October 18, 2007
In United States v. Inn Foods, Inc., __ CIT __, Slip Op. 2007-142 (September 25, 2007), the United States Court of International Trade determined that Inn Foods, Inc., through a related entity, Seaveg, Ltd., fraudulently declared the value of imported frozen foods from Mexico to Customs through the use of a “provisional” invoicing scheme. (A “provisional” invoice is an invoice that is not recognized as “final” at the time it is issued.)
According to the facts at trial, Seaveg, Ltd. would first secure the initial market price for each subject entry from the Mexican growers over the telephone. Then, under an agreement with its suppliers, Seaveg would receive an invoice at seventy percent of the initially set sales price, with the understanding that the remaining thirty percent would be paid within sixty days of entry (subject to certain adjustments). Seaveg, Ltd. was responsible for importing and distributing the imported products to Inn Foods. Neither Inn Foods nor Seaveg, Ltd. told Customs or its broker that the invoice values used at the time of entry were “provisional”; and in fact, asserted to Customs and its broker that the “provisional” invoices were the only invoices associated with the shipments.
Customs claimed that Inn Foods knowingly, intentionally, and fraudulently filed entry documents that contained materially false statements in violation of 19 U.S.C. §§ 1481, 1484 and 1592. Whereas, Inn Foods contended that "its good faith, but erroneous compliance in this case was the result of ordinary negligence borne out of inexperience in Customs matters."
The first order of business for the court was to find that Inn Foods was responsible for the liabilities, not Seaveg, Ltd. The court found that Seaveg was an alter ego of Inn Foods; and therefore, the fact that Seaveg and Inn Foods were incorporated as two separate entities was not going to shield Inn Foods from Customs duties and penalties owed for actions that occurred under the name of Seaveg.
Next, the court addressed the issue of liability. A violation of 19 U.S.C. § 1592(a)(1) occurs when a person or entity makes a materially false statement or omission in connection with the entry of merchandise into the United States; and that false statement or omission is the result of fraud, gross negligence, or negligence.
The court concluded that the invoices were false because they contained valuations of merchandise that were significantly less than the invoices that were later created by Inn Foods for the same goods; and that the misstatements on the invoices were material because Customs relied on the information when making the proper determination of the value of the merchandise and, therefore, of the lawful duties owed. The court defined the term “material” as any statement that "has the potential to alter the classification, appraisement, or admissibility of merchandise, or liability for duty."
The court then turned its attention to what it considered to be the real issue in the case, the level of culpability of Inn Foods, as this has a direct correlation to the maximum amount of penalty that can be assessed.
Under the concept of simple negligence, the maximum penalty that can be assessed under 19 USC 1592 is two (2) times the loss of revenue (or 20 percent of the value of the imported goods, if no revenue loss is involved).
If gross negligence is found to exist, the maximum penalty that can be assessed under 19 USC 1592 is four (4) times the loss of revenue (or 40 percent of the value of the imported goods, if no revenue loss is involved).
If fraud is found to exist, the maximum penalty that can be assessed under 19 USC 1592 is the domestic value of the merchandise.
For purposes of a Section 1592 violation, negligence is defined (see Appendix B, 19 CFR Part 171) as the failure to exercise the degree of reasonable care and competence expected from a person in the same circumstances in either:
- Ascertaining the facts or in drawing inferences therefrom, in ascertaining the importer’s obligations under the statute; or
- Communicating information in a manner so that it may be understood by Customs.
As a general rule, a violation is considered to be negligent if it results from failure to exercise reasonable care and competence to:
- Ensure that statements made and information provided, in connection with the importation of merchandise, are complete and accurate; or
- Perform any material act required by statute or regulation.
Gross Negligence is defined (see Appendix B, 19 CFR Part 171) as an act or acts done with actual knowledge of or wanton disregard for the relevant facts, and with indifference to or disregard for the offender's obligations under the statute.
Fraud is defined (see Appendix B, 19 CFR Part 171) as the use of a material false statement, or an omission, or act in connection with the transaction that was committed knowingly, i.e., was done voluntarily and intentionally, as established by clear and convincing evidence.
Inn Foods argued that the invoices with the incorrect values were given to Customs negligently. Whereas, Customs asserted that it was done fraudulently.
Lack Of Knowledge Of The Legal Effect
Of Post-Importation Price Adjustments Is No Defense
In its defense, Inn Foods argued that there was no evidence that indicated the company knew or understood the legal effect of post-importation price adjustments to the price actually paid or payable to the grower/packers, based on the U.S. resale prices.
In reviewing the evidence from the trial, the court agreed with the government that the violations were fraudulent in nature. Regarding Inn Foods’ argument that it did not understand the legal effect of its post importation price adjustments, the court said, “This argument needlessly confuses the crux of the wrongdoing.” “Inn Foods knew that (1) the prices on the subject entries were significantly undervalued, (2) these undervaluations caused a commensurate reduction in lawful Customs duties owed and (3) there was no plan or intention to correct these undervaluations.”
