NAFTA importers be on the lookout for this… a win in your book!

NAFTA importers will now not be held responsible for negligence as long as you are practicing reasonable care, based on this recent decision made by Office of Regulations and Rulings of the Office of International Trade.

U.S. Customs and Border Protection has recently reversed a steep penalty for negligence in exercising reasonable care when it comes to NAFTA Certificates of Origin.

An importer’s reliance on NAFTA Certificates of Origin supplied by the exporter show that an importer “exercised reasonable care” when it made NAFTA claims, even if the certificate is later found to be problematic, CBP headquarters said recently in a review of penalty issued by the Port of Laredo. [source: International Trade Today]

Ted Murphy, Partner of Baker & McKenzie LLP explains,

“The issue involves claims made under NAFTA that are later corrected/revoked by the importer after being informed by the exporter that the goods no longer qualify – and more specifically what the importer is liable for in such a situation.

In the situation involved in the attached decision, a U.S. company imported goods from a related party in Mexico and claimed NAFTA preference based on a NAFTA Certificates of Origin provided by the exporter/producer.  The NAFTA eligibility of the goods hinged on the fact that a key component was itself NAFTA originating.  The exporter/producer had a NAFTA Certificate of Origin covering this component from an unrelated supplier.

Based on the applicable rule of origin, the finished goods would originate, provided that this component originated.  Since it had a NAFTA Certificate of Origin from the unrelated component supplier, the exporter/producer certified that the finished goods were originating and the importer made claims based on the exporter/producer’s NAFTA Certificate of Origin.

Photo Source: depositphotos.com/vepar5

Photo Source: depositphotos.com/vepar5

Years after the claims were made, the unrelated component supplier advised that its component was actually of Chinese origin and revoked its NAFTA Certificates of Origin.  This resulted in the finished goods no longer qualifying for NAFTA.  After confirming this analysis, the exporter/producer notified the U.S. importer that the goods it had previously certified as being NAFTA originating no longer qualified.

The U.S. importer then filed a corrected declaration with CBP at the appropriate Port of entry pursuant to 19 C.F.R. §181.21(b).  The corrected declaration identified all of the effected entries over multiple years.

In terms of duties, however, the importer only tendered the duties and Merchandise Processing Fees on the unliquidated entries.  The importer’s position was that it had acted with reasonable care when it relied on the NAFTA Certificate of Origin voluntarily provided by the exporter/producer (and the exporter/producer acted reasonably when it relied on a facially valid NAFTA Certificate of Origin for the component voluntarily provided by the third-party supplier).

The fact that the supplier revoked its certification years after the fact does not make those claims negligent acts.  If the importer was not negligent, there was no basis to reopen the liquidated entries.

The Port disagreed and chose to treat the corrected declaration as a prior disclosure (i.e., an admission of a culpable violation of the law).  Since the importer did not tender all of the duties covered by the “prior disclosure,” it was deemed to be invalid and the Port initiated a penalty action.  The Port sought duties and MPF of approximately $400,000 and a penalty based on a claim of negligence of approximately $800,000.

After much back and forth, the importer was ultimately able to get the case referred to CBP Headquarters for a decision.  As you will see from the attached, CBP Headquarters confirmed that an importer that relies on a facially-valid NAFTA Certificate of Origin is exercising reasonable care and that, if that certificate is later revoked, the importer is not liable for the duties or MPF on the liquidated entries.  The Port’s $1.2 million demand was remitted in full.
This an issue that any company that imports under NAFTA should be aware of, as the approach taken by the Port involved here is not an isolated instance.  We have 3 similar cases currently pending at other Ports and are aware of at least one other situation handled by another firm.  Importers should remember (particularly since CBP seems not to) that NAFTA (unlike our more recent FTAs) is an exporter-based agreement, which means that an importer who relies on a facially-valid NAFTA Certificate of Origin voluntarily provided by the exporter has a good argument that it exercised reasonable care.

If that certificate later turns out to be incorrect, then the importer will be liable for the duties and fees on the unliquidated entries (i.e., the past 10 months or so), but not on the liquidated ones.  As demonstrated by the attached, remembering this can help ensure that the company does not tender monies to the government unnecessarily.”

Click here to read CBP’s Decision