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U.S. General Counsel’s Corner - March 2010

Exercising Reasonable Care Over the Customhouse Broker

International Compliance Professionals are often heard to say their day-to-day job activities have a lot in common with the job of herding cats.  They are faced with a group of independent thinkers having their own agendas, goals and priorities for the company.  That being the case, the initial battle inevitably begins with successfully communicating trade compliance priorities—stressing to colleagues that trade compliance is symbiotic with, and not counter to, the business goals of other departments.  Concurrent with that battle is the oversight and control over ones service providers, specifically the Customhouse Broker (the “broker”).

Whether due to resource issues or a misunderstanding of the law, importers all too often believe that hiring a cracker-jack broker is sufficient to demonstrate the exercise of reasonable care over its company’s importations, and the proper handling and filing of its entries.  The statement from the compliance/supply chain folks goes something like this, “we hired a broker, an expert, so we exercised reasonable care.  The company cannot, by definition, be ‘negligent’ if any information on my entry(s) turns out to be incorrect.”  You believe you cannot get a 19 U.S.C. §1592 penalty.  Not true.  The government has been clear that the mere hiring of a knowledgeable customs broker is not enough to demonstrate the exercise of “reasonable care” over ones entries.  Therefore, importers must do much more than just open their wallet for the services of a licensed broker.

Engaging an expert and reliable partner is just one step in the communication and expectation process.  Many instances of non-compliance could have been averted altogether if the communication of expectations, roles and responsibilities on both sides of the partnership were better articulated, documented and verified/audited.  Certainly, importers should establish written internal policies, procedures and a manual relative to their cross-border operations.  Within those documents, and relative to the oversight of the broker, importers should establish performance metrics, replete with key performance indicators, often referred to as a “broker scorecard.”  In considering content, it is prudent that you understand not only your own needs, but the broker’s regulatory obligations as well.

For instance, brokers can receive a penalty for failure to exercise responsible supervision and control over Customs business, pursuant to 19 U.S.C. § 1641.  Responsible supervision and control means that degree of supervision and control necessary to ensure the proper transaction of the customs business of a broker, including actions necessary to ensure that an employee of a broker provides substantially the same quality of service in handling customs transactions that the broker is required to provide.

While the determination of what is necessary to perform and maintain responsible supervision and control will vary depending upon the circumstances in each instance, factors which U.S. Customs and Border Protection (“CBP”) must consider are the 10 factors listed in 19 CFR §111.1.  In fact, CBP was recently chastised by the Court of Appeals for the Federal Circuit (“CAFC”), in U.S. v. UPS Customhouse Brokerage Inc., 2008-1409, decided August 11, 2009, and again last month as the case was remanded to the Court of International Trade (“CIT”), slip op. at 10-11, dated January 28, 2010, for its failure to follow its own regulations.  CBP failed to consider the factors found in §111.1.  The court reminded CBP that the decision maker responsible for considering the 10 mandatory factors was the Fines, Penalties & Forfeitures Officer (“FP&FO”) and that CBP was obligated “under the regulation to consider at the least the ten listed factors.”  The CAFC stated that CBP may use its discretion in how it weighs each of the 10 factors, and if a particular factor does not apply, may simply state the reason it is not being considered.  The CAFC also stated that CBP may consider other factors as well.

In light of the court’s decision, importers should consider, as part of the broker selection process and on an ongoing basis of compliance measurement, performing due diligence over the broker’s exercise of responsible supervision and control over the customs business it conducts.  The broker should demonstrate its compliance with the following minimum factors:

1. The training required of employees of the broker;
2. The issuance of written instructions and guidelines to employees of the broker;
3. The volume and type of business of the broker;
4. The reject rate for the various customs transactions;
5. The maintenance of current editions of CBP Regulations, the Harmonized Tariff Schedule of the United States, and CBP issuances;
6. The availability of an individually licensed broker for necessary consultation with employees of the broker;
7. The frequency of supervisory visits of an individually licensed broker to another office of the broker that does not have a resident individually licensed broker;
8. The frequency of audits and reviews by an individually licensed broker of the customs transactions handled by employees of the broker;
9. The extent to which the individually licensed broker who qualifies the district permit is involved in the operation of the brokerage; and
10. Any circumstance which indicates that an individually licensed broker has a real interest in the operations of a broker.

Since CBP rulings identify multiple mitigating factors, such as, whether this is the first violation; implementation of new procedures; cooperation with Customs; successful processing of large volumes of entries; replacement of managerial or supervisory personnel; immediate remedial actions taken; payments of all money owed and payments of late penalties; concerted effort to comply with Customs regulations; petitioner did not intentionally violate the provisions of 19 U.S.C. § 1641; etc., importers might consider discussing these issues with their prospective or current service providers.

In conclusion, most successful business partnerships excel at communication, coordination and alignment of common goals.  Importers’ relationships with their brokers are no exception.  The broker should be treated as a respected business partner.  As with any partner in business, trust but verify.