The scheme may have worked had the aircraft’s 20mm cannons not been discovered in October 2008 at the Port of Savannah, Ga hidden inside containers being imported by the aircraft’s owner, Claude Hendrickson, president of Dixie Equipment in Woodstock, Ala.  Upon this discovery, U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HIS) unit launched an investigation into the circumstances surrounding the importation of the cannons, which revealed the unauthorized entry of the aircraft earlier that year.

Under 22 U.S.C. §2778(b)(2) “Control of Arms Export and Imports”, no defense article (as designated by the President on the United States Munitions List) may be imported or exported without a license, whether for export or temporary or permanent import from either the Department of State or the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF).  In this case, the importer would have required a license for importation from the ATF because the importation of the U.S. Munitions List Category 8 aircraft was permanent (as opposed to temporary import licenses, which are granted by the State Department).

The process of obtaining a permit from the ATF for importation of arms, ammunition and implements of war begins with an application Form 6, which must be signed, dated, and contain very specific information regarding the importer, foreign seller and shipper, and specifications of the article to be imported.  The regulations set forth in 27 C.F.R. §447.42 list the requirements in more detail.  Importers will generally have an answer from ATF on their permit within four to six weeks provided the importer properly completes the Form 6.  Once the importer receives the permit, it will be valid for one year from the issuance date, and the importer must then complete a Form 6A, “Release and Receipt of Imported Firearms, Ammunition and Implements of War”  in order to obtain release of the article from CBP upon its arrival into the United States.**

As a result of Mr. Hendrickson’s not following these guidelines for importing his aircraft, the plane and its log books, cannons, and other parts are now on their way to the National Naval Aviation Museum in Pensacola, Florida.

*This aircraft is an American single-seat attack aircraft that was used by both the U.S. and French military from the 1940s through the 1980s.  http://en.wikipedia.org/wiki/Douglas_A-1_Skyraider

**This is a simplified explanation of the arms licensing and permit procedure.  For more information on importing munitions, please visit the following website:  http://www.atf.gov/firearms/how-to/import-firearms-ammo-implements-of-war.html.  It is also highly advisable for importers to seek the advice of professionals engaged in the import and export of arms and munitions as well as the advice of legal counsel.

For more information see the following:

• http://www.ice.gov/news/releases/1201/120106birmingham.htm
• http://avstop.com/news_january_2012/illegally_smuggled_military_jet_ad_4n_skyraider_to_end_up_at_naval_museum.htm

According to settlement documents made public by the Bureau of Industry and Security, International Photo Equipment Company (IPE), of Tavares, Florida, was asked by a would-be customer in Syria to determine whether it would be legal to directly ship to it photography equipment from the United States. Because this would-be customer was apparently helpful and outgoing, it further offered to pick up the proposed shipment of photo equipment in nearby Lebanon and drive it to back to Syria should there be any legal prohibition upon shipping directly to Syria.

IPE asked its freight forwarder whether it could ship directly to Syria. The forwarder, apparently being familiar with the General Order prohibiting virtually all exports to Syria, answered in the negative. It is at that point that things got interesting. The forwarder, also apparently being helpful and outgoing, advised IPE that the shipment would have to go through Lebanon or the UAE. Knowing that its customer had advised that a pickup in Lebanon was possible, IPE agreed to send the equipment to Lebanon so that its customer could drive there to pick it up and return with it to Syria.

All of this landed IPE and its proprietor, Adam Karesh, in trouble. Whether they realized it or not at the time, they were engaging in illegal “transshipment” of goods to a prohibited destination. Here, IPE knew that its goods were destined to Syria, a prohibited country. As explained in Part 732 of the EAR, “[t]he country of ultimate destination for an export . . . determines its licensing requirements.” Part 734 further states that “[f]or purposes of the EAR, the export . . . of items subject to the EAR that will transit through a country or countries or be transshipped in a country or countries to a new country or are intended for reexport to the new country are deemed to be exports to the new country.” IPE, pursuant to its forwarder’s advice, engaged in a classic act of prohibited transshipment.

