International Trade Compliance Newsletter - July 2020 - GRVR Attorneys

Public Comment submitted by Oscar Gonzalez, Attorney Phone (469) 774-4793; email address: [email protected] Law Firm: Gonzalez, Rolon, Valdespino, & Rodriguez, LLC Submission Date: July 29, 2020 Docket No. USCBP-2020-0009 Agency: US Customs and Border Protection DHS Document Citation: 85 FR 34836 Action: Notice of proposed rule making Summary I make four objections to CBP’s proposed changes to the customs broker regulations, each objection explained in greater detail below. First, CBP provided insufficient notice regarding the newest and most important proposed changes to the customs brokers regulations. Second, making customs brokers “force multipliers” is unwise and illegal. Third, making customs brokers responsible for proper classification and valuation changes and heightens their standard of care. Fourth, forcing customs brokers to provide corrective advice to importers is the unlawful practice of law and imposes irreconcilable conflicts of interest/duties. 1. CBP provided insufficient notice regarding the newest and most important proposed changes to the customs brokers regulations. In its Federal Register Notice, CBP provides a history of the buildup to its proposed revisions of customs regulations. CBP highlights its outreach to the trade community about ACE, national permits, and the customs broker exam and licensing. To be sure, all these are vital issues to customs brokers and CBP takes great pains to feature and expand upon them throughout its Federal Register Notice. However, for the most part, it is the regulations catching up to the practice. ACE and national permits, the main thrust of the Federal Register, are already and mostly in place. The major departure from current practice and law is what I dedicate the remainder of my comments. Whether CBP ever reached out to the trade community about the specific issues that I now raise is nowhere mentioned in CBP’s Federal Register Notice. Given the sea change that CBP is proposing, CBP should provide a fuller explanation of these proposed amendments and provide further opportunities for the public to comment before finalizing and adopting its proposed regulations. 2. Making customs brokers “force multipliers” is unwise and illegal. Making customs brokers “force multipliers” is a euphemism for conscripting and deputizing customs brokers. Here is the wording from CBP’s Federal Register Notice: CBP proposes to add a new sentence requiring a broker to document and report to CBP when the broker separates or terminates the broker's representation of a client as a result of the broker determining that the client is intentionally attempting to defraud or otherwise commit any criminal act against the U.S. Government. Under the current CBP regulations, when brokers discover that a client has not complied with the law or made errors or omissions in documents, affidavits, or other paper required by law, the broker must advise the client promptly of the noncompliance, error, or omission. See 19 CFR 111.39(b). The proposed new requirement puts an affirmative duty on the broker to document and report to CBP when the broker terminates representation of a client as a result of determining that the client is attempting to defraud or otherwise commit any criminal act against the U.S. Government. This requirement covers situations where a broker advises the client of a noncompliance, error, or omission, the client directs the broker to continue such noncompliance, error, or omission, and in response the broker terminates its relationship with the client. The proposed changes will allow brokers to act as “force multipliers” in combating fraud and other schemes against the government. Not only will CBP’s proposal distort the importer-broker relationship, but CBP is not empowered to legally make that change. Only Congress, and not CBP, may seek to change the nature of the customs broker-import client relationship. There is no statute that allows CBP to deputize customs brokers. CBP’s proposed regulations reveal either a profound misunderstanding or a troubling disdain of the customs broker-client relationship. CBP licenses and regulates customs brokers, but it does not employ or contract with them. Customs brokers are not federal officers, employees, or agents. Customs brokers are undoubtedly responsible for a number of things, including accurately reporting information to CBP, but it is the Secretary of the Treasury/CBP, not customs brokers, that shoulders the primary duty to protect the revenue under 19 USC § 1641. Customs brokers are primarily responsible to their importer clients. That is why a customs broker must operate under a power of attorney from its importer client. The importer client is the principal and the customs broker is its agent. As seen in 19 CFR 141, Subpart C, §§ .31-.46 (the regulations pertaining to powers of attorney), CBP is not a party to this relationship. The customs broker is a fiduciary, with its primary duty of loyalty to its importer-client, as set out by the terms of the power of attorney and within the law. The customs broker’s duty cannot be diluted or split because a diluted or split loyalty is no loyalty at all. None of these principles are debatable and all are uniformly recognized and enforced by our courts, including the US Court of International Trade. See, for example, Boynton v US , 517 F Supp 2d 1349, 1355 (CIT 2007) (“Customs brokers, as fiduciaries, are held to a higher standard of care than are ordinary businessmen”); US v Pan Pacific Textile Group , 395 F Supp 2d 1244, 1251 (CIT 2005) (by virtue of a power of attorney, a customs broker owes a fiduciary duty as agent to principal importer); Command Communications . Fritz , 36 P 3d 182 (Colo: Court of Appeals, 2nd Div 2001) (“Customs brokers act as agents for importers and therefore act in a fiduciary capacity”). CBP’s proposals may well disrupt the business of customs brokerage. Few would hire a CPA to prepare their tax returns if the CPA acted as a “force multiplier” for the IRS. Few would hire a landscaper if the landscaper was working as a “force multiplier” for city ordinance enforcement. Likewise, importers might be reluctant to engage or trust customs brokers who spy on the importers and report back to CBP when they suspect something is wrong. Not only is CBP prohibited by law from conscripting customs brokers as “force multipliers,” but the ambiguity in the customs broker’s duty to snitch is open to abuse. With the duty of loyalty in ruins, little prevents a customs broker from leveraging their new-found power to exaggerate or even concoct customs errors that can be reported to CBP if the customs broker does not get its way with its client importer. In its Federal Register Notice, CBP writes: In addition, CBP proposes to add a new sentence requiring a broker to document and report to CBP when the broker separates or terminates the broker's representation of a client as a result of the broker determining that the client is intentionally attempting to defraud or otherwise commit any criminal act against the U.S. Government. Under the current CBP regulations, when brokers discover that a client has not complied with the law or made errors or omissions in documents, affidavits, or other paper required by law, the broker must advise the client promptly of the noncompliance, error, or omission. See 19 CFR 111.39(b). The proposed new requirement puts an affirmative duty on the broker to document and report to CBP when the broker terminates representation of a client as a result of determining that the client is attempting to defraud or otherwise commit any criminal act against the U.S. Government. This requirement covers situations where a broker advises the client of a noncompliance, error, or omission, the client directs the broker to continue such noncompliance, error, or omission, and in response the broker terminates its relationship with the client. The proposed changes will allow brokers to act as “force multipliers” in combating fraud and other schemes against the government. A customs broker’s duty to snitch is triggered when its importer client is “attempting to defraud or otherwise commit any criminal act against the U.S. Government” or has committed any “noncompliance, error, or omission.” In other words, just about any compliance error or omission will do. This open-endedness is alarming. CBP may respond that the customs broker’s duty to snitch is limited because it is activated only when an importer refuses to correct the errors or omissions, thereby forcing customs broker to terminate its representation of the importer. Such logic ignores CBP’s proposal to heighten the standard of care that customs brokers must observe when performing customs business on behalf of an importer (see argument 3, below). Their heightened standard of care will pressure customs brokers, already emboldened and skittish from their new enforcement powers, to terminate importer representations prematurely and hastily, thus, paradoxically eroding the general level of compliance with customs law within the trade community. CBP’s proposal is also superfluous. Whistleblower laws exist and are found both in CBP’s own regulations (19 CFR 161.12 and 19 USC §1619) and in the False Claims Act (31 USC §§3729-3733). Both reward people, including customs brokers, for snitching on importers who violate customs laws. The difference is that whistleblower laws work through incentive, not through the coercion of a newly-fabricated affirmative duty. 3. Making customs brokers responsible for proper classification and valuation changes and heightens their standard of care. As for the heightened standard of care, CBP writes the following in its Federal Register Notice: Section 111.39 describes the requirements for brokers giving advice to clients. Currently, paragraph (a) requires a broker not to

