May 9, 1997
Our File: 2700-01
M E M O R A N D U M
TO: Clients and Friends of the Firm
FROM: John M. Peterson
Neville Peterson LLP
RE: Proposed Customs Recordkeeping Regulations -------------------------------------------------------------------------
    The United States Customs Service has proposed new regulations to codify recordkeeping requirements imposed under the Tariff Act of 1930, as amended by the Customs Informed Compliance and Modernization Act of 1993. The Customs Service is requesting public comment on these proposed regulations through June 23, 1997.
This Memorandum briefly describes the proposed recordkeeping regulations.

Proposed 19 C.F.R. Part 163 -- Recordkeeping Requirements
    Customs proposes to add a new Part 163 to the Customs Regulations, under the title Recordkeeping. This new part would set forth a wide range of new rules pertaining to Customs recordkeeping and audit requirements.

19 C.F.R. Section 163.1 -- Definitions
        Proposed 19 C.F.R. Section 163.1 would establish definitions for various terms associated with recordkeeping, including the terms "records", "audit", "(a)(1)(A) list", "certified recordkeeper", "certified recordkeeper's agent" "compliance assessment", "entry record", "original record/information", "summons", "technical data" and "third-party recordkeeper".
        Of particular interest is 19 C.F.R. Section 163.1(f), which would codify the concept of a Customs "compliance assessment", which is defined as "the first phase of an audit". Customs acknowledges that a compliance assessment may be completed without requiring that a detailed audit be performed. However, the definition also provides for compliance assessments to be expanded to allow auditors to "conduct detailed audit steps to further examine non-compliant practices", to identify causes, effects and necessary corrective action, to implement corrective action plans and to conduct follow-up of corrective action".
        That the "recordkeeping" regulations define Customs audit concepts underscores that the main purpose of the recordkeeping requirement is to assist Customs in its post-entry audit functions, which are increasingly the agency's primary law-enforcement tool.

19 C.F.R. Section 163.2 -- Parties Required to Maintain Records
        This provision identifies the parties (owners, importers, consignees, importers of record, entry filers, their agents, and other persons whose activities require the filing of a declaration or entry, all of whom are required to keep records. Subsection 163.2(b) of the regulation enumerates certain circumstances in which persons ordering merchandise from an importer in a domestic transaction may be required to keep records. These would include, for example, domestic purchasers who control the terms and conditions of the importation, and domestic parties who provide "assists" for use in connection with the production of the imported merchandise.
        The regulation also extends recordkeeping requirements to exporters of NAFTA goods, Customs brokers, drawback filers/claimants, and persons engaged in the bonded transportation and storage of merchandise.

Section 163.3 -- Entry Records
        This regulation requires persons subject to recordkeeping requirements to "produce or transmit to Customs within a reasonable time after demand" any records required by law or regulation for the entry of merchandise, that is, information on the so-called "(a)(1)(A) list".

Section 163.4 -- Record Retention Periods
        Proposed 19 C.F.R. Section 163.4 reiterates the statutory requirement that records shall be kept for 5 years from the date of entry (if the record relates to an entry), or 5 years from the date of the activity which requires creation of the records. As an "exception" to this rule, the regulation provides that records relating to drawback claims shall be kept until the third anniversary of the date of payment of the claim.
        The proposed regulations also provide that packing lists need only be kept for 60 days from the end of the release or conditional release period, or from 60 days after goods are redelivered to Customs custody.

19 C.F.R. Section 163.5 -- Methods for StoringRecords
        This proposed regulation requires that all records be maintained in their original formats (whether paper or electronic), unless alternative methods have been approved in writing by the director of a Customs Regulatory Audit field office. The regulation establishes standards for alternative storage methods (e.g., machine readable data, CD-ROMs, microfiche). The regulation also sets forth minimum standards which Customs will apply in considering requests to use alternate records storage methods. These standards are extensive and require the use of reliable storage media, documented data retention and transfer procedures, the use of non-erasable storage media, the creation of indexing systems, and the retention of original records for a minimum of one year after the date of transfer. The regulation would also require that at least two copies of alternatively-stored data be maintained in separate locations.