BIS fined the company $45,000 and Mr. Karesh individually $45,000 on September 29, 2010, for the attempted export. The penalty amounts are subject to mitigation should the parties refrain from committing another offense. Interestingly, the forwarder here does not seem to have been penalized, although Part 764.2(b) of the EAR makes it illegal to aid and abet an illegal export, and this provision has been used by BIS in the past to impose forwarder liability. Moreover, it appears that it was the forwarder that originally wrongfully conceived the plan to transship to Syria via a third country – a fairly egregious act. One can only speculate that perhaps the forwarder voluntarily disclosed the violation and received extreme mitigation as a result.

It is worth noting that the above actions would have constituted a separate violation of the Census’s Foreign Trade Regulations had the country of end use been identified as Lebanon, when in reality it was to be Syria. Simply put, one cannot lie to the government when submitting export data via the Automated Export System. If one knows that the end-user is in Syria and the country of ultimate destination is Syria, it is fraudulent to state that the goods’ ultimate destination is Lebanon.

The moral of the story is that, while creativity is a virtue, creative “work arounds” to attempt to avoid the provisions of the EAR can land exporters and forwarders in trouble. In the world of export controls, it should be assumed that no means no.

All continuous and term bond submissions, including continuous ISF bonds, along with requests for terminations and bond riders, must be submitted via email to cbp.bondquestions@dhs.gov. Details concerning the items that must be included in a complete bond application package are set forth at page four of the policies and procedures document. Questions about bond processing can be submitted to the same email address. All email communications with CBP concerning bonds must be drafted according to the mandatory format prescribed in the policies and procedures document.

Currently, less than 10 percent of bond submissions are rejected by CBP. Notification of an approved bonds is provided by email to the applicant.

The new policies and procedures can be found at:

http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/bonds/pilot_program/news_develop/bond_pol_proc.ctt/bond_pol_proc.pdf

That issue was brought before the Court of International Trade in Lizzaraga Customs Broker v. CBP, Slip Op. 10-113 (Oct. 4, 2010).  CBP summarily deactivated Lizzaraga’s filer code due to suspected “misuse.”  Specifically, CBP believed that Lizzaraga used his filer code to smuggle narcotics into the United States and be used by Mexican nationals.  These are fairly strong accusations, and it is unclear what evidence the government had that Lizzaraga was engaged in wrongdoing.  What is clear is that Lizzaraga was not going to stand by and allow his filer code to be revoked without a contest.

First, Lizzaraga requested that the Court enter an injunction to prevent Customs from deactivating his code.  He argued that, in the modern commercial environment, stripping a broker of his filer code is tantamount to revoking his license – an act that would require a hearing to comport with due process.  He pointed out that 96% of all entries are filed electronically, and that among brokers, that figure is probably higher, insofar as those importers that file their own entries largely do so on paper.  By using the filer code via the Automated Broker Interface (ABI), Lizzaraga received 10 days from the date Customs released his clients’ goods to submit estimated duties, whereas he would be constrained to submit paper entries with estimated duties attached were Customs to revoke the electronic filing option.  To make matters worse, 90% of Lizzaraga’s clients imported FDA-regulated merchandise, such as flowers, and Customs required FDA-related documents to be submitted within a two-hour window on weekends, whereas they were freely submitted via ABI.  In short, Lizarraga argued that his business would collapse without use of his filer code, as his clients would defect to brokers that could more effectively transact Customs business.

CBP capitulated.  Without awaiting a ruling on the matter, CBP issued a confession of judgment concerning Lizarraga’s right to a hearing.  In a courtroom hearing, CBP acknowledged that Lizarraga had a due process right to his filer code, and stated that the agency would not again attempt to summarily deactivate it without a hearing.  Lizarraga still asked the Court to issue an injunction in his favor, arguing that the threat of deactivation still existed.  The Court disagreed, and held that CBP’s assertion that it would not again seek to revoke Lizarraga’s license in the absence of due process was sufficient to render the case moot.

