Neville Peterson LLP: Customs and International Trade Law

July 9, 1998
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: Customs Issues Final Recordkeeping Regulations
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I. INTRODUCTION
     The United States Customs Service has issued Treasury Decision 98-56, which sets forth the agency's final regulations concerning the obligations of persons engaged in "Customs business" to make, retain, and produce on demand records (hard copy and electronics) pertaining to the transaction of such Customs business. The new regulations will enter into force on July 16, 1998.

     The issuance of these regulations effectively implements the provisions of Section 509(g) of the Tariff Act of 1930, as amended [19 C.F.R. Section 509(g)], which authorize Customs to impose steep civil penalties on persons who fail to make, keep and produce mandatory records specified on the so-called "(a)(1)(A) List" [established pursuant to 19 U.S.C. Section 1509(a)(1)(A)].

     Treasury Decision 98-56 promulgates a new Part 163 to the Customs Regulations, which deals with "Recordkeeping", and makes changes to other sections of the regulations dealing with record retention requirements.

     This Memorandum briefly summarizes the new Customs recordkeeping requirements.

II. RECORDKEEPING REQUIREMENTS: 19 C.F.R. PART 163
     Section 163.0: Scope.

     This introductory section of the regulations confirms that Part 163 sets forth "the recordkeeping requirements and procedures governing the maintenance, production, inspection, and examination of records", as well as procedures for examination of records during Customs investigations, audits, compliance assessments, and other inquiries¹.

     Section 163.1 : Definitions

     The regulations establish define several of the terms relating to recordkeeping requirements, as follows:

(a) Records. "Records" are defined generally as "any information made or normally kept in the ordinary course of business that pertains to" a broad range of Customs related activities."² The term includes information required for the entry of merchandise [as noted on the "(a)(1)(A) list"] and other information "pertaining to, or from which is derived, any information elements set forth in a collection of information required by the Tariff Act of 1930, as amended."³

(b) "(a)(1)(A) list". The referenced list is also defined as "entry records" in Section 163.1(f), and encompasses "records required by law or regulation for the entry of merchandise (whether or not Customs required their presentation at the time of entry)". The current version of the list appears as an Appendix to 19 C.F.R. Part 163.

(c) "Audit": the term "audit" is defined as a "Customs Regulatory Audit verification of information contained in records required to be maintained and produced" by persons subject to the recordkeeping regulations, but does not include quantity verifications held at a Customs bonded warehouse or general purpose foreign trade zone.

(d)" Certified Recordkeeper". A certified recordkeeper is a person required to keep records who is a participant in Customs' Recordkeeping Compliance Program.

(e) Compliance Assessment: A "compliance assessment" [CAT audit] is defined as "a type of importer audit performed by a Customs Compliance Assessment Team . . . to assess the importer's compliance level in trade areas, to determine the adequacy of the importer's internal controls over its Customs operations, and to determine the importer's rates of compliance".⁴

(f) Entry records: see "(a)(1)(A) list", supra.

(g) "Inquiry"; an inquiry is defined as any "formal or informal procedure, other than an investigation" through which a request for information is made by a Customs officer.

(h) "Original". The term "original" refers to "records that are in the condition in which they were made or received by the person responsible for maintaining the records", including records consisting of electronic information which was used to develop other electronic records or paper documents, electronic information in a readable format, such as a facsimile paper format or a electronic or hard copy spreadsheet, carbon-copy or other multipart forms, or a certified copy of a record provided to another government agency.

(i) "Party/person". These terms refer interchangeably to natural persons, corporations, partnerships, associations, or other entities or groups.

(j) "Summons" is defined as a summons issued by a Customs official requiring the production of records or the giving of testimony, or both.

(k) Technical Data. These are defined as records, including diagrams and other data with regard to a business, engineering or exploration operation, whether conducted inside or outside the United States, and regardless of the form in which stored.

(l) Third-party recordkeeper: The term "third-party recordkeeper" is defined as "any attorney, any accountant or any customs broker other than a customs broker who is the importer of record on an entry".

     Section 163.2: Persons Required to Maintain Records

     The persons required to maintain records are defined to include owners, importers, consignees, importers of record, entry filers, or other persons who import merchandise into the United States, file a drawback claim, or transport or store bonded merchandise. The term also encompasses agents of these persons (e.g., Customshouse brokers), and other persons whose activities require the filing of a declaration and/or entry.

     A person who orders merchandise from an importer in a domestic transaction "knowingly causes merchandise to be imported" only if the person controls the terms and conditions of the importation (i.e., the importer of record is acting as the ordering person's agent) or provides technical data, molds, equipment, and other tangible or intangible "assists".

     In addition, any person who exports goods to Canada or Mexico which is covered by a NAFTA Certificate of Origin is required to maintain records pertaining to such activity.

