2016: The Year of Cuba

2016 has kicked off with some big changes, many of which pertain to the United State’s relationship with Cuba. On January 27th, 2016, the Bureau of Industry and Security (BIS) and the Office of Foreign Assets Control (OFAC) announced new regulations that further reduce U.S. sanctions on Cuba. Translation: things are looking up in terms of repairing a long-term strained relationship between the two. These modifications relate to financing, exportation, and travel; they further liberalize bilateral access and promote improved relations between the United States and Cuba. Since January, regulations have steadily been chipped away at an effort to slowly dilute the embargo; these include regulations eased as recently as March 15th.

Previously, there were very strict regulations regarding payment and financing terms for non-agricultural exports to Cuba. C.O.D. was the only means of payment allowed: credit was forbidden. However, many of these terms have now been reduced or repealed, allowing for payments of cash in advance, sales on an open account, and financing by a third-party country or the U.S. In support of this, a regulation was promulgated on March 15th to ease the transfer of money between Cuban and American banks. Establishing expanded methods and means of financing helps encourage trade and exchange between the U.S. and Cuba, and it is an important step in growing the relationship between the two.

In addition, regulations regarding U.S. exports were altered. Licenses for exports of food and services which are deemed to aid Cuba have been expanded; this category now includes telecommunications, agricultural, civil aviation safety, and news gathering software items. This expansion allows a larger variety of items to be sent to Cuba, and a case-by-case basis licensing policy has been introduced for even more additional items.

The most drastic changes are those regarding travel. OFAC (the Office of Foreign Assets Control, which regulates embargos) has now approved an expanded number of business-related travel reasons; these include professional conferences, sports competitions, artistic expeditions, humanitarian projects, market research, and sales/contract negotiation. It is important to note that travel blatantly for tourism alone is still banned, but there are an increasing number of ways to circumvent this. As of March 15th individual travel is permitted for “people-to-people missions”; this includes any trip which involves a meaningful cultural exchange with Cuban people. This is a big development, as previously this category was limited to tour groups only. Since commercial flights to Cuba are scheduled to resume in the Fall, it is an appropriate time for these more lenient travel regulations to be taking form.  Given these new “people-to-people ” rules, it seems a foregone conclusion that individuals who make, let’s say, culturally driven sojourns with enjoyable side trips are very unlikely to find themselves under threat of prosecution at this time.

President Obama announced in February his plans to make a trip to Cuba in this month; it will be the first time an American President has visited Cuba in 88 years. The goal to repair and expand relations with Cuba through enhanced communication and travel was originally announced by Obama in December 2014, and this seems to be a big step in that direction. It is sure to be worthwhile keeping an eye out for regulatory chanages regarding import, export, trade, financing, and more as relations between the U.S. and Cuba continue to warm.

The Trade Facilitation and Enforcement Act of 2015

The Trade Facilitation and Enforcement Act of 2015 was passed by the Senate on February 11th, 2016 in a 75-20 vote. Now that the bill has been passed by the House and the Senate, the final piece of the puzzle is for President Obama to sign the bill into law. Given that this is projected to be enacted by the President soon, it is imperative for international traders to understand its key provisions.

The Act is split into 9 different sections with an overall focus on facilitating and enforcing trade; this will help to promote U.S. global opportunities while keeping the playing field level and fair. Key provisions of the Act focus on enhancing enforcement of international trade laws, providing stronger protection for international intellectual property, and modernizing U.S. Customs and Border Protection (CBP) processes. According to an article published by The Washington Examiner, “Current customs rules that have not fully embraced technological and trade advances are creating bottlenecks at the border that impede the just-in-time manufacturing process, which is critical to the productivity, efficiency, and global competitiveness of the U.S.” Passing this bill marks the first, long overdue, significant update to CBP processes and policies in over 10 years.

Three aspects of the bill are of particular interest. First, the focus on strengthening anti-evasion procedures is key via establishment of a Trade Remedy Law Enforcement Division at CBP’s Office of Trade. This division will be specifically aimed at preventing the evasion of antidumping and countervailing duty orders. If it is determined that evasion has occurred, CBP is required to suspend liquidation of entries and enforce the appropriate cash deposit rate for the merchandise. Updates streamline the process for investigating evasion and assessing the corresponding penalty.

Another area of focus in the bill is intellectual property protection, manifested through the creation of a greater National Intellectual Property Rights Coordination Center. It will focus on investigating sources of merchandise that infringe intellectual property rights. The thought is to advance U.S. competitiveness globally by identifying those responsible for producing, smuggling, or distributing copyrighted and/or trademarked merchandise, rather than just seizing the end products when discovered.