19 U.S.C. Section 163.6 -- Notices for Production: Production Times: Penalties
        Proposed Section 163.6 of the recordkeeping regulation requires that records be produced to Customs within a reasonable time from the date a proper request is made. A sliding scale of "reasonable times" is provided, ranging from 5 business days in the case of entries up to 1 month old, and escalating to 30 days for entries more than 5 years old. Where Customs requests records which a party has already provided in response to a previous request for information, the party is required to prove to Customs when, where and how the information was provided.
        The regulation also provides for the imposition of penalties on persons who fail to produce records in timely fashion. The maximum penalties are based upon the recordkeeper's deemed culpability, as follows:

Level of Culpability	Per-Release Maximum Penalty
Willfull failure	$100,000 or 75% of the appraised value of the  merchandise, whichever is less
Negligent failure	$10,000 or 40% of the appraised value of the  merchandise, whichever is less

        In addition, where a recordkeeper fails to produce information which relates to the eligibility of merchandise for a special rate of duty under the Harmonized Tariff Schedule, Customs is authorized to liquidate the entry as fully dutiable, and may reliquidate entries made within the past two years, regardless of the normal time limitations on finality of liquidation.
        Penalty liability can be avoided if the recordkeeper can show if the requested information was lost as the result of an act of God or a natural disaster, or that the demand was substantially complied with on the basis of other information, or that the information was submitted to Customs at an earlier time.

19 C.F.R. Sections 163.7, 163.8 -- Summons
        This regulation authorizes the issuance of Customs Summonses, a form of compulsory process requiring persons to produce records or give testimony, or both. It also provides that, unless good cause is shown, a witness summoned to give testimony shall be provided with a copy of the transcript of that testimony.
Section 163.8 of the proposed regulation describes the content of the Summons, while Section 163.9 provides that any Customs officer may serve a Summons.

19 C.F.R. Sections 163.10 through 163.12 -- Third-Party Recordkeepers
        This proposed regulation provides that where a Summons is issued to a third-party recordkeeper, demanding the production of records or testimony relating to transactions of any other person, the "other person" shall receive a notice of the Summons. This notice will allow the person to exercise his or her remedies, e.g., to file a motion to quash the summons received by the third-party recordkeeper. The regulation also contains a procedure allowing the person whose information is being summoned to stay the execution of the third-party summons by providing notice in writing to the third-party recordkeeper.
Sections 163.11 and 163.12 of the proposed regulation restate current law concerning procedures for judicial enforcement of Customs Summonses, and detail sanctions which may be imposed upon a party for failure to comply with a Court order to produce records.

19 C.F.R. Section 163.13 -- Regulatory Audit Procedure
        This regulation would establish, for the first time, formal regulations governing the conduct of regulatory audits. It would require Customs auditors to provide advance notice to the person being audited, to grant auditees an entry conference, together with an estimate of theneeded to complete the audit. It also provides for the scheduling of a "compliance assessment closing conference" upon the completion of the first phase of a Customs audit. Where it is determined, on the basis of a compliance assessment, that no further auditing will be done, a report to this effect will be generated. Alternatively, if further auditing is warranted, a new audit opening conference will be called.
        The regulation also requires auditors to furnish a copy of their audit report to the audited person within 90 days following the closing conference for the audit. However, many of these procedural safeguards are not accorded to importers once Customs determines that a formal investigation should be commenced with respect to particular audit issues.

19 C.F.R. Sections 163.14, 163.15 -- Recordkeeping Compliance Program
        This regulation establishes the voluntary Recordkeeping Compliance Program, which allows importers to have Customs review and "certify" their recordkeeping procedures. Importers who are certified under this program will receive a qualified immunity from Customs recordkeeping penalties in certain circumstances. Section 163.15 of the draft regulations provides procedures for appeal from the denial, suspension, or revocation of a party's participation in the Recordkeeping Compliance Program.

19 C.F.R. Part 111 -- Customs Broker Requirements
        Customs' proposed regulations also contains several provisions applicable to Customhouse brokers. Notably, they require each broker to designate a knowledgeable company employee to be the broker's "recordkeeping officer", and to appoint a back-up recordkeeping officer for broker-wide entry and financial recordkeeping requirements.

19 C.F.R. Part 143 -- Entry Procedures
        Customs' proposal would also amend Part 143 of the Customs Regulations to clarify procedures for the creation and transmission of electronic entry and entry summary information, and for retention of electronic records. It also notes that brokers and importers can be liable for penalties resulting from failure to make, retain and produce electronic records.

Public Comments
        As noted above, Customs is accepting public comments concerning these proposed recordkeeping regulations through June 22, 1997. We stand ready to furnish any additional information or assistance which you may require concerning these proposed regulations or concerning Customs recordkeeping requirements in general. Please call if you have any questions. Best regards. _________________________________
1 As we have frequently noted, however, disposal of records three years after payment of a drawback claim may not be wise or warranted, particularly if the drawback claim has not yet been made liquidated and made final.
2 As of this writing, packing lists are among the documents required to be kept pursuant to the (a)(1)(A) list, although it is questionable whether such documents should appear on this list at all.
3 Presumably, an importer could protest this reliquidation, providing records to support its tariff preference claim, but the proposed regulations do not specifically provide for such protest.
4 Persons who fail to follow such an order may be held in contempt of court, and Customs may be instructed not to release any further merchandise entered by or consigned to such person. This is one of the very few areas in the law which allows the government to prohibit a person from importing merchandise altogether.

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