Customs, FTA and FCPA Updates

New York

February 21, 2013 Copyright © 2013 Jon Fee All Rights Reserved

ALSTON&BIRD LLP

Customs Update

Customs reauthorization

• Two nearly identical

bills, HR 6642 and HR

6656, introduced at the

end of last Congress, are

expected to be re-

introduced in some form

in this Congress

• House Ways and Means

and Senate Finance staff

of both parties say

reauthorization is a

shared priority this year

Trade advocate and ICE budget

• Would create new “Trade Advocate” position to be filled by CBP Commissioner (US Chamber wants this to be a political appointee with Assistant Commissioner title)

• Would establish a separate budget for Immigration and Customs Enforcement (ICE)

COAC and Commercial Targeting

• Codifies and authorizes activities of Customs Operations Advisory Committee (COAC) – some want it to allow membership by registered lobbyists

• Creates CBP Commercial Targeting Division and allows advance trade data (ISF) data, now use for security purposes, to be used for commercial compliance targeting

CEEs and training

• Codifies establishment of Centers for Excellence and Expertise

• Requires seminars for CBP and ICE personnel on selected “trade enforcement issues,” including “evasion of duties on imports of textiles” (treated on a par with “enforcement of child labor laws”)

• Seminars can be taught by private parties

Importer ID and new importers

• Requires CBP to make regulations

for identifying importers and

providing penalties o up to

$10,000 against brokers who fail

to collect minimum identifying

information about importer

customers

• Establishes “new importer

program,” to “adjust” bond

amounts and provide screening

and oversight regarding new

importers

Non-resident importers

• Non-resident importers would have to designate an agent for service of process in the United States (this is already required by CBP regulations)

• The agent would be responsible for payment of duties and penalties if not collected from the non-resident

• Non-residents that are tier 2 or 3 C-TPAT participants would be exempt

Certified importers; IP provisions

• Establishes a “certified importer

program” for importers who are

both C-TPAT tier 2 and 3

participants and ISA participants

under which release of cargo

would be expedited by CBP and

other covered federal agencies

• Allows sharing of information

with trademark and copyright

owners in cases of suspected

counterfeiting or infringement

Trade remedies; drawback

• Contains several provisions

addressing evasion of trade

remedies (ADD and CVD)

• Changes from 3 years to 5 years

the time after importation or

release that imported

merchandise must be used in

manufacture (for manufacturing

drawback) or exported or

destroyed (for unused

merchandise and rejected

merchandise drawback

Chapter 98 changes

• Allows commingling of fungible goods for purposes of 9802.00.40 and 9802.00.50, relating to importation of goods after having been exported for repair

• Changes 9801.00.10 to allow, in addition to duty free treatment of US origin goods exported and returned, duty free treatment of other goods exported and returned within 3 years after export

Centers for Excellence and Expertise

CEE locations and coverage

• Electronics – Long

Beach (Active)

• Pharmaceutical, Health

and Chemicals – New

York (Active)

• Automotive and

Aerospace – Detroit

(Active)

• Petroleum, Natural Gas

and Minerals – Houston

(Active)

CEE locations and coverage

• Agriculture and Prepared Products – Miami

• Apparel, Footwear and Textiles – San Francisco

• Base Metals – Chicago

• Consumer Products and Mass Merchandising – Atlanta

• Industrial and Manufacturing Materials – Buffalo

• Machinery – Laredo

Participation

• Importers presently must apply

• Applicants must have an ACE portal and CBP prefers that they are C-TPAT or ISA participants

• Participants will continue to file entries at their preferred ports; but the CEE will process all of their entries

• The CEE will handle the participant’s entry summaries, PEAs, 520(d) refunds, Forms 28 and 29, liquidations and other actions

Other participation activities

• Resubmission of rejected

entry summaries

• Responses to Requests for

Information on Form 28

and Notices of Action on

Form 29

• Internal advice requests

• Protests

• Prior disclosures

Advantages to CBP

• Identify trusted traders

and shift emphasis to

higher risk importers

• CEEs will become more

involved in enforcement

over time

• CEEs will give CBP

better understanding of

industry and products

• CEEs will reduce

transaction costs

Advantages to participating importers

• Uniformity and consistency of treatment

• Participation means importers will get inquiries from only one source – the CEE – rather than from multiple ports

• CEEs should operate as resource centers for the importing community

• Training promised for CEE personnel should enhance their knowledge and industry familiarity

