Archive for the ‘Customs, Import & Trade Law’ Category

When “Minor” Export Violations Can Become Federal Crimes

Thursday, July 10th, 2014

The following article was written by Stephen Wagner for the Export Compliance Training Institute. Mr. Wagner is a faculty member for the Institute,and frequently lectures and writes on export compliance and enforcement matters. We repost Mr. Wagner’s article here with the Institute’s permission.

Your foreign customer has been complaining to you about the high duties on your products when they are imported into his country. He asks if you could manifest an item as a “Return of Goods under Warranty.” That way, his company will avoid having to pay customs duties when the merchandise is imported.

 You know that the merchandise will be properly valued and described (other than the “warranty return” label) when your freight forwarder inputs the Electronic Export Information into the Automated Export System (AES). This will really help the customer, so this isn’t a big deal, right?

There is an old proverb that states, “What you don’t know can’t hurt you.” However, when it comes to export regulation and enforcement matters, the “First Law of Blissful Ignorance” is probably more accurate:

What you don’t know will always hurt you.

Improperly declaring export information in AES is a violation of the Foreign Trade Regulations (FTRs), which are codified at title 15 of the Code of Federal Regulations (C.F.R.) part 30. Specifically, 15 C.F.R. § 30.3(a) requires that electronic export information (EEI) be “complete, correct, and based on personal knowledge of the facts stated or on information furnished by the parties to the export transaction.” This requirement of accuracy applies (in this case) to the merchandise information that is submitted pursuant to 15 C.F.R. § 30.6(a)(13), which calls for a description of the commodity.

Therefore, even if you disregard the guidance contained in the FTRs regarding the “reporting of repairs and replacements” (15 C.F.R. §30.29) and accurately report the price and the commodity classification number, misrepresenting that merchandise as a warranty return, when it is not, is still a violation of the FTRs.

Subpart H of the FTRs (15 C.F.R. §§ 30.71-74) outlines the penalty provisions for export violations; these penalty provisions are enforced by U.S. Customs and Border Protection (CBP). Penalties for this type of infraction can be as high as $10,000 per violation, but CBP mitigation guidelines could reduce the penalties to as low as $500, if this is your company’s first offense. Moreover, according to CBP:

For first violations of the FTR, CBP may take alternative action to the assessment of penalties, including, but not limited to, educating and informing the parties involved in the export transaction of the applicable U.S. export laws and regulations, or issuing a warning letter to the party.

(U.S. Customs and Border Protection, “Guidelines for the Imposition and Mitigation of Civil Penalties for Failure to Comply with the Foreign Trade Regulations in 15 CFR Part 30,” CBP Dec. 08-50 (Feb. 2009)).

But that may not be the end of your potential enforcement liabilities.

In 2005, the U.S. Supreme Court considered the case of Carl and David Pasquantino and Arthur Hilts who were arrested and convicted of smuggling large quantities of liquor from the United States into Canada to evade Canada’s high alcohol import taxes. In this case, the men were convicted of criminal wire fraud, in violation of 18 U.S.C. § 1343.

The federal criminal wire fraud statute prohibits the use of the “instrumentalities of interstate or international telecommunications in furtherance of any scheme or artifice to defraud.” The Court in Pasquantino held that a scheme to deprive a foreign government of lawful duties and taxes comes within the scope of a “scheme or artifice to defraud” in the U.S. federal wire fraud statute. (Pasquantino v. United States, 544 U.S. 349, 354-55 (2005)).

The bottom line is that whenever a U.S. exporter knowingly falsifies any export information or export documents with the result that a foreign country is deprived of its lawful import duties, that action may constitute a Pasquantino violation.

Therefore, if you electronically transmit your EEI to AES with the erroneous “warranty return” information, under Pasquantino, you could be guilty of criminal wire fraud, because you are using your U.S. computer to deprive your customer’s foreign government of its duties. Also, if you mail copies of the export documents with that same false information, that may be a violation of the federal criminal mail fraud statute (18 U.S.C. § 1341).

While the penalties for the AES violations may be as negligible as informed compliance from CBP, a warning letter, or a mitigated penalty of $500, a criminal conviction of federal wire fraud and/or mail fraud can carry prison sentences up to 20 years per violation and a fine of up to $250,000 for each violation. Such serious potential consequences of even “minor” export violations is why your company – and every U.S. exporter – should religiously adhere to all export laws and regulations, and make export compliance a top corporate priority.

Export Compliance Update: OFAC Issues General License Easing Restrictions On Exportation Of Communications Services, Software, and Hardware To Iran

Monday, June 10th, 2013

On May 30, 2013, the Office of Foreign Assets Control (“OFAC”) of the United States Department of the Treasury announced the issuance of a general license authorizing the exportation to Iran of certain services, software, and hardware incident to personal communications. The general license will allow U.S. persons to export consumer communications equipment and software to Iranian citizens. As described by Bloomberg Businessweek, the general license will cover a wide variety of software and hardware including mobile phones, satellite phones, laptop computers, modems, broadband hardware, and routers. A copy of the general license can be read here.