     Section 163.3: Entry Records

     Owners, importers, consignees, importers of record, and entry filers must be prepared to produce or transmit to Customs any "entry records" which the agency has requested.

     Section 163.4: Record Retention Period

     In general, the regulations require that records be kept for five years from the date of entry, or five years from the date of the activity which required creation of the record. Customs has acknowledged that, in particular circumstances, (e.g., drawback claims which are not "liquidated" within five years from the date of an import entry), importers' recordkeeping obligations may be for much longer time periods. Records relating to drawback claims must be kept until at least the third anniversary of the date of payment of the claim⁵.

     Packing lists need only be retained for sixty calendar days from the end of the release or conditional release period, whichever is later.

     Customs' regulations specify that a "consignee who is not the owner or purchaser and who appoints a customs broker" -- in other words, express consignment carriers such as Federal Express and UPS -- need only retain records pertaining to merchandise covered by an informal entry for two years from the date of such entry, rather than the usual five year retention period. A shortened two-year record retention time is also provided for articles admitted free of duty and tax pursuant to 19 U.S.C. Section 1321(a)(2), as well as for carriers' records pertaining to manifested cargo which is exempt from entry.

     Section 163.5: Methods for Storage of Records

     The regulations require persons transacting Customs business to maintain original records, whether paper or electronic, unless alternative storage methods have been adopted. Customs' final regulations scrap the agency's proposal to require parties seeking to use alternative record storage methods to make application for, and obtain, advance Customs approval of these methods. Rather, 19 C.F.R. Section 163.5(b) allows persons to maintain records in alternative format upon giving advance written notification of such alternative storage methods to the Director of Customs' Regulatory Audit Division in Miami. Written notice to the Customs audit director in Miami must be provided at least thirty (30) days before the alternative storage method is implemented, and must identify the alternative storage method to be used. Alternative storage methods may not be used if Customs objects, or if the law requires retention of original records.

     Alternative records storage methods must comply with the standards set forth in 19 C.F.R. Section 163.5(b)(2). These standards require operational and written procedures to ensure that imaging or other media storage processing methods preserve the "integrity, readability and security of the information pertaining to the original records", that there is an effective labeling, naming, filing and indexing system, that internal testing of the system is performed annually,and that the recordkeeper must be able to make hard-copy reproductions of alternatively stored records. Entry records must be maintained in their original formats for one hundred twenty (120) calendar days from the end of the release or conditional release period, whichever is later, or for a period of 120 calendar days from the date goods are redelivered to Customs custody or otherwise disposed of.

     "Alternate recordkeepers" must maintain and keep available one working copy and one backup copy of the records stored in a secured location, and may not change alternative recordkeeping procedures without first notifying the Director of the Customs Audit Office in Miami.

     Section 163.6. Production and Examination of Entry and Other Records and Witnesses: Penalties

     This regulation provides generally that recordkeepers must produce entry records within thirty calendar days of receipt of a Customs demand for the records, or within any shorter period that Customs may prescribe when the entry records are required in connection with a determination regarding the admissibility or release of merchandise. Where a party encounters problems in timely complying with a Customs demand for records, a request for additional time to comply may be submitted. The mere submission of a request for additional time "shall not by itself preclude the imposition of a monetary penalty or other sanction under this part for failure to timely produce the records, but no such penalty or other sanction will be imposed if the request is approved and the records are produced before expiration of that additional period of time".

     Where a person fails to comply with a lawful demand for records, monetary written penalties may be imposed as follows:

Culpability	Maximum Penalty
Willful failure to maintain, store or retrieve records	$100,000 per release of merchandise, or 75% of the appraised value of the merchandise, whichever is less
Negligence in maintaining, storing or retrieving records	$10,000 or 40% of the appraised value of the merchandise, which ever is less.

     Where a party fails to produce records which relate to the eligibility of merchandise for a special Column 1 rate of duty (GSP, CBI, NAFTA, etc.), Customs may, as an additional sanction, liquidate all such unliquidated entries as fully dutiable, and, to the extent of entries were liquidated during the two year period preceding the date of demand for the records, reliquidate them as fully dutiable.⁶

     Penalties imposed for recordkeeping violations may be remitted or mitigated under 19 U.S.C. Section 1618, upon the filing of a petition.

     During the course of any investigation or compliance assessment, audit or other inquiry, the Customs officer may request access to records "during normal business hours, and to the extent possible at a time mutually convenient to the parties", by providing to the person responsible for such records "reasonable written, oral or electronic notice that describes the records with reasonable specificity".

     This regulation also stresses that Customs may seek access to information by means of an administrative summons and other forms of mandatory process.

     Section 163.7:Summons

     This section provides for the service by Customs of Administrative summonses pursuant to 19 U.S.C. Section 1509. The regulation describes the persons who may be served with a summons, the method of service, and details relating to service of summonses and the taking of testimony under oath.

