the FDA collaborated with INTERPOL, the World Customs Organization, Permanent Forum of International Pharmaceutical Crime, Heads of Medicines Agencies Working Group of Enforcement Officers, the Medicines and Healthcare products Regulatory Agency of the United Kingdom, the Irish Medicines Board, the London Metropolitan Police, the U.S. Department of Homeland Security, the Center for Safe Internet Pharmacies, and the national health and law enforcement agencies from 100 other participating countries. The cooperative investigations conducted by these law enforcement, customs, and regulatory authorities resulted in civil and criminal charges, seizure of illegal produces, and removal of websites. For more information regarding Operation Pangea V, please see our previous report here.

The following discussion contains an outline of the penalties practitioners may face when importing foreign pharmaceutical drugs. This outline, however, is not exhaustive, as different penalties may be applicable to different importation activities under different circumstances.

1. Criminal Penalties under the FDCA

Under the FDCA, it is unlawful to import unapproved, misbranded, and adulterated drugs into the United States. This includes the importation of foreign versions of U.S. approved pharmaceuticals as well as those drugs that are manufactured in the United States, exported to other countries, and then subsequently reimported.

Two of the more typical FDCA violations which healthcare practitioners may face as a result of importing misbranded drugs are: 1) introduction or delivery for introduction into interstate commerce of any drug that is adulterated or misbranded; and 2) the receipt in interstate commerce of any drug that is adulterated or misbranded, and the delivery or proffered delivery thereof for pay or otherwise. See 21 U.S.C. § 331 (a), (c). The penalties and punishments associated with these crimes are governed by 21 U.S.C. § 333 and depend on whether the government charges the defendant with committing a violation “with the intent to defraud or mislead.”

Pursuant to 21 U.S.C. § 333(a)(1), a first misbranding violation is a strict liability offense and is a misdemeanor. Thus, no criminal intent need be established by the Government in order to sustain a conviction. However, 21 U.S.C. § 333(c) provides several good-faith exceptions, of which, if the healthcare practitioner qualifies, would absolve them from liability.

The maximum sentence provided by statute for a violation of 21 U.S.C. 331(a) or (c) is 1-year imprisonment, a supervised release of one year; and a maximum fine not in excess of $100,000. 21 U.S.C. § 333(a)(1); 18 U.S.C. § 3571. In addition, section 2N2.1 is the Sentencing Guideline applicable to misdemeanor violations of biological products, devices, cosmetics, and usually used in FDA prosecutions of statutes and regulations relating to foods, drugs, agricultural products.

However, if a healthcare practitioner is charged with violating either 331(a) or (c) with the intent to defraud or mislead, enhanced penalties do exist and such cases are prosecuted as felonies. The penalties associated with a violation of 21 U.S.C. § 333(a)(2) are a term of imprisonment of not more than 3 years and a fine of not more than $250,000. See 21 U.S.C. § 333(a)(2); 18 U.S.C. § 3571.

A violation of 21 U.S.C. § 333(a)(2) is a specific intent crime, see United States v. Mitcheltree. The specific intent requirement in § 333(a)(2) requires:

1. Proof of misbranding; and
2. Proof of intent to mislead or defraud “which is connected to the misbranding violation.”

Id. In other words, because “knowledge of the essential nature of the alleged fraud is a component of the intent to defraud, a defendant cannot act with an intent to mislead or defraud under § 333(a)(2) without some knowledge of the misbranding.” Id. (citing United States v. Hiland, 909 F.2d 1114, 1128 (8th Cir. 1990)).

As previously explained, “felony criminal responsibility requires a knowing violation with the specific intent to defraud or mislead.” Mitcheltree, 940 F.2d at 1350. A violation of 333(a)(2) “may be proved with facts indicating knowledge of the misbranding activity and a concomitant intent to defraud or mislead the FDA or its state counterpart.” Id.; see also United States v. Patwardhan,422 Fed. Appx. 614 (9th Cir. 2011); United States v. Bradshaw, 840 F.2d 871 (11th Cir. 1988) (sustaining a conviction under 333(a)(2) where defendant: 1) knowingly sold steroids without a prescription for unapproved use; 2)mislabeled the steroids as vitamins to avoid detection; and 3) made affirmative misrepresentations and omissions to state drug authorities while attempting to obtain a drug wholesalers permit.).

Additionally, while “the cases construing § 333(a)(2) have ordinarily been based on a sellers intent to defraud or mislead purchasers,” a prosecution under 333(a)(2) may be “based upon an intent to mislead or defraud not only natural persons, but also government agencies if there is evidence that a defendant consciously sought to mislead drug regulatory authorities such as the FDA or a similar governmental agency.” Mitcheltree, 940 F.2d at 1347, 1348 (10th Cir. 1991). As described by the Court in Mitcheltree, “if the government proceeds on this theory, there must be a demonstrated link between the § 331 violation and an intent to mislead or defraud an identifiable regulatory agency involved in consumer protection. Id. at 1349 (emphasis in original); see also United States v. Cattle King Packing Co., 793 F.2d 232 (10th Cir. 1986) (finding that the specific intent requirement of the statute could be satisfied by a showing that defendant intended to mislead or defraud the government agency charged with federal meat inspection); Bradshaw, 840 F.2d 871 (11th Cir. 1988) (finding defendant could satisfy the specific intent requirement of the statute by showing that defendant intended to mislead or defraud state agency in charge permitting and licensing). Additionally, “similar governmental agency” is interpreted to include agencies of foreign governments. See United States v. Industrial Laboratories, 456 F.2d 908 (10th Cir. 1972) (finding that the specific intent requirement of the statute could be satisfied by a showing that defendants intended to mislead or defraud Canadian authorities).

2. Additional criminal and civil liabilities

In addition to violations of the FDCA, practitioners who import foreign pharmaceuticals can face a variety of other criminal penalties. For example, according to the Centers for Medicare and Medicaid Services fact sheet, Medicare will not pay for health care or supplies obtained outside the U.S., which includes prescription drugs imported from Canada. 42 U.S.C. § 1395y. As such, doctors could face criminal and civil liability for knowingly importing drugs in violation of the FDCA and submitting a claim to Medicare for the illegally imported drugs.

Such charges may include:

• Health care fraud for defrauding or obtaining money from a health care benefit program. 18 U.S.C. § 1347. Notably, the doctor does not need to have actual knowledge or specific intent to violate this section. Violations of the health care fraud statute are punishable by fines or imprisonment of no more than 10 years, or both.

• False claims for knowingly presenting a false claim for payment or approval to the government. 31 U.S.C. § 3729. Violations for false claims are punishable by civil penalty of not less than $5,000 and not more than $10,000.Further, healthcare practitioners could be subject to various fraud charges related to importing drugs from overseas. Such charges may include:

• Mail and wire fraud for the use of mails or wire communications in furtherance of a scheme to defraud. See 18 U.S.C. § 1341; 18 U.S.C. § 1343.  Violations of the mail and wire fraud statutes are punishable by imprisonment of no more than 20 years, or fines, or both.

• Bank fraud for obtaining money held by a financial institution through false representations pursuant to 18 U.S.C. § 1344. Violations of the bank fraud statute are punishable by no more than $1,000,000 or imprisonment of no more than 30 years, or both. Section 2B1.1 is the Federal Sentencing Guideline applicable to fraud perpetrated by individuals. Under this guideline, although the “victims loss is usually used as the proxy for the severity of thr crime, the offenders gain, i.e. the proceeds from the illicit activity, can provide an adequate, alternative method of gauging the crimes just penalty when the loss is incalculable. See United States v. Haas, 171 F.2d 259, 269, 270 (5th Cir. 1999) (finding that while “the loss sustained by either the FDA or Haass customers is, for all practical purposes, incalculablethe district court can, however, estimate the gain that Haas received from defrauding the FDA. Thus, Haass gain from his fraudulent importation scheme appears to have been the monies received [from his company] by way of salary and profits.”). Therefore, under the sentencing guideline, the more money involved in a fraud scheme involving  the sale or distribution of misbranded or adulterated drugs, the greater the potential sentence.

• Money laundering in violation of 18 U.S.C. § 1957.

• Smuggling or clandestinely introducing goods because of failure to comply with other statutes. 18 U.S.C. § 545. Violations are punishable by fines or imprisonment of no more than 30 years, or both.Healthcare practitioners must also be aware of the potential liabilities they face if they engage in the re-importation of drugs.