As we have previously reported, Iran is already subject to broad and sweeping sanctions which are administered by OFAC. The Iranian Transactions Regulations (“ITR”), which are found at 31 C.F.R. part 560, were promulgated pursuant to the International Emergency Economic Powers Act. 31 C.F.R. § 560.206 prohibits U.S. persons from “financing, facilitating, or guaranteeing” goods, technology or services to Iran. Additionally, 31 C.F.R. § 560.208 prohibits U.S. persons from approving, financing, facilitating, or guaranteeing any transaction by a foreign person where the transaction performed would be prohibited under the IRT if performed by a U.S. person. However, pursuant to the Iran-Iraq Arms Non-Profileration Act of 1992, the President has the authority to waive the imposition of certain sanctions if such waiver is “essential to the national interest” of the United States. General information regarding economic sanctions against Iran can be found at OFACs website.

While the decision to grant this general license may appear on the surface to run counter to recent OFAC sanctions, (more information on these restrictions can be read on our prior report here), two points must be noted. First, the general license does not authorize the export of any equipment to the Iranian government or to any individual or entity on the Specifically Designated Nationals (“SDN”) list. Second, general licenses permitting the sale and export of telecommunications equipment and technology currently exist in other OFAC administered sanctions regimes.

For example, similar general licenses exist within the Cuban Sanctions program. 31 C.F.R. § 515.542(b) provides that U.S. telecommunications services providers are authorized to engage in all transactions incident to the provision of telecommunications services between the United States and Cuba, the provision of satellite radio or satellite television services to Cuba, and the provision of roaming services involving telecommunications services providers in Cuba. In addition, section 515.542(c) authorizes persons subject to U.S. jurisdiction to contract with and pay non-Cuban telecommunications services providers for services provided to particular individuals in Cuba (other than certain prohibited Cubans). More information on the Cuba Sanctions regime can be found on OFAC’s website here.

Similar general licenses also exist under the Syrian Sanctions program. Pursuant to General License No 5, U.S. persons, wherever located, may export to persons in Syria services incident to the exchange of personal communications over the Internet, such as instant messaging, chat and email, social networking, and blogging, provided that such services are publicly available at no cost to the user.

The purpose of such general licenses is to help facilitate the free flow of information between persons located within countries subject to U.S. Sanctions and the outside world. As explained by the Treasury Department in its press release announcing the new general license:

The United States is taking a number of coordinated actions today that target persons contributing to human rights abuses in Iran and enhance the ability of the Iranian people to access communication technology. As the Iranian government attempts to silence its people by cutting off their communication with each other and the rest of the world, the United States will continue to take action to help the Iranian people exercise their universal human rights, including the right to freedom of expression.

The people of Iran should be able to communicate and access information without being subject to reprisals by their government. To help facilitate the free flow of information in Iran and with Iranians, the U.S. Department of the Treasury, in consultation with the U.S. Department of State, is issuing a General License today authorizing the exportation to Iran of certain services, software, and hardware incident to personal communications. This license allows U.S. persons to provide the Iranian people with safer, more sophisticated personal communications equipment to communicate with each other and with the outside world. This General License aims to empower the Iranian people as their government intensifies its efforts to stifle their access to information.

A copy of Treasury Department’s press release can be read here.

Fuerst Ittleman David and Joseph, PL will continue to watch for developments in the implementation of the new Iranian sanctions program with a keen eye. For more information regarding the Iranian Sanctions Program, the Iranian Transaction Regulations, OFAC and for strategies on maintaining compliance with federal regulations, please contact us at 305-350-5690 or

Announcing the Fuerst Ittleman David & Joseph Mini-Blog

Friday, June 7th, 2013

This week, Fuerst Ittleman David & Joseph is launching a Mini Blog, which will be submitted to its readers on a weekly basis. Unlike its usual Blog, which will continue to be updated here, the Mini Blog will allow FIDJ to communicate with its readers in a short and to-the-point style, delivering critical news updates with just enough commentary to explain why the updates are critical. We believe that this Mini Blog will be a valuable resource for our readers, and will allow subscribers to stay up to date on issues affecting all of our practice areas, including Tax & Tax Litigation, Food Drug & Cosmetic Law, Complex Litigation, Customs Import & Trade Law, White Collar Criminal Defense, Anti-Money Laundering, Healthcare Law, and Wealth & Estate Planning. Additionally, subscribers may sign up to receive only the content relevant to their interests on a subject-by-subject basis. As always, please feel free to reach out to us with comments regarding our content or suggestions regarding how we may better keep you up to date.

Click here to sign up.