Concerns

• Some importers have close, productive relationships with their local ports and may be reluctant to transfer their customs business to a port thousands of miles away

• For textiles and apparel, it is unclear how CBP will shift human resources from the principal textile and apparel ports (such as Long Beach, New York, Norfolk, Charleston, Savannah, Miami, Laredo, El Paso, Seattle) to San Francisco

Concerns

• Highly skilled and experienced

CBP apparel import specialists

are presently located in these

other ports

• It is unclear whether those

personnel will physically move,

will participate with San

Francisco personnel virtually,

will be subordinate to San

Francisco personnel or will

change jobs

Concerns

• Some areas of expertise are not product specific, such as NAFTA and CAFTA expertise resident in Miami and border ports or QIZ expertise resident in New York and Norfolk, and expertise may be diffused among CEEs

• Some importers, particularly retailers, are not product specific, and might find their interests divided between, for example, Long Beach, San Francisco and Atlanta CEEs

TPP “short supply” origin rules

Some short supply background

• NAFTA –lengthy process and

bilateral agreement for yarns and

fabrics used for specific

classifications of garments

• CBTPA/AGOA/ATPDEA –

unilateral process used for yarns

and fabrics for specific

classifications of garments

• CAFTA/Colombia/Peru/Korea

/Panama – quick unilateral

process used for yarns and

fabrics for use in any garments

TPP short supply that isn’t

• USTR and CITA have invited proposals for a TPP short supply process that isn’t short supply at all

• The TPP governments, according to the United States, will negotiate short supply lists that will be part of TPP when implemented – no ongoing process and no opportunity for requests after implementation

• Short supply designations will be either permanent or of 3 years duration

Permanent advantage to CAFTA

• CAFTA short supply, with all

its faults, will remain available

to CAFTA producers and a

similar program will never be

available to TPP producers

• As new short supply yarn and

fabric candidates become

apparent, CAFTA producers

can request and obtain

designations that TPP

producers will never enjoy

• Is this really intended?

Another throwback: limited end use

• CITA and USTR proposed, as types of “short supply” features that they might consider for the list, certain cotton fabrics “for use in dress shirts” of certain classifications, and certain “laminated fabric” for use in “outdoor apparel”

• Invites uncertainty and mischief

“Duplicitous” CAFTA designations

• USTR and CITA identify 7 CAFTA designations for cotton flannel fabrics as “duplicitous,” suggesting that they might be combined into as single TPP short supply item for cotton flannel using broader specifications

• Unsure why USTR and CITA consider these CAFTA designations as deliberately deceptive

Production and finishing variances

• USTR and CITA suggest that all of the TPP designations should be made with ranges of specifications (e.g., 62 to 78 percent polyester, 20 to 35 percent nylon, 2 to 5 percent spandex)

• This would allow for effects of dyeing, napping and other finishing processes in the production of the fabric that appear when garments are tested by CBP

“Permanent” vs. “temporary”

• Some designations would be permanent, such as cotton velveteen fabric, rayon staple fiber and Harris Tweed fabric (this is reminiscent of single transformation provisions of NAFTA)

• Others would be temporary, of 3 years’ duration, like polyester staple and wool fabrics, polyester and rayon fabrics and certain laminated fabrics used for outerwear

Purpose of temporary designations

• “Provides additional,

immediate flexibilities to

allow the TPP partners

time to adjust

manufacturing and

sourcing plans”

• What, then, will happen

if TPP partners haven’t

adjusted by the end of 3

years?

SSL proposals

• USTR and CITA have circulated instructions for short supply list (SSL) proposals

• They created a website where proposals can be reviewed and commented upon

• Only one point of contact (POC) per company or per trade association can have access

Submissions for the SSL

• Submissions were requested

by a “soft” deadline of

February 15 for discussion

at the next round of TTP

negotiations

• Final submissions are due by

March 31

• Submissions must be made

by POCs directly to USTR

and CITA on a designated

template at a given email

address; they are not to be

made on the website itself

Review of submissions

• Submissions will be reviewed,

modified and edited and placed on

the website for review each week

• Submissions can identify short

supply candidates by HTS code and

by a subset within that HTS code

where a more detailed description is

necessary to differentiate the

unavailable input

• Submissions can specify a particular

end use and indicate whether the

designation is intended to be

permanent or temporary

Objections

• Objections must be made within 15

days after posting of a submission

• Must include information on the

ability of a TPP supplier to provide

the input, with details about current

and past production, quantities,

capacity, expansion plans, and other

factors

• Can be provided on the website

comment section; but business

confidential information can go

directly to USTR and CITA

Access

• Only POCs of US companies and trade associations have access

• Some have suggested that every interested company, even if it has no suggestion, should designate a POC to get access to the website and monitor what is going on