Due process requires that a licensed broker be given an opportunity to be heard and have his or her arguments considered prior to license revocation.  Due process similarly requires that CBP consider a broker’s arguments in connection with penalty proceedings.  As the Lizarraga case illustrates, sometimes CBP operates without regard for due process considerations, and when this occurs it is entirely appropriate to push back.  Sometimes it takes a formal complaint to make the agency reverse course and do the right thing.

For many years, the exporting community has been forced to cope with the ITAR’s provisions concerning dual- and third-country nationals that work for foreign consignees or end users, which provide that such dual- and third-country nationals must be specifically approved by DDTC to either have access to or receive U.S.-origin defense articles and data, even though the company they work for is a licensed consignee or end user itself.  Unless the dual- or third-country national was approved by DDTC in advance, DDTC has taken the position that providing access to the licensed article or data by the dual- or third-country national by the licensed corporation is an unauthorized transfer, or diversion.  This longstanding rule has caused issues with U.S. allies such as Canada, where labor laws prohibit employers from discriminating against workers according to nationality with respect to job performance.  It also raises issues insofar as a U.S. exporter that exports licensed goods to a foreign consignee or end user,  which thereafter provides unauthorized access to an unlicensed dual- or third-country national, may find themselves in the middle of an export control violation over which they had no, or little, control.

The proposed amendment to this rule published by DDTC on August 11, 2010, would allow for in-company transfers of defense articles and data so long as the employee is a “bona fide, regular employee[], directly employed by the foreign business entity.”  For such an employee, a transfer may take place without a license, but only within the territory where the end user is licensed.  The transfer cannot exceed the scope of the underlying license or exemption.  To take advantage of the proposed rule, certain preconditions must be satisfied.  First, a foreign end user or consignee must commit to abide by U.S. laws and regulations, including the ITAR, or both have a screening process in place and require that the foreign employee execute a non-disclosure agreement that provides assurances that the employee will not further transfer the defense article or data in question.  Second, the licensed foreign end user or consignee must implement a security clearance procedure approved by the foreign host government for its employees, or utilize screening for its employees to detect their “substantive contacts” with restricted or prohibited countries under the ITAR’s Section 126.1, such as China, Cuba and the Sudan.  Substantive contacts include recent or regular travel to such countries, continued allegiance to such countries, or “acts otherwise indicating a risk of diversion.”  An employee with substantive contacts to such countries creates a presumptive risk of diversion, and the transfer cannot occur.

In other action, on August 4, 2010, DDTC formally adopted a final rule to allow for online commodity jurisdiction requests through its D-Trade portal.  Soon, starting in October, electronic filing of commodity jurisdiction requests will be mandatory, and paper submissions will no longer be accepted.  A commodity jurisdiction request is a request made by a putative exporter to DDTC to determine whether a good is subject to the ITAR regime, applicable to defense articles, or subject to the Export Administration Regulations (EAR), which applies to dual-use goods.  Importantly, just because a putative exporter submits a product classification request to the Department of Commerce, Bureau of Information and Security, the agency that administers the EAR, and thereafter receives a CCATS (Commodity Classification Automated Tracking System) classification assigning an Export Control Classification Number (ECCN) to their good, the issuance of that classification by BIS does not act to determine BIS’s jurisdiction over the good.  The Department of Commerce, on August 2, 2010, adopted an interim rule wherein it amended Section 748 of the EAR “to remind the public of the longstanding principle that commodity classifications and advisory opinions are not and may not be relied upon as U.S. Government determinations that the items described therein are subject to the EAR as opposed to the jurisdiction of another U.S. Government agency.”  The publication observes that BIS does not have the authority to issue commodity jurisdiction determinations, as this is the purview of DDTC.  Pursuant to the interim rule, BIS will soon be placing reminders on all commodity classifications that it issues to the effect that its classification is not a determination as to whether the good in question may be exclusively controlled for export by another U.S. Government agency, such as DDTC.  In sum, as BIS’s publication makes clear, “prior to seeking a commodity classification [from BIS], the applicant should have already determined – through a self-determination or with thte assistance of another U.S. Government agency – that the item is not subject to the exclusive export control jurisdiction of another U.S. Government agency [such as DDTC].”