• Drug re-importation involves exporting U.S. manufactured prescription drugs to a foreign country, then subsequently importing the same drug back into the U.S. by someone other than the U.S. manufacturer, and carries additional penalties under the FDCA. The  FDCA prohibits anyone other than the U.S. manufacturer of a drug to re-import the drug into the U.S. even if the drug was approved and manufactured in the U.S; 21 U.S.C. § 381 (d)(1).The FDA has found that, because it does not have oversight over other countries drug distribution systems, insufficient safeguards in foreign handling and shipping exist to prevent the introduction and retail sale of substandard, ineffective, or counterfeit drugs. 59 Fed. Reg. 11842 (March 14, 1994). Thus, products that are re-imported by anyone other than the manufacturer will be denied entry into the U.S. 21 U.S.C. § 381(d)(3)(B).If a business or individual knowingly violates 21 U.S.C. § 381 (d)(1) by causing prescription drugs manufactured in the U.S. to be re-imported by persons other than the manufacturer of the drug, they may be subject to criminal liability consisting of a maximum of 10 years in prison and a maximum $250,000 fine. 21 U.S.C. § 333(b)(1)(A).It is important to note that those who aid and abet in a criminal violation of the FDCA, or conspire to violate the FDCA, can also be found criminally liable. 18 U.S.C. §§ 2, 371. Thus, businesses or individuals that import drugs from foreign sources in violation of the FDCA could potentially be charged with these offenses as well.

3. Exclusion from participation in federal health care programs

In addition to criminal penalties, practitioners may also face various administrative penalties. For example, 42 U.S.C. §1320a-7b(a) empowers the Secretary of Health and Human Services to exclude certain convicted individuals from participation in any “Federal Health Care Program.” In particular, § 1320a-7(b)(1)(a) authorizes the Secretary to exclude individuals convicted of a criminal offense consisting of a misdemeanor relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct in connection with the delivery of a health care item or service.

Additionally, § 1320a-7(b)(3) authorizes the Secretary to exclude any individual who has been convicted of a criminal offense consisting of a misdemeanor relating to the unlawful manufacture, distribution, prescription, or dispensing of a controlled substance. See Friedman v. Sebelius, Case No. 11-5028 (D.C. Cir. July 27, 2012).  Further, “items and services furnished, ordered, or prescribed by [an excluded person] will not be reimbursed under Medicare, Medicaid and all other Federal health care programs until [that person] is reinstated by the OIG.” 42 C.F.R. § 1001.2. For more information regarding exclusion from federal health care programs under 42 U.S.C. § 1320a-7b, please see our previous report here.

Conclusion

Healthcare practitioners are in a never-ending struggle to control the costs of patient care, but must nevertheless ensure that the methods they choose comply with federal law. For more information regarding the importation of drugs from foreign sources, our FDA litigation practice, or how to ensure that your business maintains regulatory compliance, contact Fuerst Ittleman David & Joseph PL at (305) 350-5690 or contact@fuerstlaw.com.

If you have ever attempted to import merchandise into the United States you are probably aware that there are numerous rules, regulations, forms, and guidelines which must be compiled with and submitted prior to the entry of your goods. For even the most seasoned importer, the task of properly assembling this information for US Customs & Border Protection (“CBP” or “Customs”) can seem confusing and overwhelming. Recognizing these difficulties, Customs has formulated the Trade Transformation Initiative. This initiative focuses on driving down trade costs and promoting trade efficiency. The intended result is a more streamlined and efficient means for importers and brokers to expedite the clearance and review process of their trade goods.

On November 9, 2011, CBP announced the commencement of the initial phase of its Simplified Entry Pilot Program (“SEP Program” or “Program”). Serving as one of CBPs integral trade transformation initiatives, the Program was created to streamline the entry process, enhance cargo security, and reduce transaction costs for trade. This Program offers a direct response to the industrys call for more predictability in the importation process. Under the Programs framework, importers produce an entry data set with 12 required elements and 3 optional elements as opposed to the 27 currently required on the CBP 3461 entry form. Carriers will be required to submit manifest/ ACAS security filings, and importers will submit the SEP Program data set. All of this data will be included in the newly developed commercial trade processing system called the Automated Commercial Environment (“ACE”).

Filing well in advance allows CBP to run all targeting earlier and ensure that transport is not delayed for issues that can be resolved pre-shipment. While in route, CBP can indicate whether the goods are cleared for release or if additional data is required. Because of this, filers can resolve many issues before departure or in transit which results in a more efficient trade transaction. On June 4, 2012 CBP announced that it had received its first Simplified Entry filings at the three pilot ports located in Indianapolis, Chicago, and Atlanta. 9 brokers selected by CBP are currently participating in the Program which is available for Air Mode of Transportation exclusively.

