Written by Susan Kohn Ross

For many months, the customs brokerage community has been expecting to see updates to the existing regulations. They finally came out in the Federal Register on June 5, 2020, see here. Comments are due on or before August 4, 2020. While much of what is in the proposed revisions is not controversial and fits nicely into CBP’s stated purpose to “modernize” the regulations, one update is totally out of line – and CBP should know better! For all the positive steps forward these revisions accomplish, CBP has yet again failed to comprehend the role of the customs broker. The way the proposed language is written, CBP is again trying to turn customs broker into Junior G-Men. As worded, brokers would be turned into investigators and enforcers for CBP, and that attempt alone totally undermines all the good which is otherwise accomplished, AND fails to understand the role of the customs broker in international trade!

There is a little concern about all brokers having a national permit and being regulated at the Center of Excellence and Expertise level. Increasing the filing and processing fees is also understandable as is the preference for electronic data filing. At the same time, what is particularly notable (beyond the attempt at making brokers into Junior G-Men) is the lack of anything remotely approaching the topic of continuing education. For months this was a hot topic with lots engagement between CBP and the brokerage community – and now nothing!

One change CBP made really just underscores what has been a long-standing requirement. However, now that so many brokerage operations are part of multi-country forwarding, courier and/or 3PL operations, the long standing concern by CBP that individuals outside the U.S. are making decisions about classification and value has again been vocalized. To address this point of concern, the new regulations make clear that “customs business” must be conducted in the U.S., which includes entry and admissibility determinations, so classification, value, etc., and, of course, entry filing.

The elimination of all but national permits is certainly reasonable, but allowing someone to apply for the national permit simply because they are a licensed broker flies in the face of basic corporate law, which requires the person acting on behalf of the company to have “apparent” authority. To eliminate any doubt that the applicant had that authority, the old rule was the person filing the application had to be a corporate officer. CBP is doing away with that requirement. Perhaps CBP thinks having a license provides apparent authority, but many individual brokers would tell you they are part of a larger team which makes joint decisions, meaning simply having the license is not the determining factor.

Another topic on which CBP may have created mischief has to do with who may request records from a broker. The current law is found at 19 C.F.R. 111.24 and states, the broker is not to release the importer’s confidential information except to the importer, the relevant surety/ies, the Regulatory Audit Field Director, the Special Agent in Charge, the Port Director and “other duly accredited officers or agents of the United States, except on subpoena by a court of competent jurisdiction.” The potential challenge is the proposed change eliminates the various titles and instead allows “representatives of the Department of Homeland Security (DHS), or other duly accredited officers or agents of the United States, except on subpoena or court order by a court of competent jurisdiction, or when authorized in writing by the client.” Now, in principle, this change seems relatively tame. Perhaps, but given history, there remains the potential that someone at DHS who is not familiar with what brokers do or the regulatory framework in which they operate (and most have no idea) will simply demand records orally or in an overly broad or otherwise objectionable manner. The good news is this does not now happen often, but that is due in large measure to the fact that brokers have taken to heart the need to have such requests made in writing. How many more DHS staffers might need to be educated under this proposed change?

CBP has also expanded the definition of responsible supervision and control, the corollary to the importer’s reasonable care standard. Reasonable care appears at 19 U.S.C. 1484(a)(1) and has been defined by CBP as the importer’s obligation to make sure the classification and value declared at time of entry are accurate and that any admissibility requirements have been met. Responsible supervision and control has long be defined by regulation at 19 C.F.R. 111.1 to include: “… While the determination of what is necessary to perform and maintain responsible supervision and control will vary depending upon the circumstances in each instance, factors which CBP will consider include, but are not limited to: 1) training, 2) instructions and guidelines to employees; 3) volume and type of business; 4) reject rate; 5) maintenance of the proper reference materials; 6) frequent interaction between the individually licensed broker and the other employees; 7) the frequency of visits by the licensed broker to the branch offices where no license holder is present; 8) the frequency of audits and reviews by the licensed broker; 9) how involved is the licensed broker in the overall brokerage operation; and 10) anything else which “indicates” the licensed broker has a “real interest in the operations” of the broker.