• Other TPP countries will presumably seek input from their industries on their own terms

FCPA review

FCPA origins

• FCPA was passed in the Carter

administration in the wake of a

1970s Lockheed scandal

involving bribes for foreign

defense contracts

• FCPA was also inspired by

“Bananagate,” where Chiquita

bribed the president of Honduras

to lower its taxes

• But the United States is only one

of many countries, including

China, Russia and the UK,

banning foreign bribery

Reality

• In April 2012, the New York Times

said the SEC asked some Hollywood

studios (including 20th Century Fox,

Disney and Dreamworks) about

payments to government officials in

China to gain the right to film and

show movies there

• The 2010 annual report of Kraft

Foods said it had been subpoenaed

by the SEC for FCPA reasons in

connection with an Indian company

that was part of its acquisition of

Cadbury

Reality

• In a November 2012 SEC filing,

Beam, Inc. said it started an

investigation into whether its

business in India was in compliance

with the FCPA and other US laws

• In 2010, gunmaker Smith &

Western came under FCPA

investigation after a sales executive

was charged with allegedly offering

a bribe to an FBI agent posing as a

government official of an African

country

Reality

• Since 2008, Avon has conducted an internal FCPA investigation after an employee wrote to the CEO about improper spending related to travel with Chinese government officials

• Avon has taken “certain personnel actions, including termination of employment of certain senior members of management,” according to its Form 10-Q filed with the SEC in November 2012

Avon’s problems expand

• The 10-Q says the case involves “travel, entertainment, gifts, use of third-party vendors and consultants, joint ventures and acquisitions, and payments to third-party agents, in connection with our business dealings with foreign governments and their employees”

• “The Company believes that it is probable that the Company will incur a loss related to the government investigations [and] such loss could be material”

And then there’s Walmart

• In December 2011, Walmart

disclosed that it might have

violated the FCPA, that it

started an internal

investigation and that it

alerted the SEC and DOJ

• It said, the investigation

involves “certain matters,

including permitting,

licensing and inspections”

and “discrete incidents in

specific areas”

Walmart story grows

• In April 2012, the NYT

reported that Walmart paid

bribes of $24 to officials in

Mexico to facilitate its rapid

growth there (about one-fifth of

all Walmart stores are in

Mexico)

• After discovering the bribes in

2005, according to the NYT,

Walmart’s leaders engaged in a

“massive cover up” until its

disclosure in 2011

Later Walmart disclosure

• The case could lead to “judgments, settlements, fines, penalties, injunctions, cease and desist orders or other relief, criminal convictions and/or penalties”

• “Could impact the perception among certain audiences of its role as a corporate citizen”

• “The Company can provide no assurance that these matters will not be material to its business in the future”

• Also mentions class action based on claims that the case affected stock value and eleven derivative suits against certain officers and directors who allegedly condoned or participated in illegal activity

Legal cost

• Walmart’s company filings say

that it spent $51 million in legal

fees in 2012

• Avon has spent $280 million in

legal fees

• Weatherford International, an oil

services company, spent $125

million in its own probe of

possible FCPA and related

export violations for dealings in

Africa, Iraq and Europe

Top ten FCPA settlements

1. Siemens (Germany): $800 million in 2008

2. KBR / Halliburton (USA): $579 million in 2009

3. BAE (UK): $400 million in 2010

4. Snamprogetti Netherlands B.V. / ENI S.p.A (Holland/Italy): $365 million in 2010

5. Technip S.A. (France): $338 million in 2010

6. JGC Corporation (Japan) $218.8 million in 2011

7. Daimler AG (Germany): $185 million in 2010

8. Alcatel-Lucent (France): $137 million in 2010

9. Magyar Telekom / Deutsche Telekom (Hungary /Germany): $95 million in 2011

10. Panalpina (Switzerland): $81.8 million in 2010

Who’s subject to the FCPA

• Any “issuer” (US or foreign) that

has securities registered, or which is

required to file reports, under the

Securities and Exchange Act of 1934

• Any “domestic concern,” including

any individual who is a US citizen,

national or resident, and any

corporation or partnership that has a

US principal place of business or

that is organized under the laws of a

US state

Who’s subject to the FCPA

• Any other person or entity,

other than an issuer or

domestic concern, “while in

the United States”

• Each of the foregoing

includes any officer,

director, employee, or agent

of such person or any

stockholder acting on behalf

of such person

Extraterritorial reach

• Notice that foreign companies

can be prosecuted under the

FCPA if they violate the Act

anywhere in the world “while

in” the United States

• Similarly, foreign companies

can be prosecuted under the

similar UK Bribery Act if they

violate the Act anywhere in the

world “and carry on a business

or part of a business in the

United Kingdom”

FCPA violations

• “Corruptly” (i.e., with corrupt

intent) to make a “payment”

• To a “foreign official” or

“foreign political party” or “party

official” or “candidate for foreign

political office” or “any person”

while knowing the payment will

be given to such an official, party

or candidate

• For the purpose of obtaining or

retaining business for or with, or

directing business to, any person

Comments

• Foreign officials can be minor officials,

officials of state-owned businesses,

members of royal families and other

non-obvious persons

• Third party payments are sensitive; the

US Justice Department warns to exercise

due diligence and be wary of unusually

high commissions, lack of transparency

in expenses, lack of qualifications of

joint venturers, a history of corruption

in the country where business is

conducted and other “red flags”

Exception – “grease payments”

No violation for payments for “routine governmental action,” such as:

• permits, licenses or other documents to qualify a person to do business in a country

• visas or work orders

• police protection, mail delivery, scheduling of inspections

• phone, power or water services, loading cargo, protecting perishables

• similar nondiscretionary actions

Affirmative defenses

• The payment was lawful under the written laws of the foreign official’s or political party’s country

• The payment was a reasonable and bona fide expenditure, such as travel or lodging, related to (a) promotion, demonstration or explanation of a product or service, or (b) the execution or performance of a contract with a foreign government or agency

FCPA accounting provisions

• A company with listed

securities must keep

books and records that

accurately and fairly

reflect the transactions of

the company and must

maintain adequate

internal controls

• Intended to complement

the anti-bribery

provisions

Penalties under the FCPA

• $2 million criminal penalty for

corporations and other business

entities

• $100,000 and five years

imprisonment for officers,

directors, employees and agents

• The Alternative Fines Act

provides a criminal fine of twice

the benefit that the defendant

sought to obtain by the corrupt

payment (this is the part that

yields such big settlements)

Penalties under the FCPA

• Civil penalties assessed

by the SEC can be as

large as the greater of a

specified amount or the

amount of pecuniary gain

to the violator as a result

of the violation

• The specified amount is

$100,000 for natural

persons and $500,000 for

other persons

Other FCPA sanctions

• Bar from government

contracts

• Ineligibility for export licenses

• Suspension from CFTA,

OPIC and other agency

programs

• Loss of IRS tax deductions

for the expense of unlawful

payments

• Private right of action (e.g., by

a competitor) under RICO

Opinion

• DOJ will issue a written opinion

upon request by any US company

or national as to its enforcement

intentions regarding proposed

business conduct

• DOJ will issue the opinion within

30 days

• Conduct for which DOJ has issued

an opinion stating that conduct

conforms with current enforcement

policy will be entitled to a

presumption of conformity with

the FCPA

November 14, 2012 Resource Guide

A Resource Guide to the U.S.

Foreign Corrupt Practices Act;

available at

http://www.justice.gov/crimi

nal/fraud/fcpa/guidance/

Self Reporting, Cooperation, Remedial Efforts

• Many expected helpful commentary

in the Guide on these topics; but the

Guide is disappointing

• For criminal matters, the Guide

merely makes cross references to

existing, general materials in

Principals of Federal Prosecution of

Business Organizations and the U.S.

Sentencing Guidelines

• No safe harbor and no special rules

for cooperation or remedial effort

Guide on best practices

• Commitment from senior

management

• Codes of conduct and

policies and procedures

• Oversight, autonomy,

resources

• Risk assessment

• Training and continuing

advice

Guide on best practices

• Incentives and disciplinary measures

• Third party due diligence and payments

• Confidential reporting and internal investigation

• Continuous improvement: periodic testing and review

• Pre-acquisition due diligence and post-acquisition integration

Jon Fee

Alston & Bird LLP

950 F Street, N.W.

Washington, D.C. 20004

202 239 3387

jon.fee@alston.com