There is speculation that BIS issued its August 2, 2010 interim rule because exporters accused of ITAR violations had previously argued that, because they sought and received a BIS classification, they had performed due diligence and confirmed that their good was subject to the EAR.  Now that exporters have been explicitly warned not to rely on BIS classifications for purposes of determining whether the ITAR might control their goods’ export, this type of defense will plainly be rejected in any enforcement proceeding.  Exporters are encouraged to take advantage of DDTC’s new streamlined commodity jurisdiction procedures to conclusively ascertain the export control regulation regime applicable to their good.

The Court of International Trade, in its April 30, 2001 decision in Hitachi Home Electronics v. United States, made it clear that, unless a protesting importer takes the affirmative step of requesting accelerated disposition of its protest pursuant to 19 C.F.R. § 174.22(d), CBP may take its time in deciding a protest, without limitation.  That’s right, CBP has an endless amount of time to issue its decision on a protest.

The facts of the Hitachi case were rather pedestrian.  Hitachi entered plasma televisions made in Mexico claiming duty-free treatment under NAFTA.  CBP instead liquidated Hitachi’s entries at 5.0% ad valorem.  Hitachi protested in May of 2005 and submitted documentation supporting its claim for duty-free treatment.  It protested similar entries thereafter.  For a variety of reasons, CBP took no action.  In November of 2007, Hitachi filed suit at the Court of International Trade, claiming that CBP’s inaction resulted in a deemed allowance of the protests.

The Hitachi court concluded that CBP has an unlimited amount of time within which to decide protests despite the fact that a statue, 19 U.S.C. § 1515(a), provides that “within two years from the date a protest was filed . . . [CBP] shall review the protest and shall allow or deny such protest in whole or in part.”  The court held that the “shall” in Section 1515 is permissive, not mandatory.  To reach this conclusion, the court examined the legislative history of the statute and noted that the Code does not “provide a consequence for Customs’ failure to either allow or deny a protest” within the two year period.  Simply put, the court found that, had Congress wanted the two year period prescribed in Section 1515 to have teeth, it would have passed a measure calling for some consequence, such as deemed denial or allowance, to result from the passing of the deadline.  Instead, the statute is silent.  As a result, the court, following previous Court of International Trade cases, held that Section 1515 is “directory” or “regulatory,” and not “mandatory.”

The court also based its decision on the fact that the accelerated disposition procedure provided for under 19 U.S.C. § 1515(b) was, in the court’s view, enacted by Congress to provide importers with a means to remedy unreasonable CBP delay in deciding protests.  That statute allows an importer to request accelerated disposition of a protest at any time after the filing of the protest and provides that “a protest which has not been allowed or denied in whole or in part within thirty days following the mailing . . . of a request for accelerated disposition shall be deemed denied on the thirtieth day following mailing of such request.”  Of course, it is difficult to imagine CBP personnel receiving a request for accelerated disposition and then rushing to decide a protest due to the ticking of the thirty day clock.  Rather, it is more likely that the filing of a request for accelerated disposition would result in the deemed denial of the filer’s protest because CBP moves at its own speed.  The resulting deemed denial may be appealed at the Court of International Trade, but most importers want administrative fairness, not expensive litigation.

The Court of International Trade’s jurisdictional statute provides that a party, unless certain unique circumstances are present, must exhaust its administrative remedies prior to filing suit by protesting a CBP decision and receiving a ruling thereon.  The Hitachi court concluded by holding that, because Hitachi’s protests had not been ruled upon by CBP, and were not deemed denied or allowed by operation of law, the court lacked jurisdiction to hear its complaint.  As a result, the case was dismissed on jurisdictional grounds, and Hitachi’s protests are presumably still pending.

(Sound of crickets chirping.)

Manufacturers or shippers that provide a “negative certification” of origin run afoul of this regulation.  In certifying the origin of a good, it is permissible to state in positive terms that “this widget was made in Canada.”  It is impermissible to certify that “this widget contains no Israeli parts.”  Negative certifications are to be avoided, although there are certain narrow exceptions to this general rule applicable to shipping information.

What many freight forwarders do not realize is that, if a shipper itself violates this regulation and states on its invoice that its goods “contain no Israeli parts,” and the forwarder then tenders the invoice a consignee or foreign agent, the forwarder itself violates the regulations.  A recent example of this can be found in the June 21, 2010, settlement of administrative charges between Houston freight forwarder Plane Cargo, Inc. and the Bureau of Industry and Security’s Office of Antiboycott Compliance.  The transaction at issue was a shipment from the United States to Syria, and Plane Cargo furnished a shipper’s invoice that stated:

We hereby certify that the good described in this invoice are not of Israelian origin and there has no Israelian material been used to produce it.

Plane Cargo’s furnishing of the shipper’s negative certification on its invoice resulted in BIS charging it with one violation of the EAR.  The company entered into a settlement agreement with BIS whereby it agreed to pay a $5,200 civil penalty.  When one considers that a single violation can result in a penalty of $250,000 or twice the value of the transaction that is the basis of the violation, one could view the settlement as being favorable for the forwarder.

This is not the first instance where a forwarder has been charged with furnishing invoices that contain a prohibited negative certification.  For example, another Texas forwarder, Rohde & Liesenfeld, paid a $108,000 civil penalty to settle charges that, on thirty-six occasions from 2002 to 2003, it furnished invoices from a shipper that certified that “the goods enumerated in this Invoice are not of Israeli origin and do not contain any Israeli materials.”
The lesson to be learned is that, although forwarders do not create the invoices furnished in export transactions, they can pay a hefty price in penalties if their content runs afoul of the EAR’s antiboycott regulations.

On June 2, 2010, in Honda of America Mfg., Inc. v. United States, the Federal Circuit shed light on a question that occasionally stumps those in the trade community, namely: When should a part be classified under the HTSUS independently, and when should it be classified as a part of a larger item for which it is intended to be used?

The court’s answer, as is often the case, was grounded in the provisions of the Chapter and Section Notes of the HTSUS. In Honda, the classification dispute concerned oil bolts, an auto part that is used to connect fluid lines to master brake cylinders or transmission cases. The bolt is hollow, allowing fluid to flow through.

The oil bolts, per General Rule of Interpretation 1, were classifiable as “screws, bolts nuts . . . and similar articles” under 7318.15.80, HTSUS, at 8.5% duty. However, they also facially met the provisions of headings 8708 and 8714, which cover “parts and accessories” of vehicle power trains, vehicle brakes and servo brakes, and motorcycles.

The decision in the case turned on whether the parts were excluded from 8708 and 8714 by the Section Notes, which provided that “parts and accessories” under those headings could not be “parts of general use,” which include articles of heading 7318. The importer argued, unpersuasively, that the Explanatory Notes should change the result. For those unacquainted with the ENs, the court has repeatedly held that these notes, which are an interpretative aid to the tariff schedule published by the World Customs Organization, are “not legally binding or dispositive,” but “may be consulted for guidance and are generally indicative of the proper interpretation of various HTSUS provisions.” Many brokers do not have a copy of the ENs at hand when they make classifications, but it is always good to check them when classification becomes a close question. The ENs, in the court’s view in this case, stood for the proposition that, even if a part for general use were to be specialized for use with a particular item, such as “springs specialized for motor cars,” the “article’s specialization for vehicles does not preclude its classification as a part of general use.”

