Customs Modernization Efforts Begin Legislative Journey

Introduction

Over the last few decades, rapid technological changes, the expansion of e-commerce, and accelerating globalization have altered the nature of global trade. In view of emerging challenges and risks, in 2018, U.S. Customs and Border Protection (“CBP”) launched the 21st Century Customs Framework (“21CCF”) initiative to engage stakeholders and identify opportunities for modernizing the agency’s authorities and processes. Earlier this month, these efforts entered a new phase with the release of draft legislation that would impose new obligations on online marketplaces and strengthen CBP’s data collection and enforcement authority in relation to parties beyond the “importer of record.” For the trade community, this draft bill previews potential Congressional and CBP priorities and signals that momentum has started gathering towards eventual legislation.

Background

The current push to update the statutory framework governing the importation of goods to the United States must be viewed in the context of prior legislative reforms and recent stakeholder engagement in CBP’s 21CCF initiative.

In 1993, Congress enacted the Customs Modernization Act (“Mod Act”), or Title VI of the North American Free Trade Agreement Implementation Act.[1] The Mod Act was the last major overhaul of CBP’s enforcement framework and aimed to clarify the responsibilities of both the trade community and CBP to facilitate greater cooperation under the rubrics of “informed compliance” and “shared responsibility.” For example, the Mod Act strengthened CBP’s obligation to provide information regarding the trade community’s rights and obligations under CBP’s regulations and other related laws.[2] In turn, importers were required to exercise “reasonable care” when entering goods.[3]

The Trade Facilitation and Trade Enforcement Act of 2015 (“TFTEA”)[4] implemented additional reforms. TFTEA included the Enforce and Protect Act, which authorized CBP to investigate the evasion of antidumping and countervailing duties; enhanced scrutiny of products made with forced labor; and extended funding for CBP’s Automated Commercial Environment (“ACE”) system, enhancing its role as a “single window” where businesses can electronically transmit import and export data to CBP and various partner government agencies with increased efficiency.[5]

The 21CCF is the latest development in CBP’s effort to modernize customs operations. Initiated in 2018, it is a landmark effort to update laws, policies, and processes to address modern trade challenges involving new actors, industries, and modes of conducting business.[6] Based on input from stakeholders received through public comment periods and a public meeting[7], CBP formulated five “foundational pillars”:

1. Enhance facilitation and security through 21st-century processes: CBP is seeking to modernize overly burdensome or outdated processes to improve efficiency.
2. Ensure seamless data sharing and access: CBP aims to leverage data to facilitate trade and law enforcement, while exploring ways to reduce the duplication or unnecessary capture of data.
3. Define customs and trade responsibilities for emerging actors: CBP is developing rules for business models built around e-commerce and small packages.
4. Employ intelligent enforcement: CBP seeks to utilize technology, big data, and predictive analytics to detect non-compliance and/or fraudulent activities.
5. Protect and enhance customs infrastructure through secure funding: CBP is exploring updates and enhancements to ACE.[8]

While CBP can work to realize certain 21CCF objectives under existing law, it became clear that in many respects, the statutory framework was outdated. The Mod Act predated the rise of e-commerce and the high-frequency, low-value shipments it facilitates. By contrast, the current legal framework is built for containerized shipping. CBP’s compliance and enforcement framework is focused on the obligations of “importers of record,” a concept not readily translated to e-commerce. Additionally, since the Mod Act’s passage, the reduction of trade barriers and the emergence of new players in the global market, significantly China, have shifted trade patterns and, in some contexts, increased supply chain risks. While TFTEA enhanced certain CBP enforcement authorities, it did not account for these broader and more fundamental transformations in global trade.

Senator Cassidy’s Draft

Against this backdrop, in early November, Senator Bill Cassidy released a draft Customs Modernization Act. Senator Cassidy indicated that his draft was developed in consultation with CBP, and sought input from industry, noting that the draft would be refined further.

Below, we highlight key provisions and issues of potential concern in the Cassidy draft relating to e-commerce, de minimis shipments, intellectual property rights, data collection, and penalties.