As a result, the Court ordered Inn Foods to pay $ 624,602.55 in unpaid duties plus interest, and civil penalties in the amount of $ 7,500,000.00, plus costs and fees and interest from the date of judgment. (See our website for further information on penalties.)
Impact Of The Inn Foods Decision
What lessons can we learn from the Inn Foods case? Many companies actual import using a “provisional” pricing program, but don’t recognize it as such. This can occur whenever invoice values declared to Customs do not state the “final” value of the goods imported. This can occur when goods are imported using a standard cost, which is then “trued-up” later in the year, or when goods are the subject of post-importation transfer price adjustments. (See our website for further information on valuation.)
The critical point is that management of importers must recognize the ongoing legal obligation a company has to: (a) review the correctness of information contained in invoices used as entry documents, and (b) to declare to Customs the true and correct value of the goods at the time of entry. See 19 USC § 1484 and 19 USC § 1485. Section 1485 provides:
Every importer of record making an entry under the provisions of section 1484 of this title shall make and file therewith . . . a declaration under oath, stating –
(2) That the prices set forth in the invoice are true, in the case of merchandise purchased or agreed to be purchased …; *** (4) That he will produce at once to the appropriate customs officer any invoice, paper, letter, document, or information received showing that any such prices or statements are not true or correct.
The plain language of § 1485 obligates importers to report immediately to Customs any new information showing that the prices declared at entry were incorrect. United States v. Hitachi America, Ltd., 21 C.I.T. 373, 964 F. Supp. 344 (1997). (Court penalizes Hitachi America Ltd. $ 1,264,204.46 for false declarations.)
In United States v. Ford Motor Co. ("Negligence Decision"), 29 CIT , 395 F. Supp. 2d 1190 (2005), the CIT held Ford liable for negligent misrepresentation of the value of import entries when it did not declare assists and supplemental payments, and imposed a penalty of $ 17,151,923.60. On appeal, the appellate court upheld a finding that Ford violated 19 USC § 1485 for failing to advise Customs that the transaction values in the entry documents were not final; and for failing to adhere to the requirements of a reconciliation agreement to report lump sum payments. The appellate court, however, remanded the case for revision of the penalty amount. On remand, the trial court determined the loss of revenue to be $ 5,877,912.64, and assessed a civil penalty against Ford in the amount of $ 11,755,825.28 (twice the LOR) plus interest. (See our newsletter on this decision.)
In United States v. Golden Ship Trading Co., 25 CIT 40, 47-48 (2001), the court sustained a finding of negligence on the grounds that the importer failed to exercise reasonable care in connection with the entry of merchandise. The court said that it was not reasonable for the importer to simply rely on information provided by the exporter or licensed customs broker in connection with the transactions. Golden Ship was negligent because it did not exercise independent responsibility to verify or ascertain the correctness of information contained in its entry documents.
Importers need to recognize the importance of establishing good internal controls over customs values; and to regularly review import invoices to ensure that they represent the correct and accurate customs values. This means understanding the complete financial transaction, and then comparing that to the declared invoice value. If a company imports using standard cost or an intercompany transfer price, those values must be independently assessed to determine their adequacy as an acceptable customs value. See Customs informed compliance publication: Determining the Acceptability of Transaction Value for Related Party Transactions (see our newsletter on this subject). In situations where provisional pricing or other valuation issues exist, importers may avoid the liability set by 19 USC § 1484 and 19 USC § 1485, by participating in Customs’ entry reconciliation program. This program allows importers to declare provisional import values; and then, within a 21-month time period, finalize those values and deposit any additional duties owing. The program also allows importers to obtain refunds if it turns out that the import value was overstated.
To limit liabilities, your company may wish to consider taking advantage of Customs’ Prior Disclosure Program. Under this program, importers voluntarily disclose to CBP the existence of the violation and tender any duties found owing. If properly done, the disclosure limits the importer’s exposure, in a non-fraud case, to interest on the amount owing.
Please contact George Tuttle, III (firstname.lastname@example.org or (415) 288-0428) if you would like more information on the effect of provisional invoice pricing, the use of IRS transfer pricing for Customs valuation, or how you can participate in Customs’ entry reconciliation program.
R. Tuttle, III, is an attorney with the Law Offices of George
R. Tuttle in San Francisco.
The information in this article is general in nature, and is not intended to constitute legal advice or to create an attorney-client relationship with respect to any event or occurrence, and may not be considered as such.
Copyright © 2007 by Tuttle Law Offices.
All rights reserved. Information has been obtained from sources believed to be reliable. However, because of the possibility of human or mechanical error by our offices or by others, we do not guarantee the accuracy, adequacy, or completeness of any information and are not responsible for any errors, omissions, or for the results obtained from the use of such information.