Summary

I make four objections to CBP’s proposed changes to the customs broker regulations, each objection explained in greater detail below. First, CBP provided insufficient notice regarding the newest and most important proposed changes to the customs brokers regulations. Second, making customs brokers “force multipliers” is unwise and illegal. Third, making customs brokers responsible for proper classification and valuation changes and heightens their standard of care. Fourth, forcing customs brokers to provide corrective advice to importers is the unlawful practice of law and imposes irreconcilable conflicts of interest/duties.

1. CBP provided insufficient notice regarding the newest and most important proposed changes to the customs brokers regulations.

In its Federal Register Notice, CBP provides a history of the buildup to its proposed revisions of customs regulations. CBP highlights its outreach to the trade community about ACE, national permits, and the customs broker exam and licensing. To be sure, all these are vital issues to customs brokers and CBP takes great pains to feature and expand upon them throughout its Federal Register Notice. However, for the most part, it is the regulations catching up to the practice. ACE and national permits, the main thrust of the Federal Register, are already and mostly in place. The major departure from current practice and law is what I dedicate the remainder of my comments. Whether CBP ever reached out to the trade community about the specific issues that I now raise is nowhere mentioned in CBP’s Federal Register Notice. Given the sea change that CBP is proposing, CBP should provide a fuller explanation of these proposed amendments and provide further opportunities for the public to comment before finalizing and adopting its proposed regulations.

