Customs Update: Record what?
(Published in the JOC Online May 4, 2006)

Added to the law as part of the Mod Act in 1994, importers are under an obligation to keep defined records and the failure to maintain those records can lead to penalties, and, boy, are those penalties starting to fly!

One in particular caught everyone's attention when it became public that importer Ford Motor Co. had failed to support its North American Free Trade Agreement claims. As a result, it was hit with a $25 million penalty for making false NAFTA claims and another $16 million for record-keeping violations. Shortly, thereafter, Ford's name was again associated with a messy situation, this time involving record keeping. As Ford is in litigation on these issues, we can look at the public record to see just how convoluted a situation this has become. 

In October 2005, Ford filed suit in federal court in Michigan seeking declaratory relief. Specifically, Ford claims that Customs is operating in an arbitrary and capricious manner (the legal standard required) by insisting that American importers who claim NAFTA must provide the records of their foreign suppliers and the failure to do so allows the imposition of serious record keeping penalties. 

The history of the situation is common for importers of NAFTA-eligible goods from Mexico. Ford was required to produce its NAFTA Certificates of Origin to support its claims. Then it was required to produce records maintained by its Mexican supplier. In this instance, Customs served a summons on Ford for records related to country of origin and classification of component parts and materials. Ford quite understandably took the position that it was not obligated to keep those records in the ordinary course of business or by the NAFTA agreement or Customs' own regulations, and so Customs was out of line in making its demands. Customs then imposed a huge penalty on Ford for failing to produce those records.

The law is clear. If Customs wants records from the exporter/producer, it must follow the procedures contained in NAFTA and initiate a verification. It did this for entries filed in 1996 from this supplier and profusely praised the supplier's record-keeping and understanding of NAFTA's requirements when it issued its audit findings.

In 2001, Customs served a summons on Ford to produce records for about 500 NAFTA entries filed in 1996. The goods in question came from the same supplier and were imported during the same period as the records previously reviewed and approved. In a gesture of good faith, Ford claimed to have provided certain limited records which related to approximately 45 percent of the entered value of products imported from that supplier covered by NAFTA claims. 

What is remarkable about Customs' position is its arrogance. If Customs believes a response to a summons is incomplete, its remedy is to get a court to order production of the records. Instead, Customs walloped Ford yet again (we all recall the recent court decisions imposing millions of dollars in fines on Ford for a variety of violations unrelated to this particular scenario). The original negligence penalty was for $41,931,997! It was later mitigated to $21,642,481! Given that the record-keeping penalty for negligence is $10,000 per entry, an enormous number of entries had to be involved. 

Ford's lawsuit also asks the Court to invalidate any attempt by Customs to stretch the definition of (a)(1)(A) records beyond the NAFTA Certificate of Origin, plus that Customs not be allowed to circumvent the statute of limitations governing 19 U.S.C. § 1592 by bootstrapping to a claimed record-keeping violation which itself seeks records after liquidation and more than five years after entry, i.e., outside the applicable statute of limitations. 

At about the same time as Ford filed its lawsuit in Michigan, the federal government filed its own lawsuit seeking to collect the full $41,931,997. As a result, Customs' response to Ford's lawsuit was to seek dismissal or a transfer to Texas where its own lawsuit was filed. The basis for the government's defenses was that the U.S. domestic courts do not have jurisdiction to enforce NAFTA except through suits brought by the government. In other words, there is no basis for Ford to argue from the NAFTA agreement, only Mexico and Canada can challenge the government's actions. While a neat trick, it avoided the real basis of Ford's suit -- that Customs was engaging in creative regulation making.

The parties then duked it out in their pleadings trying to convince the judge which case should be allowed to proceed. Only at the Reply stage, does it come out that El Paso Customs notified Ford in January 2000 that it was under investigation for violations unrelated to a prior disclosure which had been filed by Ford. Customs claimed the summons in question was an outgrowth of that investigation. 

Stay tuned. The hearing on the government's motion to dismiss was originally scheduled for April 13. Given that Customs sees record-keeping violations as the means to enforce summons, it is safe to assume there are several more of these cases out there. Yet again, we find Customs has forgotten its role in informed compliance -- the deal made with the trade as part of the Mod Act is Customs informs and the trade complies. How is the trade supposed to comply if it is not told of Customs' expectations, (never mind that they are unrealistic and beyond the scope of NAFTA?