Lastly, the Act drastically alters provisions regarding duty drawback. Essentially new provisions simplify drawback procedures by extending the deadline for filing drawback claims. It rises to five years while creating more transparency in the calculation of drawback refunds, and establishing a standard for classification of substitution drawback items.

Overall, this seems to be a piece of legislation that will help to advance the American economy when signed into law. While this brief post is only able to focus on certain key highlights, there are many changes proposed within the Trade Facilitation and Enforcement Act of 2015 that are significant and impactful. To view the bill in its entirety, please visit the following link: https://www.congress.gov/bill/114th-congress/house-bill/644/text

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An Introduction to Business Succession Planning

Many of our clients are smaller, family-owned enterprises which have succession concerns.  It is always important to be thinking ahead, whether it’s your overall strategic vision, marketing and sales, human resources, or any other facet of your business.  The common thread for success in each of these disciplines is having a well-developed plan, including one for exit.   Here I focus primarily on planning within a family business, i.e. regarding passing a company from one generation to the next.  This includes planning for the unexpected, as the reality is that you may not always be able to foresee exactly when you will exit your business (if you catch my drift). The sooner you develop a succession plan, the better prepared you will be.

According to the Conway Center for Family Business, “Nearly 70% of family businesses would like to pass their business on to the next generation, but only 30% will actually be successful at doing so.”  Prior to establishing the critical plan, it is important to agree on some fundamental goals and objectives not only for the transition of ownership, but also for next-generation management.  The most essential element is identifying successors, because not all heirs are really interested in what your business does.   Regardless, all family members need to be factored in, even if they are not designated as successors.  A good plan will allow you to assign active and non-active roles for each member.  Additionally, the plan should outline any additional support or privileges that will be needed by the successor from other family members.  It is critical to agree on a method for dispute resolution, document the plan in writing, and ensure it is agreed to by all family members.  Yes, that is ordinarily possible.

The work does not stop there.  After a succession plan has been decided upon, it is important to create both a business and an owner estate plan.  These will address issues of taxation upon transfer of ownership. It is important to structure the succession in a way that accurately reflects the value of the business while minimizing taxes and avoiding delays in transfer of ownership. The final piece of the puzzle is ensuring there is a trustee or executor to enforce the timeline and method for transition, when that time comes.

Family business succession plans might fail due to differing family interests, but taking these initial steps ensure that you have done what you can to avoid it.   A careful planning process promotes an open family dialogue, and ensures that everyone is on the same page regarding the future of the family business. You can do this!

FTZ Subzones: Not a Remote Possibility Anymore

It is no secret that there are many benefits to taking advantage of Foreign Trade Zones (FTZs).  Regardless of the size of an importer or exporter, using FTZs can significantly reduce costs from customs duties and taxes, and as a result increase  a company’s  global market competitiveness.  By definition, a foreign-trade zone is a geographical area (located within 60 miles of a United States port) where commercial merchandise is considered to be outside the jurisdiction of U.S. Customs and Border Protection. Even though the site is physically within the United States, it is treated as being outside of the Customs’ jurisdiction.  Therefore ordinary Customs rules, regulations, and fees do not apply.

A downside to FTZs is that by law they may only be operated by a city or county.  For private parties wanting their own zones, however, there is a solution, and it goes by the name of “Foreign Trade Zone Subzones”.  An FTZ subzone is an area approved by the Foreign-Trade Zone Board for use by a specific company.  Subzones endow all of the same benefits as general-purpose FTZs, but they relieve companies from having to relocate within the established Foreign Trade Zone sites.  Essentially, if you are able to have a pre-existing site or warehouse permitted as a subzone for your company, then you are operating your own private Foreign-Trade Zone.

This establishment of subzones provides many potential benefits for companies, especially those that import or re-export products. For example, let’s take a look at Volkswagen.  This company was able to have one of its production plants in Chattanooga, TN declared an FTZ subzone, and as a result VW has estimated that it could save upwards of $1.9 million dollars in inverted tariffs. (FAS.org) Tires and parts otherwise subject to high duties enter the subzone completely exempt from them, and then later  enter the U.S.  after being incorporated into cars, no longer as parts, at a much lower duty rate.  The ability to manufacture within a subzone coupled with the exemption from ordinary Customs’ duties and tariffs can translate to very significant savings.  There are many other legal advantages we don’t have space to list here.