Under the proposed revisions, first, it will no longer be necessary to have a licensed broker in each office, which is certainly a welcome change. Instead, the standard becomes that the broker must “employ a sufficient number of licensed brokers relative to the job complexity, similarity of subordinate tasks, physical proximity of subordinates, abilities and skills of employees, and abilities and skills of the managers.” Admitting what is required varies, CBP goes on to expand the list of factors it will consider by adding: (11) The timeliness of processing entries and payment of duty, tax, or other debt or obligation owing to the Government whether owed by the broker or where the broker is transmitting payment on behalf of the importer; (12) Communications between CBP and the broker; (13) The broker’s responsiveness and action to communications, direction, and notices from CBP; (14) Communications between the broker and its officer(s); and, (15) The broker’s responsiveness and action to communications and direction from its officer(s). What one quickly comes to realize is this continues to be a somewhat subjective determination. What is clear is if you fail to pay your bills or timely submit funds paid by importers, and/or ignore instructions from CBP, you are in trouble with the agency. Otherwise, it is difficult to see any clarity. This need for clarity is, of course, driven home by the case brought at one of the southern border ports a few years ago against a local customs broker by CBP in circumstances where the ultimate outcome was CBP wrote and filed the motion to dismiss!

Another change worthy of note has to do with the dealings between brokers and unlicensed parties. Typically, what causes CBP concern is the importer’s relationship is with the freight forwarder, not the broker. The forwarder hires the broker and directs what is to be done. The current regulation can be found at 19 C.F.R. 111.36(c)(3) and makes clear the forwarder cannot bar the broker from having direct contact with the importer, although for relationship reasons some may still foolishly try to do so. Seeking to drive the point home more forcefully, CBP will now bar the importer from issuing a power of attorney to the forwarder that allows the forwarder to issue the power of attorney to the broker. Any power of attorney provided to the broker must come directly from the importer. CBP states this step is needed to deal with identity theft, supply chain security, fee transparency and “help ensure that unlicensed persons are not benefitting from the customs business conducted.” While that sounds reasonable at first, why not just revoke the ruling which allows this practice? Also, from all the audits conducted, CBP should have learned long ago, there are ways to bill charges which include the brokerage fee which are compliant with the regulations, in letter and spirit!

Growing up, all of us learned there are boundaries to our actions, and consequences when we cross those boundaries. For years, CBP has tried to fashion a way that it could gain the means to have brokers help it enforce the law against importers CBP thinks are bad guys. If the importer is a truly bad apple, the only brokers who might want to deal with them are often co-conspirators. Otherwise, the standard has been if the importer will not follow the broker’s advice regarding compliance, the broker fires the importer as their customer. CBP has been repeatedly reminded that it cannot and should not turn brokers into informants for two very important reasons: 1) the identity of the broker will come out in any trial which follows (and likely earlier in the process); and 2) the broker as the agent owes a duty of loyalty to its principal – the importer. CBP knows this is the state of the law and yet it has crossed the line – and done so unabashedly!

Where CBP has gone overboard, and by a very large margin, is when comes to making brokers into Junior G-Men! It has long been the case (see 19 C.F.R. 111.32) that, brokers are not to file or assist in the filing of false claims or documents. Frankly, it seems all would agree that is a no-brainer! The regulations goes on to say the broker should not give false or misleading advice, again, a no-brainer. If the new provision stopped here, everything would be fine. However, the next sentence is basically outrageous. It reads: “…A broker also must document and report to CBP when the broker separates from or cancels representation of a client as a result of determining the client is intentionally attempting to use the broker to defraud or otherwise commit any criminal act against the U.S. Government.”

What CBP has basically said with this ill-advised proposal is the broker is now an investigator and enforcer for CBP – report the impropriety to CBP or else! In short, fink on your importer or you are in trouble with the agency! This is a total breach of the duty of loyalty the broker owes to the importer. It is equally a breach of the obligation of the broker-agent to act without conflict of interest on behalf of his importer-principal. Making matters worse, the first time a broker does rat out his importer and this becomes public knowledge (and you know it will), that brokerage operation will be quickly out of business. No importer wants to work with a broker that is so unprofessional that it informs on the importer to CBP rather that find an earlier point in time to cut ties with that importer. Frankly, prudent brokers can be expected to fire questionable importers long before they have actual knowledge the importer is acting intentionally. Every other professional does the same thing. Brokers should not be put in a compromising position.

Did CBP really forget about the basic principal-agency and good judgment rule: fire clients when they do things you consider improper, but keep your mouth shut so you don’t get sued! The role of the broker is to help the importer become compliant. The broker is not a Junior G-Man, and shame on CBP for ignoring the difference!