     Customs summonses are a form of mandatory process, which may be enforced in United States District Courts. Parties receiving such summonses may defend against them in court, or move to quash them on a variety of grounds, particularly if the request is unreasonable, not authorized by law, or overbroad and unduly burdensome.

     Where a Court orders the production of records pursuant to a summons, and the target of the summons fails to comply, the court may hold a person in contempt and impose additional sanctions, including an order directing Customs not to release merchandise entered by the importer (e.g., effectively preventing the party from continuing to import goods into the United States).

     Section 163.8: Third-Party Recordkeeper Summons

     Where Customs serves a summons on a third-party recordkeeper, seeking the production of, or the giving of testimony relating to, records of another person, notice of the summons must be provided to the person identified in the summons. Thus, if Customs serves a summons on Customs Broker A, seeking information regarding entries by Importer X, notice of the summons must be given to Importer X. The notice must be given "immediately after" service of the summons, but in no event less than ten business days before the date set in the summons for the production of records or the giving of testimony. This advance notice allows the party whose records are sought to take action to prevent enforcement of the summons, for example, the filing of an action to quash the summons.

     The party whose records were sought may stay compliance with a third-party recordkeeper summons, by given a written direction not to comply ("stay") to the person summoned. A copy of any such direction to not comply and a copy of the summons must be sent by registered or certified mail to the person summoned and the Customs officer who issued the summons.

     Where third-party notice is required, Customs may not examine records before the production date fixed in the summons. Where a person entitled to notice issues a stay of compliance with the summons served on a third-party recordkeeper, no examination of records may take place except with the consent of the person staying compliance or pursuant to an order issued by a United States district court.⁷

     The notice and stay of compliance provisions of these regulations may do not apply if a United States District Court determines, upon petition by an issuing customs officer, that reasonable cause exists to believe that the giving of notice may lead to an attempt to conceal, destroy or alter relevant records, or to prevent communications through intimidation, bribery or collusion, or to cause a party to flee to avoid prosecution, testifying, or the production of records.

     Section 163.9 Enforcement of Summons

     Where a party fails or refuses to comply with the summons, Customs may seek an order from a United States District Court to compel enforcement. Persons entitled to notice will have a right to intervene in any such enforcement proceeding.

     Section 163.10 Failure to Comply with Court Order: Penalties

     Where a party fails to obey a court order directing it to comply with a Customs summonses, the court may find such a person to be in contempt, and may assess a monetary penalty. Where a person is adjudged to be in contempt, the Commissioner of Customs, with the approval of the Secretary of Treasury, may:

(1) . . . prohibit importation of merchandise by that person, directly or indirectly, or for that person's account; and

(2) may withhold delivery of merchandise imported by that person, directly or indirectly, or for that person's account.

     Where a party remains in contempt for more than a year, any of the party's property in Customs custody will be considered abandoned and sold at public auction or otherwise disposed of.

III. CUSTOMS COMPLIANCE ASSESSMENT AND AUDIT PROCEDURES
     New Part 163 of the Customs Regulations also contains provisions regarding Customs CAT audits and other customs audits.

     Section 163.11: Compliance Assessment and Other Audit Procedures

     This regulation seeks to ensure some of the procedural rights of importers who are subject to CAT audits and other Customs audits. The rules require, inter alia, the Customs notify an audited party telephonically and in writing in advance of the assessment or audit and provide a reasonable estimate of time to be required for the completion of the audit. Customs must also advise the party of its right to an entry conference to review the objectives and requirements of the audit, and to provide a further estimate of any additional time for the completion of the audits.

     Customs must schedule a closing conference upon completion of on-site work to explain the preliminary results of the exercise, and complete a formal written compliance assessment or audit report within 90 calendar days following the closing conference.

     Customs is also required to send a copy of the audit report to the party who is subject of the audit.

IV. RECORDKEEPING COMPLIANCE PROGRAM
     Section 163.12: Recordkeeping Compliance Program

     This section describes the Recordkeeping Compliance Program, the voluntary Customs program under which "certified recordkeepers" may qualify for alternatives to recordkeeping penalties.⁸

     Applicants wishing to participate in the program must apply to Customs' regulatory audit director in Miami to be certified, and must meet the requirements set out in Customs' Recordkeeping Compliance Handbook. The party must also be able demonstrate that it understands the legal requirements for recordkeeping, has in place procedures to explain those requirements to its employees, has procedures regarding the preparation and maintenance of required records and production of such records to Customs, and has designated a dependable individual to be responsible for recordkeeping compliance under the program.

     A program participant must also establish record maintenance procedures acceptable to Customs (for original records or alternative recordkeeping procedures), and have procedures for notifying Customs of any variance from, or violations of, the requirements of the Recordkeeping Compliance Program.