Declaring locations as subzones used to be seen as more a privilege than a right, but there has been a shift in this attitude over the past few years.  The application process for forming a subzone is fairly streamlined, and all of the required steps and documentation can be found at the following link: http://enforcement.trade.gov/ftzpage/sz-application.html.  The average total cost including necessary permit and legal fees may range from $15,000 to $25,000, and the average time span from application to operation can be  6 months or less.  It is important to consider the costs and benefits before proceeding with a decision to pursue subzone declaration, but it is clear that there a number of significant advantages from this classification.

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New BIS Export Enforcement Guidelines

As we start off this new year there are some important new changes to be aware of; this includes the Bureau of Industry and Security’s (BIS) proposed changes to export enforcement guidelines. This bureau is the agency responsible for enforcing the Export Administration Regulations (EAR), which handles all export enforcement cases. These proposed changes will impact how the BIS categorizes export violations, as well as how they determine the appropriate penalty for qualifying violations.

We must initially examine how violations will be categorized, because this will in-turn effect how they are penalized. First, BIS will categorize violation cases as either egregious or non-egregious. Four factors will be considered in determining the egregiousness of each case; a willful or reckless violation of the law, the awareness of conduct at issue, harm caused to the regulatory program objectives, and relevant individual characteristics. The other important factor at play for violation categorization is whether or not the violation was voluntarily self-disclosed. Self-disclosure was a factor of “great weight” prior to these changes,  but it now plays an even more pivotal role in determining the applicable monetary penalty.

The  proposed changes by the BIS have allowed for the creation of a base penalty matrix. This matrix takes into account the previously discussed factors, as well as the number of relevant EAR violations.  The base penalty amount is based on three different values; the maximum statutory amount, the transaction value, and the applicable schedule amount. The matrix will be structured as shown below;


The current “statutory maximum” penalty is twice the value of the transaction, not to exceed $250,000. The” transaction value” is defined as “the U.S. dollar value of a subject transaction” based on commercial invoices, bills of lading, Customs declarations, and other relevant documents. The “applicable schedule amount” referenced in the matrix is determined by referring to a table (not reproduced here) that categorizes various transaction values with corresponding penalty amounts. (Ex. If the transaction value is between $10,000 and $25,000, the corresponding schedule amount in the table is $25,000.) Once the base penalty has been determined, there are a set of factors that will be considered in determining whether the base amount needs to be adjusted. Aggravating factors increase the penalty, mitigating factors reduce the penalty, and general/other relevant factors are considered on a case-by-case basis and can either increase or reduce the penalty.

The overall goal of these changes is to make BIS penalty amounts more predictable and transparent. Additionally, these changes are intended to more closely align BIS procedures with those of the Treasury’s Office of Foreign Assets Controls (OFAC).  It is imperative for companies involved in export to understand these changes, as they could lead to higher penalties for export violations if implemented.  We have always urged clients to make Voluntary Disclosures quickly, and in most cases have avoided any penalty whatsoever.  Public comments regarding this proposal are due by February 26, 2016.

Dealing With Patent Trolls

Freight forwarders, Customs brokers, and carriers always provide shipment tracking to their customers. There are a variety of ways to do this; they may use their own software to track shipments, or they may track shipments by linking to another carriers’ website. There is nothing magical about this, yet this type of technology may be covered by patents or copyright. Logistics professionals deal with threats of patent infringement lawsuits asserted by patent owners, especially so-called patent trolls, increasingly.  Patent trolls are those who seek to enforce patent rights, but do not actually manufacture or supply services based on the patents.  They make a living just by demanding payment for the supposed infringement upon a right they themselves are unlikely to use.

The most aggressive company presently following that template in the shipping industry is ArrivalStar.  ArrivalStar is incorporated in the tax haven of Luxembourg, and it is one of the most litigious patent plaintiffs in the U.S.  In 2013 alone, it lodged 137 lawsuits across the country.   Defendants in its suits include the biggest names in logistics and transportation, such as FedEx, UPS, DHL, American Airlines, American Express, Continental Airlines, Delta Airlines, the Port Authority of New York and New Jersey, and others. Our brief analysis of ArrivalStar’s lawsuits indicate that none have actually gone to trial; most are settled quickly for an undisclosed sum.  In certain cases where the defendants vehemently fought back, ArrivalStar withdrew from the lawsuit, dropping its claims.  In some cases, its patents had been infringed and it did collect sizable license or other payments.

Trolls usually avoid active lawsuits, either because they are afraid that their patent allegations will not withstand a challenge, or because they believe that there is actually little or no infringement by the defendants. They also avoid extensive litigation because they are concerned with the costs: simply mounting a patent infringement suit can cost $100,000 in a few short months, and actually taking a case to trial can easily exceed a million dollars in legal fees and costs over a period of years.  Since trolls are often bankrolled by investors whose sole purpose is to engage in litigation, or by law firms which work on contingency, they do not have the litigation motives of a normal business competitor. When defendants fight back, trolls often retreat because they would rather go after the targets who may give in more easily.

Conventional wisdom on how to best defend a patent case does not apply in the case of trolls, because that would be conservative, expensive, and time-consuming.  Small carriers, freight forwarders, or Customs brokers do not readily have the wherewithal to finance those suits. We have helped several logistics companies avoid suits by doing a proper analysis of their tracking systems and respective data components, and then responding clearly under the U.S. Patent Act with the defenses available to both patent troll and/or ArrivalStar-type demands. Alternatively, we have settled infringement claims without extended suit.  Any such demand must be taken very seriously, but with the knowledge that a mere demand does not mean infringement actually occurred.

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Transitioning to the ACE Portal

There is continual automation in the world of forwarding.  One change this week is the integration of the Automated Export System (AESDirect) into the Automated Commercial Environment (ACE) Portal.  Until recently, AESDirect has been the sole government electronic system used to input SED information on export shipments. Inputting this information accurately is of the utmost importance, as it is used in comparison to Customs entries to develop our national trade balance statistics. The idea behind integrating this system into the ACE Portal is that now ACE will be able to serve as a single hub for all transactions relating to imports and exports. All major agencies are transitioning to using this system; including the CPSC, FDA, DOT, and now Commerce. Theoretically, having all of this information located within a single source will create a more organized and easily accessible system for queries.

According to U.S. Customs and Border Protection, all existing AES functionality  has been incorporated into ACE. But while the two systems will be integrated, AESDirect will continue to exist as a stand-alone product.  This adoption of AESDirect into the ACE Portal will take time.  For now, ACE is still technically incomplete; testing to improve the system continues to take place. However, it is inevitable that this transition will eventually be complete, and at such time ACE will become the necessary outlet for appropriately reporting information regarding international exports. If you have any further questions regarding this transition, please visit the following link; http://www.cbp.gov/trade/automated/ace-faq.

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Drug Prototypes: Pharma And Customs Brokerage Pointers

We have seen terrible problems arise when pharmaceuticals for medical trials have been imported without sufficient coordination between the importer and its broker. The Product Development and Testing Act of 2000 (PDTA) was enacted as part of the Tariff Suspension and Trade Act of 2000 (Act).  Its purpose is to promote product development and testing in the United States, by allowing the importation on a duty-free basis of articles commonly referred to as ‘‘prototypes’’.  These must be used exclusively for product development, testing, evaluation, or quality control. Consequently, section 1433 of the Act amended the Harmonized Tariff Schedule of the United States (HTSUS) by inserting a new subheading 9817.85.01 in Chapter 98, HTSUS, to provide for the duty-free entry of prototype articles. Section 1433 of the Act also included a new U.S. Note 6 in Subchapter XVII of Chapter 98, HTSUS, to define the term ‘‘prototypes’’ as used in HTSUS subheading 9817.85.01.

Customs amended the Customs Regulations to add a new § 10.91, in accordance with the requirements of the PDTA.  What is does is: (1) establish procedures regarding the identification of prototypes at the time of their importation into the United States; and (2) establish procedures regarding the sale of prototypes as scrap, waste, or for recycling, after their intended use in product development, testing, and evaluation.

To qualify as a prototype, the merchandise must meet the requirements set forth in Note 6:

  • It must be originals or models of articles that (i) are either in the preproduction, production, or postproduction stage and are to be used exclusively for development, testing, product evaluation, or quality control purposes; and (ii) in the case of originals or models of articles that are either in the production or postproduction stage, are associated with a design change from current production (including a refinement, advancement, improvement, development, or quality control in either the product itself or the means for producing the product).
  • It may be imported only in limited noncommercial quantities in accordance with industry practice.
  • Except as provided for by the Secretary of the Treasury, prototypes or parts of prototypes may not be sold after importation into the United States or be incorporated into other products that are sold.
  • The imported item may not be subject to quantitative restrictions, antidumping orders, or countervailing duty orders, and
  • It must comply with all applicable provision of law and otherwise meet the definition of “prototypes”, if the articles are subject to licensing requirements or other laws, rules, or regulations administered by agencies other than the CBP.

The entry has very particular requirements. It must be done in accordance with procedures set forth in 19 C.F.R. § 10.91, which state in pertinent part:

  • Prototypes may be entered under subheading 9817.85.01, HTSUS, on CBP Form 7501 or an electronic equivalent.
  • The importer must declare the intended use at the time of entry.

19 C.F.R. §10.91 also set forth procedures regarding sale and disposition of prototypes and requirements regarding record keeping.

To avoid the disaster of irrevocable imposition of duty at the moment of release, probably the most important take away message here for customs brokers and importers is to (i) enter under subheading 9817.85.01, HTSUS on all entry documents, and (ii) explicitly declare the intended use as a prototype at the time of entry.

This blog post was authored by Dr. S. Shannon Liang. If you have any further questions about this topic or The Mooney Law Firm, please feel free to contact us today.

Subpoenas: What You Need to Know

A surprising number of our clients have received subpoenas in civil suits or from Federal agencies lately, and there tends to be a bit of confusion about what exactly the implied responsibilities are regarding subpoenas. As such, it seemed only appropriate to author a blog on the topic this week.

To start, let’s review what a subpoena is. Officially, a subpoena is a writ issued by a government agency to compel the production of evidence. Most often subpoenas will be issued by courts, although they can technically be issued by any court official, including lawyers. If a subpoena is being issued by a private party, such as a lawyer, it must be in relation to an active case. Otherwise, the subpoena will not be considered valid. This is not true for government agencies though; agencies have the ability to issue subpoenas for investigative purposes at any time. It is important to understand this distinction because you would not want to make the mistake of producing information in relation to a subpoena that is not actually valid.

It can be confusing when a client receives a subpoena from an agent of state government, or a state court, for information that is federally protected.   Customs brokers are beholden by law and regulation to keep their clients’ information confidential.   What if a state judge demands production of federal (Customs brokerage, for example) records?  This apparent conflict leaves people wondering exactly which agency they have a responsibility to: Federal licensing authorities and their regulations, or state courts and their rules? The answer is that you are subject to your state court judges. You sit within the jurisdiction of your state, therefore they have the power to make you produce even most federally protected documents. If state court judges are subpoenaing material for a strictly federal matter, they may not be able to do anything with the information obtained, but they do still have the power to make you produce it. This may seem counterintuitive, but it is important to understand how the system works.  This is especially important for federally licensed Customs brokers and freight forwarders to understand, as they will likely encounter this situation at some point in their careers.

One last important point to note is that when requesting you produce documents, most subpoenas will say you must appear “with” the required materials. However, it is almost never the case that you actually  need to physically appear. It is important to understand that subpoenas are not the same as depositions. With depositions, you are required to appear in person to give your recorded testimony; whereas with subpoenas, faxing or mailing the required information will almost always suffice.

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Please note: Contact your own legal counsel immediately should any of the above situations arise.  We are providing general information which may not be applicable to the actual situation you find yourself in.

Confidential Export Information

It is always important to ensure that you are completing international shipping documentation accurately.  One of the documents required for each single commodity  exported having a value exceeding $2,500 is a Shipper’s Export Declaration (SED).  SEDs essentially allow the Census Bureau to keep track of what is being exported from the United States.  Back when I started, in the Bronze Age, SED’s were yellow forms for most exports, and pink for goods in transit.  Today the SED filings are done via Census’ AES system, either via your link or on the web at AESDirect (https://aesdirect.census.gov/).  These filings are the means for compiling U.S. export statistics, which help the U.S. government in managing export control and, when compared to Customs’ entry information, generate balance of trade information.  Given that this information is used for critical national reporting measures, it is of the upmost importance that SEDs are completed both accurately and honestly.  To help promote honest reporting, SEDs are completely confidential.  As a result, you cannot be forced to produce copies of SEDs and you will never be required to disclose information reported within.  It cannot be disclosed to any party other than the Census: See 15 USC 30.60:

Confidentiality: The Electronic Export Information (EEI) contained in the Automated Export System (AES) isconfidential and is to be used solely for official purposes as authorized by the Secretary of Commerce.  The collection of EEI by the Department of Commerce has been approved by the Office of Management Budget.  Only the U.S. Principal Party in Interest (USPPI) or the USPPI’s agent may have access to its AES record.  It is prohibited to share the EEI Information with a Foreign Government or entity, or any other party for non-official purposes.”

The information you disclose on an SED is known as Electronic Export Information (EEI); this is the electronic data detailing your shipment which is collected by the government. There are certain regulations mandated when preparing an SED; to insure that you are in compliance with the requirements, please visit the guide published by the Census Bureau posted below. It is important to note that even though you cannot be forced to produce copies of an SED to any entity (with the exception of the United States government), you are still responsible for maintaining copies of shipping documents for a period of 5 years.  These documents are required to be kept for statistical purposes.  Be sure to download these excellent guides for your professional library:




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