CIT Rules Principal is Liable for Unpaid Duties Arising from the Fraudulent Customs Transactions of Broker Who was "Importer of Record"

The principal's agent, a freight forwarder who acted as the principal's unlicensed customs broker, was the "importer of record" for the shipments, and held power of attorney for the principal.

(The principal had placed orders for tracksuits from China prior to their importation, received the goods directly from his agent's companies after the goods cleared Customs, and retained ownership of the goods throughout the process, and to that end, remained the ultimate consignee.)

According to the CIT, the fraud at issue occurred as part of a flat fee scheme, where the agent charged the principal a flat fee for each shipping container, which included freight forwarding charges and customs duties. The agent then misdescribed the tracksuits as plastic bags and wooden patio furniture to attain lower duty rates and avoid quota restrictions. The agent also informed the principal that he would no longer need to purchase quota visas separately. The CIT states that the flat fee charged for each shipping container was lower than the duties applicable to the tracksuits contained therein.

CIT Rules that Principal is Liable for Agent's Fraudulent Conduct

The CIT has ruled that the principal is liable under the fraud provisions of 19 USC 1592 for the customs violations of his agent acting within its proper scope of authority.

The CIT also ruled that this liability, which is for unpaid duties pursuant to 19 USC 1592(d), occurs regardless of whether the principal authorized the agent's specific unlawful conduct.

(The CIT states that this case appears to be the first time the CIT has applied agency liability to customs violations in this manner where the principal responsible was notalso the importer of record.

The agency principles employed in this case are closely analogous to those in a Supreme Court decision involving fraud, where the Supreme Court ruled that a principal is liable for a fraud made possible by the responsibilities delegated to an agent, even if the agent acts independently in motive and execution.)

Among other reasons for holding the principal liable, the CIT noted that the principal benefited from the agent's fraudulent actions, as the savings the agent achieved through his fraud were passed on to the principal. In addition, under the flat fee scheme, quota visas were not purchased.

Moreover, the CIT finds that sound public policy supports the application of liability to the principal for the agent's fraudulent violations of 19 USC 1592. The CIT reasons that if costs could be lowered through unlawful customs transactions without incurring any liability, principals would be encouraged to seek brokers willing to commit fraud on their behalf, thus leading to an increase in fraudulent customs transactions.

The CIT states that the amount of duties to be paid by the principal will be determined following briefing by both parties.

(In a footnote, the CIT goes on to say that the novelty of Pan Pacific is probably due to the unusual nature of the business arrangement under the flat fee scheme. In most customs transactions involving a broker, the principal remains the importer of record and, as such, is made explicitly liable by Customs regulations.)

Principal's Liability for 1592 Civil Penalty Will be Determined at Trial

The CIT also ruled that the issue of the principal's liability for a civil penalty under 19 USC 1592(b) is reserved for trial. Among other reasons, the CIT found that trial is appropriate because a dispute as to the material fact of the importer's knowledge exists.

CIT Slip Op. 05-107, dated 08/26/05, available at http://www.cit.uscourts.gov/slip_op/Slip_op05/05-107.pdf

BP Note

During its November 2-4, 2005 Trade Symposium, officials from CBP's Office of Regulations and Rulings made a point of discussing the CIT's decision in U.S. v. Pan Pacific Textile Group et al.