On August 14, 2012, CBP announced its plans to further expand the SEP Program for Air Mode of Transportation.  Utilizing a regional expansion approach, the Program has already expanded to include the port of Seattle with San Francisco, Oakland, and Los Angeles to follow soon after. In Mid-September expansion will continue into the south and southeast with the inclusion of Dallas/Ft. Worth, Houston, and Miami followed by northeastern expansion into Newark, New York, and Boston.

CBP plans to further develop the Simplified Entry Pilot program to eventually include functionalities such as the Participating Government Agency Message Set, the Simplified Entry transaction set, Single Transaction Bonds, automatic cancellations and deletions, the Document Image System, and Remote Location Filing. CBP will run the Air Mode Transportation SEP Program until approximately December 31, 2013 and will continue to further develop the Programs functionality until Cargo Release is fully available in the ACE.

The attorneys in the Customs, Import and Trade Law practice group at Fuerst Ittleman David & Joseph, PL will continue to keep abreast of the developments in the Simplified Entry Program. If you are a broker and have any trade concerns or legal issues stemming from the use or implementation of the new Simplified Entry Program, feel free to contact us at 305-350-5690 or contact@fuerstlaw.com.

For importers and brokers, there may be several aspects of US Customs & Border Protections (“CBP” or “Customs”) policies that are obscure. One of those areas is liquidated damages provisions and their proposed consequences. Under CBPs most recent proposal, importers who fail to respond to liquidated damages claims in a timely manner will face possible fines and consequences far beyond what is currently in place. As any shrewd business person will note, it is important to keep operating costs low and to avoid any extra bills whenever possible. This holds the same for importers and brokers whose job is to quickly and efficiently get merchandise from point A to point B. Brokers and importers must be attentive to deadlines and time requirements just as much as any other business, but even more so because of the nature of their profession.

If the newly proposed changes to the Liquidated Damages Mitigation Guidelines (as will be discussed below) are put into place, filing timely may be the difference between a few hundred and a few thousand dollars in extra bills. But lets not get too far ahead of ourselves, lets first get a clear understanding of what exactly a Liquidated Damage is, where it comes from, and why it is so crucial for importers to “timely” respond to Liquidated Damages claims made by Customs.

Background & Current Mitigation Guidelines for Untimely Liquidated Damage Response Petitions

Before we address the consequences of untimely responding to a liquidated damages claim, we need to first understand how they occur. Liquidated damages arise out of customs bonds. A customs bond is typically filed by the importer of record, warehouseman, or other custodian of merchandise. It is effectively an agreement between an importer and surety that ensures compliance with all of Customs obligations with respect to entry, storage, and transport of goods.   In the event that an importer breaches one of these obligations, this bond functions as security for liquidated damages claims issued by the CBPs Office of Fines, Penalties, and Forfeitures.

In the event that a liquidated damages claim is issued, CBP affords importers the opportunity to challenge the claim by submitting a petition pursuant to 19 C.F.R. § 172.3(b). Under this regulation, a petition must be filed within 60 days from the date of mailing to the bond principal the notice of claim for liquidated damages or penalty secured by a bond. Historically, CBP has been lenient with respect to accepting late petitions.

CBPs most current Mitigation Guidelines: Fines, Penalties, Forfeitures, and Liquidated Damages provide instruction on how CBP determines settlement amounts for late petitions. CBP begins by calculating the mitigation amount as if a timely petition was submitted. This is called the “base amount.” CBP then takes 1% of the base amount and multiplies that by the amount of days the petition was late. This amount is then be added to the original base amount with a minimum additional value to be no less than $400.

Now that we have established what Liquidated Damages are, how they arise, and the current calculation for untimely filing, let us now turn our attention to the newly proposed changes to Customs Mitigation Guidelines.

CBPs Proposed Changes to Mitigation Guidelines for Late Petitions

In an informal document made available to members of the trade industry, CBP has claimed that the current mitigation guidelines have not effectively reduced or deterred the number of late petition filings by importers. Furthermore, in recent discussions between CBP the International Trade Surety Association (“ITSA”) and Customs Surety Executive Committee (“CSEC”), CBP explained its intent to significantly alter the calculation scheme for mitigation on untimely liquidated damage responses by importers.

Under the proposed calculation, CBP will take 1% of the full original assessment amount and multiply that by the amount of days the petition was late. This amount will then be added to the base amount. It is also reported that petitions later than 180 days late will not be accepted at all and the full original assessment amounts will be paid.

