Expect More Prior Disclosures in Light of Section 232 Enforcement Directive, Lawyers Say
President Donald Trump's directive in his proclamation expanding Section 232 steel tariffs to assess penalties for the misclassification of entries resulting in non-payment of the duties without regard for "evidence of mitigating factors" may run afoul of existing customs laws, trade lawyers said. Even if the directive stays within the bounds of the current statutory scheme, expect more prior disclosures and proactive steps to ensure the proper customs treatment of steel entries, the lawyers added.
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In a blog post on the topic, customs attorney Lawrence Friedman said the declaration is indicative of the current administration's embrace of the "unitary executive" theory, under which the president has unilateral control of all the executive agencies. Under a traditional view of the statutes, however, only Congress has the power to eliminate the consideration of mitigation factors in assessing penalties for the avoidance of Section 232 tariffs, Friedman said.
The two relevant statutes at play are 19 U.S.C. 1592(b)(2) and 1618. The former is a provision of the authority under which the executive can impose customs penalties, and it says that an importer "shall have a reasonable opportunity" to "make representations, both oral and written, seeking remission or mitigation of the monetary penalty.”
The second statute, 19 U.S.C. 1618, made the CBP Commissioner the "final decision maker on the penalty amount." The law says that the commissioner can "remit or mitigate" the penalty if he "finds the existence of such mitigating circumstances as to justify the remission or mitigation of such fine, penalty, or forfeiture."
Friedman said whether the invocation of the unitary executive theory works in this way "will surely be litigated if there is an effort to assess a significant penalty."
Maureen Thorson, partner at Wiley Rein, said that to give the proclamation any effect, CBP will be forced to confront the statutes and the agency's existing regulations implementing the statutes. "If Customs doesn't comply with its own regulations in pursuing a penalty case, that can be a real problem for Customs if that case goes to court," Thorson told us.
Thorson added that the directive could be aimed at CBP's existing mitigation guidelines and regulations, with the agency saying it won't consider them anymore. "I don't know exactly how it would work to say you're not going to consider mitigating factors," she said. "Perhaps, that means they're not going to consider mitigation petitions generally," in which case there may be a surge of cases at the Court of International Trade that would see the court assess whether reasonable care was used by the importer or if mitigating steps were taken, she said.
"Mostly, the guidelines give some predictability for importers so that they know what the ground rules are, or what they can expect out of the mitigation petition and to keep the folks at Customs, each individual officer, from having to reinvent the wheel every time they're looking at a mitigation petition," Thorson added. Though she added that in her practice, customs penalty cases are rare and, much more frequently, importers will file prior disclosures -- that is, voluntary disclosures of violations made by importers to CBP.
Friedman highlighted the role of prior disclosures in the statute, noting that prior disclosures limit the maximum penalty to be assessed under § 1592. He added that the EO will "likely spur prior disclosures by companies that discover potential violations," since paying the duties is "often better than fighting about whether there is really a violation."
John Peterson, partner at Neville Peterson, said in an email that if CBP no longer accepts mitigation petitions, the solution will be to state your defenses before the trade court. At CIT, the questions will be "whether a violation was committed," and, if so, whether the "appropriate amount of the penalty" was imposed, Peterson said. If CBP scraps mitigation considerations, they seemingly will migrate to the courts, he suggested.
Both Thorson and Friedman emphasized the need for importers to show "reasonable care," with Thorson saying that CBP, by definition, cannot find a customs violation if an importer shows reasonable care. The statute allows for penalties to be imposed in cases of "negligence, gross negligence or fraud." She said there is no penalty, "presumably, if you are taking reasonable care, and you are not being negligent or committing fraud."
Friedman emphasized this point in his post, telling parties that it's "incredibly important to document [their] critical entry processes (e.g., classification, valuation, rate of duty determinations)."
Thorson added that importers should put some "extra time and care into vetting classifications" and ensure that they have a "strong, good faith basis for that classification." As a result, there may be more official ruling requests at CBP or more companies ensuring that they have a "classification matrix."