U.S. Customs and Border Protection (CBP)

A Nightmare for an Importer: Being Accused of Fraud by U.S. Customs

posted by Jennifer Diaz October 1, 2009 2 Comments

It is common for an importer to receive a CBP Form 28 (Request for Information) and then a CBP Form 29 (Notice of Action) for incorrectly classifying merchandise.  It is also relatively common for an importer to receive a Pre-Penalty Notice from U.S. Customs and Border Protection (Customs) alleging negligence, gross negligence, or fraud, and demanding tens or hundreds of thousands of dollars in monetary penalties and additional duties.  Don’t panic.

When a CBP 28 or CBP 29 is issued by an Import Specialist of Customs to an importer, it may ultimately result in the issuance of a fraud penalty in violation of 19 U.S.C. 1592.  If Customs alleges fraud, then the penalty will be equal to the total invoiced value of the shipments affected.  For example, if a shipment of clothing valued at $100,000 was misdescribed or misdeclared in some way to Customs, and a fraud penalty is issued, the penalty will $100,000.  If the penalty is not paid, the case is referred by Customs to the U.S. Department of Justice to pursue litigation against the importer.  Sometimes, Customs seeks to collect money by personally naming the officers, shareholders, and/or managers of the company as well.  That means joint and several liability, so even if the company is no longer in business or does not have the money to pay, the U.S. Department of Justice will seek the payment of the penalty from the persons involved.

Whenever a CBP 28 or 29 indicates that the importer is under "formal investigation", those magic works should not be ignored.  You can be pretty sure that the matter will result in a penalty being issued by Customs against the importer for some form of fraud.  Import fraud comes in all shapes and sizes.  It could be that the wrong tariff classification in the Harmonized Tariff Schedule of the United States was used by the importer to get a lower or zero duty rate, or avoid import quotas.  Another common violation is the importer incorrectly stating that the imported product qualifies for one of the multi-lateral free trade agreements such as DR-CAFTA (Dominican Republic- Central American Free Trade Agreement) or a bilateral free trade agreement such as the U.S.-Australia Free Trade Agreement. Just as common is the violation whereby the importer accurately describes the merchandise and the country of origin, but greatly undervalues the merchandise to avoid Customs duties, excise taxes or other fees.

Procedurally, after the CBP 28s and CBP 29s have been issued, and the importer responds to each in writing, a Pre-Penalty Notice will be issued by Customs’ Fines, Penalties and Forfeitures (FP&F) Office. The Notice is issued to the importer of record.  The Notice describes the violation, identifies the Customs entries involved, cites the laws and regulations allegedly violated, demands payment in full or provides the importer 30 days to file a Petition explaining why the violation did not occur or otherwise why the importer should not have to pay the penalty. 

The Petition is filed with the FP&F Office, and reviewed by the assigned Paralegal Specialist. Most likely, the Petition will also be reviewed by an Import Specialist at the port of entry who issued the CBP 28 and CBP 29.  In some situations, a Special Agent from the U.S. Immigration and Customs Enforcement (ICE) Office may be involved, or legal counsel for Customs.  Customs often agrees to allow an in-person meeting to discuss the Pre-Penalty Notice. Be sure to consult Appendix B to Part 171 of the Customs Regulations to identify and list any mitigating factors which could reduce the amount of the monetary penalty.  Familiarity with the FP&F Handbook is another vital tool to attempt to persuade Customs to cancel, or at least reduce, the penalty against the importer.

Hopefully, with the help of expert, legal counsel knowledgeable and experienced in Customs law, the Petition will be reviewed, and Customs will not issue a penalty.  Customs sometimes changes the culpability of the wrongdoing from fraud to gross negligence, or from gross negligence to simple negligence.  The lower the level of culpability, the lower the amount of the penalty.

If the Petition after the Pre-Penalty Notice is not successful, Customs will state so in a responsive letter called a Penalty Notice. Then, the importer may file another Petition alleging some new legal arguments or supplement the facts.  Usually, at this stage, these cases are referred by the FP&F Office to Customs Headquarters in Washington, D.C., where an attorney in the Penalties Branch reviews the case, and writes the analytical decision.  That decision is forwarded to the FP&F office which then forwards it to the importer’s legal representative.  Hopefully, Customs will agree that there was no fraud, and the case is over. The whole process usually takes many months, and can take even longer.

 In summary,

(1) A CBP 28 or CBP 29 almost always precede a penalty notice, so be careful when replying;

(2) Whenever you read or hear the words "formal investigation", promptly get legal counsel because a fraud penalty is coming;

(3) Remember that penalties may be issued against individuals as well as companies; and

(4) Do your homework before claiming the duty free treatment of DR-CAFTA, NAFTA, or other trade agreement on Customs entries.

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Ronald Edelstein October 14, 2009 at 3:39 pm

I read with interest your article on Customs fraud penalties, as published in Jim Bartlett’s daily newsletter. As an old U.S. Customs FP&F Officer (Los Angeles, 1977-1982) it’s an area that has special interest to me. It was a good article, but I do have one small quibble with it. To quote:

If Customs alleges fraud, then the penalty will be equal to the total invoiced value of the shipments affected. For example, if a shipment of clothing valued at $100,000 was misdescribed or misdeclared in some way to Customs, and a fraud penalty is issued, the penalty will $100,000.

Actually, the penalty for fraud is the DOMESTIC or forfeiture value of the misdecribed or fraudulently entered goods, not the invoice value. This would generally be the RETAIL value of the goods, which would be substantially higher than the importer’s invoiced valued. If we could not arrive at a forfeiture value any other way, Customs used to use a formula of the (corrected) entered value + the duty + 40% of the total to cover retail mark-up. Of course different industries had different mark up rates and generally clothing has a very high rate of duty as well. So the fraud penalty could be as much as double the invoiced value or more, particularly since the invoiced value was often the point in contention as being undervalued by some means.

Melissa Irmen October 26, 2009 at 9:35 pm

After reading this very interesting article, I agree that companies must do their homework before claiming trade agreements on Customs entries to avoid complications, fines, or penalties. Software capabilities can eliminate the pain and time of gathering, maintaining, analyzing and complying with trade agreements.

Free trade agreements (FTA) are an essential piece of facilitating global trade and providing savings opportunities however managing multiple trade agreements can be time-consuming. In order to determine if products qualify for a FTA, importers must obtain product information and certificates of origin or required documentation from suppliers. Once supplier documentation is received, the importer must determine the eligibility of the product based on numerous rules surrounding the product’s Harmonized Schedule (HS) number. Without an automated system in place containing updated FTA qualifications, reference HS numbers and their applicable rules, an importer must research each product classification number and qualification status by hand.

Being thorough in your FTA analysis is key for companies that wish to validate product classification and ensure their products are correctly qualifying for international free trade agreements. Integration Point Free Trade Agreement Management software automates the process of soliciting suppliers and determining product eligibility based on free trade agreement, preferential agreement and preference program rules from around the world.


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