2. Making customs brokers “force multipliers” is unwise and illegal.

Making customs brokers “force multipliers” is a euphemism for conscripting and deputizing customs brokers. Here is the wording from CBP’s Federal Register Notice:

CBP proposes to add a new sentence requiring a broker to document and report to CBP when the broker separates or terminates the broker's representation of a client as a result of the broker determining that the client is intentionally attempting to defraud or otherwise commit any criminal act against the U.S. Government. Under the current CBP regulations, when brokers discover that a client has not complied with the law or made errors or omissions in documents, affidavits, or other paper required by law, the broker must advise the client promptly of the noncompliance, error, or omission. See 19 CFR 111.39(b). The proposed new requirement puts an affirmative duty on the broker to document and report to CBP when the broker terminates representation of a client as a result of determining that the client is attempting to defraud or otherwise commit any criminal act against the U.S. Government. This requirement covers situations where a broker advises the client of a noncompliance, error, or omission, the client directs the broker to continue such noncompliance, error, or omission, and in response the broker terminates its relationship with the client. The proposed changes will allow brokers to act as “force multipliers” in combating fraud and other schemes against the government.

Not only will CBP’s proposal distort the importer-broker relationship, but CBP is not empowered to legally make that change. Only Congress, and not CBP, may seek to change the nature of the customs broker-import client relationship. There is no statute that allows CBP to deputize customs brokers.

CBP’s proposed regulations reveal either a profound misunderstanding or a troubling disdain of the customs broker-client relationship. CBP licenses and regulates customs brokers, but it does not employ or contract with them. Customs brokers are not federal officers, employees, or agents. Customs brokers are undoubtedly responsible for a number of things, including accurately reporting information to CBP, but it is the Secretary of the Treasury/CBP, not customs brokers, that shoulders the primary duty to protect the revenue under 19 USC § 1641. Customs brokers are primarily responsible to their importer clients. That is why a customs broker must operate under a power of attorney from its importer client. The importer client is the principal and the customs broker is its agent. As seen in 19 CFR 141, Subpart C, §§ .31-.46 (the regulations pertaining to powers of attorney), CBP is not a party to this relationship. The customs broker is a fiduciary, with its primary duty of loyalty to its importer-client, as set out by the terms of the power of attorney and within the law. The customs broker’s duty cannot be diluted or split because a diluted or split loyalty is no loyalty at all. None of these principles are debatable and all are uniformly recognized and enforced by our courts, including the US Court of International Trade. See, for example, Boynton v US, 517 F Supp 2d 1349, 1355 (CIT 2007) (“Customs brokers, as fiduciaries, are held to a higher standard of care than are ordinary businessmen”); US v Pan Pacific Textile Group, 395 F Supp 2d 1244, 1251 (CIT 2005) (by virtue of a power of attorney, a customs broker owes a fiduciary duty as agent to principal importer); Command Communications . Fritz, 36 P 3d 182 (Colo: Court of Appeals, 2nd Div 2001) (“Customs brokers act as agents for importers and therefore act in a fiduciary capacity”).

CBP’s proposals may well disrupt the business of customs brokerage. Few would hire a CPA to prepare their tax returns if the CPA acted as a “force multiplier” for the IRS. Few would hire a landscaper if the landscaper was working as a “force multiplier” for city ordinance enforcement. Likewise, importers might be reluctant to engage or trust customs brokers who spy on the importers and report back to CBP when they suspect something is wrong.

Not only is CBP prohibited by law from conscripting customs brokers as “force multipliers,” but the ambiguity in the customs broker’s duty to snitch is open to abuse. With the duty of loyalty in ruins, little prevents a customs broker from leveraging their new-found power to exaggerate or even concoct customs errors that can be reported to CBP if the customs broker does not get its way with its client importer. In its Federal Register Notice, CBP writes:

In addition, CBP proposes to add a new sentence requiring a broker to document and report to CBP when the broker separates or terminates the broker's representation of a client as a result of the broker determining that the client is intentionally attempting to defraud or otherwise commit any criminal act against the U.S. Government. Under the current CBP regulations, when brokers discover that a client has not complied with the law or made errors or omissions in documents, affidavits, or other paper required by law, the broker must advise the client promptly of the noncompliance, error, or omission. See 19 CFR 111.39(b). The proposed new requirement puts an affirmative duty on the broker to document and report to CBP when the broker terminates representation of a client as a result of determining that the client is attempting to defraud or otherwise commit any criminal act against the U.S. Government. This requirement covers situations where a broker advises the client of a noncompliance, error, or omission, the client directs the broker to continue such noncompliance, error, or omission, and in response the broker terminates its relationship with the client. The proposed changes will allow brokers to act as “force multipliers” in combating fraud and other schemes against the government.