This proposed change in CBPs Mitigation Guidelines is significant and can result in final mitigation amounts being tens of thousands of dollars more than they would otherwise be under the current scheme. Importers are advised to be aware of the proposed changes and to make sure to submit liquidated damages response petitions timely.

If you need assistance filing a response petition to Customs or want more information on the developments in CBPs Mitigation Guidelines contact the Customs, Import and Trade Law practice group at Fuerst Ittleman David & Joseph, PL at 305-350-5690 or contact@fuerstlaw.com.

In an effort to combat the importation of counterfeit goods into the United States, US Customs & Border Protection (“CBP” or “Customs”) has significantly increased the number of seizures of suspected counterfeit merchandise. Between 2010 and 2011, Customs seized nearly 25,000 shipments with a domestic value of approximately 200$ Million and retail values exceeding 1.1$ Trillion. These seizures accounted for just under a 25% increase for the fiscal year 2011. Customs is making a statement, and is taking significant steps to ensure that counterfeits are not getting into the United States market place. The downside of these efforts is that with the increased volume of seizures, it is becoming more difficult for Customs to differentiate between good faith importers and those who knowingly import counterfeits.

Products such as electronics, pharmaceuticals, and footwear are at the top of CBPs watch list and good faith importers of these goods are getting caught in the crossfire. Counterfeit or not, the chances of import cargo being detained or seized is much higher, and importers are forced to wait out what could be months of administrative proceedings to have their cargo released. Worst of all, until recently, there has been virtually no recourse for importers who want to dispute these claims expeditiously. Fortunately, Customs has recognized this problem and implemented new seizure and detention policies in response.

On April 24, 2012, Customs issued an interim rule entitled Disclosure of Information for Certain Intellectual Property rights Enforced at the Border. This regulation amends 19 C.F.R. § 133.21 which outlines CBPs regulations regarding the seizure and detention of suspected counterfeit imports.

In its interim rule, Customs established an entirely new notification and response procedure between itself and importers suspected of importing counterfeits. This new procedure is designed to benefit importers because the previous version of the regulation was silent as to how importers could respond to allegations of suspected forfeiture and provided little immediate recourse for upstanding importers who have been wrongfully accused of counterfeit importation.

Under the new regulations, CBP is given a maximum of thirty days to detain suspected counterfeit goods after which the goods will be excluded from entry or delivery pursuant to 19 U.S.C. § 1514(a)(4). This period can be extended up to an additional thirty days if the importer can display good cause. Under the old regulatory framework, CBP effectively had the power to detain importers items indefinitely and offered no remedy for importers to dispute the seizure of their goods.

Pursuant to the amended regulation in 19 C.F.R. § 133.21(b), CBP is also now required to notify an importer, in writing, that his goods are being detained within 5 days of the detention. The importer will then be afforded seven days to respond to CBP and offer evidence of the merchandises authenticity. Prior to the amendment, Customs had no formal requirement to notify importers of its intentions to seize their merchandise. In fact, CBP was only required to notify the trademark owner.

Section (b) creates a twofold benefit. First, it affords honest importers an opportunity to quickly dispute claims and have merchandise released without waiting (for what could have previously taken up to 60 days) to have the authenticity of there merchandise verified. Under the new regulation good faith importers could potentially have their shipments released in a fraction of the time if they can sufficiently and quickly gather evidence of the seized goods authenticity.

Secondly, this section requires CBP to become more efficient in its verification and disposition of alleged counterfeit goods. Under the auspices of the previous regulation, CBP had full discretion to take as much time as it felt necessary to complete the forfeiture proceeding. This is no longer the case. Customs must now be much more efficient with its procedure and have matters resolved within 30 days, barring any good cause extensions.

Aside from the previously mentioned changes, 19 C.F.R. § 133.21 is effectively the same with respect to Customs dealings with the actual trademark owner. CBP is still required to notify the trademark owner about information regarding the seized shipment (i.e. port of entry, quantity, description of merchandise, product samples, etc) within thirty days. The regulation also continues to afford trademark owners the discretion to provide written consent to have the goods disposed or entered into the US (after obliteration of counterfeit trademarks).

The effect of this updated regulation seems to be positive on all fronts: It puts all involved parties on notice, affords importers the opportunity to dispute and resolve claims quickly, and continues to enforce and protect the trademarks of companies who may be damaged from counterfeit goods in the domestic marketplace.

If you are an importer and have been notified that your cargo has been detained, do not hesitate to contact an attorney in our Customs practice to assist you in responding to CBP.