1. E-Commerce

The draft expands existing recordkeeping requirements to any “commercial or marketing platform or marketplace.”[9] This change would require online marketplaces to retain for a period of five years information kept in the ordinary course of business related to imported goods, and reflects CBP’s goal of extending its visibility into supply chains by focusing on the activities of entities beyond “importers of record.”[10]

2. De Minimis Shipments

The draft proposes new information submission requirements for eligibility under Section 321 of the Tariff Act of 1930[11] to make duty-free de minimis shipments (less than $800 in value) with almost no customs formalities.[12] The draft provides that the required information may—subject to CBP rulemaking—include information relating to sales or purchases made through an “electronic commerce platform or marketplace.”[13] Clues to the information that CBP might require can be found in two CBP pilot programs that since 2019 have tested the utility of receiving advance data for de minimis entries. One program targeted at online marketplaces has enabled submission of information including country of origin, shipper, ultimate consignee, merchandise description, and value—but not tariff classification or an entry summary form. Another program allows customs brokers and importers that file their own entries to submit a new Entry Type 86 containing tariff classification, country of origin, and fair retail value, among other information.[14]

3. Intellectual Property Rights

Enhancing the enforcement of Intellectual Property Rights (“IPR”) has been a legislative focus since TFTEA in 2015. The Cassidy draft offers two major proposals. First, it would give CBP authority to share nonpublic information, including that generated by online marketplaces, with rights holders, and also to share with online marketplaces and other intermediaries information that would help combat IPR infringement.[15] These provisions could enhance the ability of online marketplaces to take action against counterfeit products and sellers, while also imposing new data disclosure obligations. Furthermore, the draft seeks to broaden the reach of penalties for IPR violations in ways that could affect online marketplaces and other intermediaries.[16] While current laws impose civil penalties on persons aiding or abetting the importation of counterfeit merchandise,[17] the Cassidy draft proposes to penalize anyone “in any way concerned” in the importing and exporting of infringing merchandise.[18]

4. Data Collection

Cassidy’s draft expands CBP’s ability to collect and use data from importers and other parties further upstream in the import supply chain. Under current law, advance information must be provided to CBP for cargo brought into or sent from the U.S. to ensure cargo safety and security, but CBP may not use that data for “any commercial enforcement purposes, including for determining merchandise entry.”[19] The Cassidy draft would authorize CBP to use the data for “any lawful purpose.”[20] According to some stakeholders, using advance information for enforcement purposes would disregard the rough, preliminary nature of such information.[21] The draft also strengthens CBP’s authority to demand information for enforcement purposes, providing that non-compliant parties may be subject to adverse inferences for compliance and penalty assessment purposes.[22] Lastly, his draft would extend CBP’s summons authority to a person that “participated in, facilitated, or was otherwise connected or related to the importation of merchandise.”[23] Consistent with other proposed amendments, this language would extend legal obligations to reach parties connected less directly to the importation.

5. Penalties

The Cassidy draft proposes significant changes to civil penalties for compliance violations. First, it removes “gross negligence” as a culpability standard (retaining “negligence”), and broadens the scope of “fraudulent” conduct.[24] Some violations that could be considered grossly negligent under current law, such as disregarding a CBP ruling or a CF-29 Notice of Action, may qualify as fraud under the draft and thus be subject to heavier penalties. Moreover, the draft proposes to subject to penalties all persons who “direct or facilitate” a prohibited entry, in addition to the importer.[25] At the same time, the draft weakens pre-penalty procedural protections. For example, CBP currently must issue pre-penalty notices where the penalty claim exceeds $1,000, but the draft would dramatically increase the threshold to $500,000; in circumstances of fraud, CBP will not be required to issue any pre-penalty notice.[26]

Implications for the Trade Community

As customs modernization efforts turn toward a legislative phase, the Cassidy draft offers a preview of potential priorities and provides the industry with an opportunity to identify areas of concern. Companies involved in global trade may want to consider how the anticipated legislative process could be used to address their interests across a spectrum of trade topics—many not addressed in the draft—including:

• Streamlining and simplifying the entry process and data required by CBP;
• Promoting transparency through formal channels for CBP to share data, including in relation to enforcement data and trends;
• Standardizing and improving consistency across CBP offices and ports in approaches to audits and enforcement;
• Enhancing benefits for importers that demonstrate compliance and participate in CBP trusted trader programs such as Customs-Trade Partnership against Terrorism (“C-TPAT”);
• Improving procedures governing CBP’s forced labor investigations and enforcement; and
• Expanding the use of automation across CBP operations.

More broadly, stakeholders should prepare for long-term engagement with Congress and CBP as part of the legislative process. Senator Cassidy’s office presently does not have a timeline for introducing their draft as a bill. The Mod Act took several years to pass. The anticipated legislative process will likely also be protracted, given that the Congressional committees with primary responsibility for trade matters will approach the effort with caution and much deliberation.

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Covington’s diverse Customs and Trade Policy teams are uniquely positioned to provide thoughtful strategic advice to clients seeking to monitor and prepare for changes to customs laws and regulations. We count among our ranks former CBP Commissioner Alan Bersin and former Commissioner and Chairman of the U.S. International Trade Commission Shara Aranoff.

If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade practice: