Have A Billion Dollar Export Penalty? Let’s Not.

        
This is an old blog we lost during our transfer of site hosting.  

   A record-setting payment of $1,190,000,000.00 by ZTE Corporation of Richardson, Texas (“ZTE”) shows the enormous risks today of underestimating U.S. export enforcement. The International Emergency Economic Powers Act gives the President of the United States broad authority to regulate international transactions and exports.. Pursuant to two Executive Orders issued by President Clinton in the mid 1990’s, the Iranian Transactions and Sanctions Regulations (“ITSR”)  was created that prohibit, among other things, exportation or re-exportation of U.S. products to Iran without a license from the Office of Foreign Asset Control (“OFAC”).

Almost a year ago,  the Obama administration accused ZTE of violating ITSR and the Export Administration Regulations (“EAR”), restricting the export of products that could make a significant military contribution to Iran or other countries. Fast forward to today, and, ZTE has pleaded guilty to charges of unlawful conspiracy to export U.S. goods (to both North Korea and Iran), obstruction of justice and knowingly and willfully making a materially false statement during the investigation. ZTE settled the lawsuit for the largest sanctions penalty in history: $1.19 billion divided between the U.S. Department of Justice, OFAC and the Bureau of Industry and Service (“BIS”). Below are some ideas of how to avoid becoming the record holder for the largest trade sanctions penalty:

What ZTE did: Senior management was aware of, and even condoned, illegal activities and non-compliance with trade laws.

Best Practices: Create a company culture of honesty and compliance, starting with top level management. It is up to senior management to establish clear company policies regarding compliance with all export policies because they, better than anybody else, understand the high risks associated with non-compliance. Senior management behavior is an example for the rest of the company so it should clearly show what are acceptable export practices.

What ZTE did: ZTE sought out and used “isolation companies” to re-export U.S. products to embargoed countries in order to hide ZTE’s involvement.

Best Practices: Take a look at the process third parties which you may employ use to complete their business.  Request written verification that they comply with trade laws and memorialize this via a contract in which the third party commits to complying with U.S. trade laws. The main point is to create and maintain transparency – with teeth –  regarding interactions between your company and any third party involved in your business transactions.

What ZTE did:  Incredibly, once the investigation had begun, ZTE asked its employees to sign nondisclosure agreements to conceal the illegal trade with Iran.

Best Practices:  Concealment is almost always worse than the initial crime! Create a company plan that empowers employees to report compliance issues. Even if it turns out there is no compliance issue at the moment, you are given the chance to address a minor problem before it turns into a major (record setting) compliance issue.  See our January 20, 2016 post regarding Voluntary Disclosures, which can greatly lessen or even eliminate penalties  (“New BIS Export Enforcement Guidelines”.)

What ZTE did: After learning of the impending charges, ZTE instituted a “contract data induction team” whose purpose was to identify and remove data related to the Iran transactions.

Best Practices:  Again, the concealment activity failed and brought on a Billion Dollar (!) penalty. When establishing an effective compliance plan for your company, it should include a method of safe and reliable record keeping. The plan should include the types of records to keep and when they can be destroyed as well as steps to be taken should the company face an accusation of violating laws.

            Ultimately, your goal should be to establish company policies that respect and enforce compliance best practices.  If an issue should arise, the company is then prepared to assist with and minimize the effect of any violation and/or investigation, rather than hinder and thereby compound it.

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Behind the Scenes: CBP Fines, Penalties, and Forfeitures Processes

Yesterday, the American Bar Association’s Section of International Law hosted a program for its members to hear from and speak directly with CBP Office of Regulations and Rulings, represented by Chief of the Penalties Branch, John Connors.  Mr. Connors told the group in attendance (live and via phone conference) that while he is not authorized to discuss recent or pending cases, he would be discussing the general process within CBP when it is either contemplating or has issued a penalty or seizure notice.

Mr. Connors first explained that many people are confused as to which CBP offices have authority in different cases, and that there are also 3 headquarter branches that deal with penalties either after review by the Fines, Penalties, and Forfeiture Officers in the field at the 300+ ports or concurrent with such review in certain cases dealing with penalties over $100,000.00.  If a case is deemed referred to “Headquarters” it could be with 1)the Office of Field Operations, 2) the Office of International Trade (commercial enforcement), or 3) the Office of Regulations and Rulings.  Thus, there is a need to clarify exactly which office your case is being assessed.

Backing up to the beginning of the process:  First, when goods are being imported or exported, field officers at each port will make initial determinations of whether there are any issues with the goods in question or with the process of importing and exporting the goods.  For example, CBP Officers will look to see if there are any issues with the vessel’s manifest, trademark or copyright infringement, drawback penalties, misclassification of goods, etc.  If there are issues, the field officers will report it to a Fines, Penalties, and Forfeitures Officer (“FPFO”) at their respective ports.  There are currently 42 FPFOs that deal with penalty actions.  These officers then determine whether there is a need to issue a penalty or pre-penalty notice or to simply cancel the case without further inquiry.  Mr. Connors reported that cancellation at this stage is extremely rare.

Pre-penalty notices are required to be issued for the following:

Commercial fraud and negligence (19 USC 1592)

Drawback penalties (19 USC 1593a)

Customs Broker penalties (19 USC 1641)

Recordkeeping penalties (19 USC 1509)

Falsity of lack of manifest (19 USC 1584(a)(1))

Equipment and vessel repairs (19 USC 1466).[1]

Once the pre-penalty or penalty notice is issued (depending on the statute), the interested party to whom the notice is issued then has a specified number of days in which to submit a petition requesting relief or to simply pay whatever penalty is assessed.  The relief petition should be sent to the FPFO from whom it was originally issued.  A general rule is that if the penalty is issued for $100,000.00 or less, the initial review of the petition stays with the FPFO who would then respond based on a review of the newly presented facts and arguments within the petition.  If the penalty is issued for greater than $100,000.00 the FPFO would review it then send it directly on to the Chief, Penalties Branch, Office of Regulations and Rulings (ORR), that is, Mr. Cooper.

If the initial relief petition is denied and if there are any further facts or arguments that would potentially mitigate the issue that were not originally presented, then the interested party may submit a supplemental petition.  The FPFO (or ORR depending on the amount of penalty) will review again and decide whether to relieve the interested party or send the petition to either the Office of Field Operations or the Office of International Trade for further review.

If the penalty is already with ORR, Mr. Connors, will funnel the case out to one of the 18 attorneys working in his office for findings of fact and conclusions of law, which are then sent back to the FPFO for relay to the interested party.  Supplemental petitions are processed in the same manner as those with FPFO, i.e. they start with FPFO for initial review and further fact finding prior to being sent to ORR.  If a supplemental petition is denied, the case then proceeds to Border Security for final review and disposition.  Border Security takes into consideration the recommendations and comments of ORR, but ultimately makes the decision of whether to uphold the denial.

Mr. Connors also discussed the nature of timing when dealing with penalties and told attendees at the luncheon that when the process seems slow, it is because there are many parts that ultimately come together in making a final decision:  FPFO investigations at the outset and further investigations as necessary; hundreds of thousands of cases requiring processing; interested parties asking for extensions; etc.  Therefore, while the process can seem long and arduous, Mr. Connors assured his audience that CBP does what it can to speed things along even in light of the realities of running what amounts to a very, very large company.

The information in this article is meant as a review of Mr. Connors’s discussion of the penalty process and not as an exhaustive review of all that occurs or can occur with respect to CBP issued fines, penalties, and forfeitures.  If you find yourself in the situation of having received a detention notice, a pre-penalty or penalty notice, a seizure notice, or other type of CBP action, we can help you through the process and work towards release of your seized items or mitigation of your potential penalties.  With over 30 collective years of expertise in the field of international trade and customs, the attorneys at the Mooney Law Firm have seen hundreds of cases through this process and are well-equipped to present your best case to Customs in recovering your seized goods or in mitigating or removing your penalties.  Please do not hesitate to contact us (via email at nmooney@customscourt.com or smorrison@customscourt.com or by phone at 800-583-0250) with your issue or with questions regarding this and other processes dealing with international trade and customs.

For more information, either contact us or visit http://www.cbp.gov/xp/cgov/trade/priority_trade/penalties/.

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