Information provided by: U.S. Customs Dept. - Cole International
U.S. Customs: When does "not knowing" become "negligence"?
Like trying to find your way through a gargantuan hedge maze, navigating the labyrinth of U.S. Customs rules for importers/exporters can feel overwhelming. Yet the tantalizing promise of increased revenue from international trade continues to drive small business owners to try their hand at understanding the rules – or getting around them.
According to the Small Business Administration, "... the U.S. is very import-friendly, [but] it does have safety and quality controls that are more stringent than other countries."
Predictably, the U.S. Customs rules that apply to importers and exporters are overflowing with legalese that requires a dictionary just to get through the first paragraph. The global economy has opened U.S. borders for savvy businesses to tap into the billion-dollar revenue chain, yet supply chain management continues to befuddle inexperienced and experienced alike.
Whether for e-commerce or a brick-and-mortar business, understanding definitions and regulations is essential. And, inevitably, there will come a question where the only response is, "I don't know".
For U.S. Customs, when does "not knowing" become "negligence"? The definitions and potential liabilities are important to understand.
Perhaps in the world of Thomas Gray's poem, Ode On a Distant Prospect of Eton College, ignorance is bliss. But U.S. Customs and Border Protection takes a very different view. For all the goods moving into and out of the country, there are three important definitions and one "exception" that apply to whether or not the person or business bringing goods across the border has followed the rules.
This is the most severe designation that inevitably results in penalties which may be very substantial. Fraud is defined as willfully falsifying documents or withholding information with the intent to subvert the customs rules and/or to minimize duty payments.
This may include filing false invoices, attempting to import counterfeit goods with the intent of defrauding the U.S. government or the rightful intellectual property owner, or falsely certifying the country of origin of goods, among other things.
This designation is similar to fraud, however "gross negligence does not require an intent to deceive, mislead or convey a false impression”.
U.S. Customs defines negligence as any violation resulting from failure to take "reasonable care" that regulations have been followed. This one is a little nebulous, enough to make some importers rather nervous as a charge of negligence can be brought for failing to understand and accurately communicate factual information.
Things like clerical errors or minor mistakes created via electronic filing of documentation is not considered negligence or a pattern of negligence.
When navigating the often confusing U.S. Customs regulations, one might be tempted to rely on claiming ignorance if challenged over an error or omission in the required documentation. At first glance, the definitions might leave enough wiggle room for claiming "I didn't know", yet recent case law indicates otherwise.
Remember, negligence does not require proving intent to deceive, and is predicated on the loose phrase "reasonable care" that is not better defined within the U.S. Customs regulations, other than as an act or acts done through the failure to exercise the degree of reasonable care and competence expected from a person in the same circumstances.
Who is liable?
Historically, liability for U.S. Customs violations rested with the importer of record who was responsible for complying with customs regulations or someone who aids or abets in a violation. However, since 2014 this changed dramatically following the landmark United States v. Trek Leather case which "held that an individual ... — who did not act as the importer of record but who participated in activities giving rise to customs violations — could be held directly liable for grossly negligent conduct under the customs penalty statute."
This case was based on the failure of a person to disclose "side payments" or “the value of assists” made, thereby undervaluing the imported merchandise and avoiding duties owed to the United States. In that case, the claim of "I didn't know" (the claim that the omission was an oversight) was ineffectual.
One of many results of this landmark case is that the field from which the government can pull to assign penalties is broader than previously used. According to Michael Cone's evaluation of this case, "it is [now] possible that any company or individual who, for example, helps prepare or send invoices for presentation to U.S. Customs — including corporate affiliates, in-house customs compliance personnel, customs brokers, perhaps even customs attorneys — could theoretically 'introduce' merchandise, and potentially be directly liable for both the lost duties and penalties arising from unintentional customs violations."
While the U.S. border is considered "import-friendly", the potential for inadvertently breaking the rules is high, with disastrous penalties possible at all stages of the supply chain. However, it is not within reason to expect inexperienced importers hoping to break into the potentially lucrative world of imports to understand all the regulations, or to even know which questions to ask.
Although U.S. Customs works diligently to provide guidance on how businesses can best remain in compliance with the latest regulations, even they strongly suggest use of "private-sector experts who specialize in importing, for example, licensed customs brokers, attorneys or consultants."
This whole subject of customs regulations and penalties and inadvertent failure to exercise "reasonable care" can be completely overwhelming and might discourage potential importers from pursuing their piece of the import/export pie.
While it's true that "I don't know" is not a useful defence, just as physicians are not expected to be accountants and pilots would likely fail a general contractor's exam, businesses wishing to understand U.S. Customs regulations would do best to simply partner with an expert in the field.
Our experienced professionals have the expertise and experience and is ready to work with you to decipher that overwhelming mountain of regulations. To begin the conversation...
- Valuation of goods for Non-Resident Importers (NRIs)
- Compliance Verification Trends - September 2021
- Freight update September 2021: latest news and updates on the worldwide supply chain
- USMCA/CUSMA: our best advice for importers
- Single Window Initiative (SWI) - Survival Guide for ECCC Vehicle and Engine Emissions Program