A customs broker’s duty to snitch is triggered when its importer client is “attempting to defraud or otherwise commit any criminal act against the U.S. Government” or has committed any “noncompliance, error, or omission.” In other words, just about any compliance error or omission will do. This open-endedness is alarming.

CBP may respond that the customs broker’s duty to snitch is limited because it is activated only when an importer refuses to correct the errors or omissions, thereby forcing customs broker to terminate its representation of the importer. Such logic ignores CBP’s proposal to heighten the standard of care that customs brokers must observe when performing customs business on behalf of an importer (see argument 3, below). Their heightened standard of care will pressure customs brokers, already emboldened and skittish from their new enforcement powers, to terminate importer representations prematurely and hastily, thus, paradoxically eroding the general level of compliance with customs law within the trade community.

CBP’s proposal is also superfluous. Whistleblower laws exist and are found both in CBP’s own regulations (19 CFR 161.12 and 19 USC §1619) and in the False Claims Act (31 USC §§3729-3733). Both reward people, including customs brokers, for snitching on importers who violate customs laws. The difference is that whistleblower laws work through incentive, not through the coercion of a newly-fabricated affirmative duty.

3. Making customs brokers responsible for proper classification and valuation changes and heightens their standard of care.

As for the heightened standard of care, CBP writes the following in its Federal Register Notice:

Section 111.39 describes the requirements for brokers giving advice to clients. Currently, paragraph (a) requires a broker not to withhold from or provide false information to a client. CBP proposes moving part of the second sentence from paragraph (a) to a new paragraph (b) titled “Due diligence” and, in that paragraph, adding language to specify that a broker must practice due diligence in providing advice on the proper payment of any duty, tax, or other debt or obligation owing to the U.S. Government….CBP proposes to add the requirement that the broker also explain the proper corrective action to better advise the client and to clarify the level of professionalism that is expected in the broker/importer relationship.

When customs violations were found in the past, CBP first and foremost sought to pin liability on the importer. Thanks to this new due diligence obligation, CBP has equal grounds to now come after customs brokers when there are errors in valuation/appraisal, tariff classification, duty and fee payment, or any other facet of customs compliance. If CBP did not intend such a sweeping change, CBP should clarify. But if that is CBP’s intent, the heightened standard of care will undoubtedly gratify importers who always felt that customs brokers should shoulder more of the compliance responsibility. In contrast, customs brokers will be unsettled by this new expectation of them and by the concomitant increased liability. Moreover, it is a circumstance that cannot be attenuated by the terms and conditions/limitations on liability that are standard in many customs broker contracts.

4. Forcing customs brokers to provide corrective advice to importers is the unlawful practice of law and imposes irreconcilable conflicts of interest/duties.

CBP’s Federal Register Notice explains that “CBP proposes to add the requirement that the broker also explain the proper corrective action.” Thus, this is the third new duty that CBP seeks to thrust upon customs brokers. CBP is instructing customs brokers to be legal advisors to importers. This is not an exaggeration. CBP is instructing customs brokers to guide importers through the legal options and complexities that surface in the face of violations. Few customs brokers possess the legal expertise to perform this duty adequately. Moreover, CBP is asking customs brokers to practice law without a law license, an illegality imposed by state law that CBP cannot overcome through regulation.

In sum, CBP wishes to require that a customs broker function as a “force multiplier” in the service of CBP by snitching on the importer. CBP also wants the customs broker to be responsible for correctly valuing and classifying the importer’s products. CBP also now expects the customs broker to advise the importer on which corrective actions to take in the presence of violations. This piling on of duties creates a teetering Jenga tower of irreconcilable conflicts of interests whose inevitable toppling will benefit no one, save perhaps CBP. It is a construct that is as unwise as it is illegal. Go back to the drawing room, CBP, and give the trade community a reasonable opportunity to chime and improve upon your proposed regulations. It will spare everyone unnecessary heartache.