Here is a sampling of what you can expect to receive in our Mini Blog:

Food and Drug:

On May 28, 2013, the Alcohol and Tobacco Tax and Trade Bureau (TTB) issued guidelines for voluntary “serving facts statements” that alcoholic beverage manufacturers may include on their packaging. A copy of TTB’s press release can be read here. The serving facts statements are similar to the nutrition panels currently found on non-alcoholic foods and beverages. According to the rule, serving facts statements will include: 1) the serving size; 2) the number of servings per container; 3) the number of calories; and 4) the number of grams of carbohydrates, protein, and fat preserving. In addition, serving fact statements may also include the percentage of alcohol by volume and a statement of the fluid ounces of pure ethyl alcohol per serving. TTB is providing the interim guidance on the use of voluntary serving facts statements on labels and in advertisements pending the completion of rulemaking on the matter. A copy of the TTB Ruling can be read here.


A new bill in the U.S. House of Representatives, the Medicare Audit Improvement Act of 2013, seeks to amend title XVIII of the Social Security Act to improve operations of recovery auditors under the Medicare integrity program and to increase transparency and accuracy in audits conducted by contractors. A few proposals include limiting the amount of additional document requests, imposing financial penalties on auditors whose payment denials are overturned on appeal and publishing auditor denials and appeals outcomes.

In related news, the Department of Health and Human Services c/o the Centers for Medicare and Medicaid Services  (“CMS”) is proposing to increase the maximum reward for reporting Medicare fraud from “10 percent of the overpayments recovered in the case or $1,000, whichever is less, to 15 percent of the final amount collected applied to the first $66,000,000”¦” In case you don’t have a calculator handy, that’s a change from $1,000 to a potential maximum windfall of $9,900,000. It’s safe to assume that the number of whistleblower reports of alleged Medicare fraud are going to skyrocket. As the saying goes, you miss 100% of the shots you don’t take.

As decided by the United States Court of Appeals for the Eleventh Circuit, HIPAA preempts Florida’s broad medical records disclosure law pertaining to a decedent’s medical records. In Opis Management Resources, LLC v. Secretary of Florida Agency for Health Care Administration, No. 12-12593 (11th Cir. Apr. l 9, 2013), the 11th Circuit Court of Appeals ruled that Florida’s broad medical records disclosure law did not sufficiently protect the privacy of a decedent’s medical records. The Court noted that Florida allows for “sweeping disclosures, making a deceased resident’s protected health information available to a spouse or other enumerated party upon request, without any need for authorization, for any conceivable reason, and without regard to the authority of the individual making the request to act in a deceased resident’s stead.” In contrast, HIPAA only permits the disclosure of a decedent’s protected health information to a “personal representative” or other identified persons “who were involved in the individual’s care or payment for health care prior to the individual’s death” to the extent the disclosed information is “relevant to such person’s involvement”.


On May 29, 2013, the New York Times reported that the Swiss Government will allow Swiss Banks to provide information to the U.S. Government in exchange for assurances that Swiss banks would only be subject to fines and not be indicted in an American criminal case. Per the New York Times,

The New York Times article reports that: But [Ms. Widemer-Schlumpf (Switzerland's finance minister)] said the Swiss government would not make any payments as part of the agreement. Sources briefed on the matter say the total fines could eventually total $7 billion to $10 billion, and that to ease any financial pressure on the banks, the Swiss government might advance the sums and then seek reimbursement”¦. Ms. Widmer-Schlumpf said the government would work with Parliament to quickly pass a new law that would allow Swiss banks to accept the terms of the United States offer, but said the onus would be on individual banks to decide whether to participate.

This appears to be the beginning of the end of Swiss bank secrecy. If the Swiss relent to the U.S., the European Union will be next in line to obtain the same concession.

Anti-Money Laundering:

Our thoughts on the United States government’s attack on Mt. Gox can be read here, and Bitcoin continues to remain a hot topic all across the internet; see here, here, and here. Another virtual currency, Liberty Reserve, has also made a splash since being shut down by the Feds last week in what many have described as the largest money laundering scheme of all time; see here for details of the takedown, as well as the following articles describing the initial bits of fallout from the Liberty Reserve takedown: online anonymity, anti-money laundering compliance,Barclays Bank involvement, and the not guilty pleas entered by Liberty Reserve’s proprietors on Thursday. We will keep our eyes on these two cases as the fallout continues.

Customs Sharing Hard Times with Importers and Travelers

Tuesday, March 5th, 2013

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.

11th Circuit Case Signals Split on Law vs. Regulation vs. … Contract?

Monday, February 25th, 2013

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.

CBP Inspects Almost a Billion Ways to Say “I Love You”

Thursday, February 14th, 2013

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.

U.S. Lifts Ban on Imports from Burma: Continued Efforts to Ease Burma Back into the Global Economy

Thursday, December 6th, 2012

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.

Fourth Circuit Court of Appeals Upholds Federal Ban on Trafficking of Certain “Culturally Significant Articles”

Wednesday, November 14th, 2012

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.

U.S. Indicts Multiple Companies and 165 Parties Added to the BIS Entity List for Alleged Involvement in Russian Military Procurement Network

Thursday, October 18th, 2012

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 or phone 305-350-56909.

Physicians and Pharmacies Must Be Aware of the Dangers and Potential Penalties Associated with Importing Prescription Drugs

Thursday, October 11th, 2012


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, 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.
  • 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.


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