     Section 163.13 Denial and Removal of Program Certification: Recordkeeping Appeal Procedures

     This section describes the procedures under which Customs will remove a certified party from the voluntary Recordkeeping Compliance Program, and explains the appeal procedures available to such party.

V. CUSTOMS BROKERS
     Treasury Decision 96-56 also amends the Customs Regulations governing the operation and regulation of licensed Customs brokers. Customs' final regulations clarify that brokers' recordkeeping obligations extend not only to entry records submitted on behalf of importer-principals, but also all other records "that are required to be maintained by a broker".

     The regulations require that each broker designate a "acknowledgeable company employee" to be the contact for Customs for a broker-wide business and financial recordkeeping requirements." Ordinarily, the designated official will be the individual broker whose license support the corporate broker's license; however, the designated person need not be a licensed broker.

     Finally, the regulations will require the brokers to maintain records in a consistent manner for each port/district in which they are authorized to transact Customs business "unless the broker chooses to consolidate records in one or more other locations, and provides advance notice of such consolidation to Customs," in accordance with 19 C.F.R. Section 111.23(b).

     The regulations note that brokers may maintain ABI entry data in electronic format, and caution that brokers who are unable to produce records requested by Customs may be subject to disciplinary action or penalties either pursuant to Section 641 of the Tariff Act [relating to broker regulation and discipline] or 19 C.F.R. Part 163. [monetary recordkeeping penalties].

VI. CONCLUSION      Customs' Recordkeeping Regulations affect all importers, brokers, drawback claimants, and other persons transacting "Customs business". The monetary recordkeeping penalties authorized by Congress give Customs enormous power over these parties to require creation, retention and production of records. All companies need to become familiar with these regulations, and must establish internal programs for ensuring compliance.

     ¹This section cross-references additional recordkeeping requirements applicable under the former U.S.-Canada Free Trade Agreement [19 C.F.R. Part 10] and NAFTA [19 C.F.R. Part 181].

     ²The covered "activities" are defined in 19 C.F.R. Section 163.1(a)(2) to include the importation, declaration or entry of goods; the transportation or storage of bonded merchandise; the filing of drawback claims; the completion and signature of NAFTA Certificates of Origin; the collection, or payment to Customs, of duties, fees and taxes; and any other activity "required to be undertaken pursuant to the laws or regulations administered by Customs".

     ³The regulation defines the term "records" as including, but not limited to "Statements; declarations; documents; electronically generated or machine readable data; electronically stored or transmitted information or data; books; papers; correspondence; accounts; financial accounting data; technical data; computer programs necessary to retrieve information in a useable form; and entry records contained in the (a)(1)(A) list."

     Some commenters have expressed concern that this broad definition may require importers and others to keep documents which might otherwise be discarded in the ordinary course of business, such as e-mails, or facsimile messages containing information relevant to the preparation of a customs entry or other submission. Customs has indicated that the definition may in fact be this broad.

     ⁴Interestingly, the term "compliance assessment" is no longer described as the "first step" in a Customs audit. This change recognizes that CAT audits are often completed without being expanded into a formal Customs entry audit, and that regulatory audits are often conducted without a CAT review preceding it.

     ⁵Please note that if drawback is paid under the "accelerated payment of drawback" procedure, a claimant may be required to keep records for longer than the three year period.

     ⁶Such a reliquidation would, in our judgment, allow an importer to file a protest challenging the assessment of increased duties. This would allow the importer to present records necessary to its claim in conjunction with the protests, or in subsequent litigation before the United States Court of International Trade (CIT).

     Certain special problems may arise in the case of some trade programs such as GSP, where the party required by Customs' regulations to maintain the GSP declarations, or backup evidence necessary to prove such facts as "substantial transformation" and local content levels, are not the parties required to keep records under the Customs laws. Many importers have encountered difficulty in attempting to obtain such records from foreign manufacturers. Importers should take special care to work with their vendors to ensure the availability of records in these kinds of situations.

     ⁷See 19 C.F.R. Section 163.8(e). These provisions are important, and each importer should discuss them with its Customs broker, or with other third-party recordkeepers. Often, Customs agents will serve a summons on a third-party recordkeeper, and attempt to gain access to the summons records, immediately, often through informal channels. A third-party recordkeeper may sometimes volunteer some information, in the belief (often mistaken) that such cooperation will aid its principal. These regulations make clear that it is improper for Customs to attempt to examine records before a party entitled to notice has been served with a copy of the summons, or where such a party has issued a stay of enforcement for the summons.

     ⁸Participation of a company in this program has no effect on Customs' power to issue a summons, or to use court orders or other legal process to compel the production of records by that company.

     Please contact our offices at (212) 635-2730 or (202) 861-2959 if you have any questions concerning the new Customs Recordkeeping Regulations.

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