In conclusion, the court found that an oil bolt, despite its being designed to function as a part of a vehicle’s power train, and despite its unusual ability to allow fluid to pass through, was still a “part of general use” which, per the Section Notes, was properly classified under 7318.15.80, HTSUS, and excluded from classification in the importer’s preferred headings. Of course, the HTSUS’s Chapter and Section Notes, as well as the ENs, can lead to different results depending upon the goods at issue, and each classification is unique. There is no substitute to working with counsel to obtain a binding Customs ruling when a classification is in doubt. In fact, a ruling request is an opportunity for advocacy, wherein an importer may cite to Customs rulings and advance arguments based upon the HTSUS and ENs to seek its preferred classification and duty rate. At the very least, when faced with a difficult classification, research should be undertaken and the HTSUS and ENs consulted, with findings memorialized in writing, to evidence the fact that due care was used in making a determination, thereby lessening the chance of a Section 592 penalty down the line.

To build on these developments, on April 26, 2010, CBP and the CPSC signed a memorandum of understanding that empowers the CPSC to interact directly with importers or their agents in connection with possibly-violative shipments.  Previously, CBP had always served as an intermediary for safety-related detentions and seizures.  Now, the CPSC will utilize the CTAC and CBP’s automated commercial environment data-collection programs to independently target shipments, and will issue its own detention notices to stop the importation of suspect goods.  The CPSC notices are to be more expansive than CBP-issued notices and provide importers with a full accounting of the reasons for detention, as well as an opportunity to submit evidence or arguments in favor of release.  These responses will be reviewed by CPSC compliance investigators.  CBP will remain responsible for storing detained or seized property, actually conducting seizures, and destroying or exporting non-compliant goods.

CBP has long served as an intermediary between importers and numerous federal agencies.  The ever-closer cooperation between CBP and the CPSC shows that the relationship between CBP and agencies is evolving, with agencies being empowered to increasingly “call the shots” concerning the area of their expertise and regulatory mandate.  Although it can be cumbersome to interact directly with numerous agencies, one can expect direct lines of communication to lead to faster decision-making with regard to issues of admissibility, and anything to speed the process will be greeted as a welcome change by the trade community.

The plaintiff in Great American Insurance Company v. United States, a surety, sought to judicially challenge Custom’s reclassification and duty rate advance on certain tobacco products.  First, as was proper, either it or the importer of record filed a protest, which CBP denied two years thereafter.  Great American then decided to go to court.

Unlike the procedure in most courts, an action in the Court of International Trade is commenced by filing a summons, not a traditional complaint.  A summons provides notice to a defendant as to the nature of a plaintiff’s lawsuit and the filing of a summons triggers the Court’s jurisdiction.  By statute, one can challenge a protest in court only when a summons is filed within 180 days of CBP’s protest denial.  The court rule concerning the filing of a summons provides that a summons is deemed filed on the date that it is mailed.  Great American mailed its summons on May 10, 2006.

On May 10, 2006, Great American also mailed a payment to CBP in the amount of the duties it sought to challenge at the CIT.  The regulation concerning the timing of duty payments to CBP provides that duties are considered paid as of the date they are received by CBP.  As of May 10, 2006, Great American still had a week before its filing deadline at the CIT would expire, and presumably it could have either hand delivered its duty payment to CBP or waited several days after its duty payment was mailed to mail its summons.  However, the legal effect of its mailing a summons and duty payment on the same day was that the CIT action was commenced prior to the time when the contested duties were paid.

The payment of contested duties prior to the filing of a CIT action is a jurisdictional requirement.  In other words, unless that condition precedent is fulfilled, the court lacks jurisdiction over the matter, and is powerless to hear a case or do equity to save a party from the consequence of its mistake, as Great American requested.  The Court actually noted that Great American failed to exercise due diligence when it mailed its summons and duty payment on the same day, so despite the jurisdictional issue, it does not appear that the judge was particularly sympathetic to Great American’s plight.  Of course, by the time the CIT decided the case, some four (!) years after it was filed, it was far too late for Great American to re-file and correct its action, so it was stuck having paid the contested duties to CBP without any means to thereafter obtain judicial review.

The moral of the story?  As any comedian will tell you, timing is everything.