FTZB Issues Final Rule Revising FTZ Regs (Final Part – Annual Reports, Fines)

The Foreign Trade Zones Board has issued a final rule, effective April 30, 2012¹, to comprehensively revise and update the Foreign Trade Zone regulations in 15 CFR Part 400. Key revisions in the final rule pertain to activities in and procedures for zones in which an imported component is combined with one or more other components to create a different finished product, and expedited access to FTZ benefits for U.S. manufacturers.

The final rule, in response to comments received by the FTZB, contains many substantive changes from the proposed rule. Changes from the proposed rule include: (1) a new definition of production which, as in the proposed regulations, replaces the manufacturing/processing concepts from the prior regulations; (2) an entirely new two-stage advance approval process, instead of the proposed elimination of advance approval, except in cases of tariff inversion, AD/CV & section 337 proceedings, and scrap or waste; (3) new separate processes for obtaining production authority and subzone designation, as well as a simpler and quicker process for obtaining subzone designation; (4) changes to the public utility and uniform treatment provisions; and (5) provisions for fines only in cases of late annual reports and uniform treatment violations (i.e., production-related violation fines will only be assessed by U.S. Customs and Border Protection (CBP) and not the FTZB).

This is Part IV, the final part of a multi-part series of summaries of the final rule, and highlights the new regulations’ more extensive provisions on annual reporting requirements, grantee liability, and penalties, including the final rule’s narrowed focus of violations subject to fines. (See ITT’s Online Archives 12022903 for Part I (Production Approval), 12030109 for Part II (Subzone Designation), and 12030212 for Part III (Public Utility & Uniform Treatment.)

Annual Reports

The FTZB’s final rule clarifies and expands on the annual reporting requirement. The new regulations set the deadline for grantees' submission of their annual report to the FTZB at 90 days after the end of the reporting period, but grantees may request an extension of the deadline from the Executive Secretary. Each zone operator must submit a complete and accurate annual report to the zone grantee in a timeframe that will enable the grantee’s timely submission of a complete and accurate annual report to the FTZB.

The regulations also stipulate that, in the event that a grantee has not received all necessary annual report information from an operator in a timely manner, the grantee may submit its annual report on time and note the absence of the missing information.

Grantee Liability and Exception

The final rule states that a grant of authority does not make the grantee liable for violations by zone participants. According to the regulations at 15 CFR 400.46(a), the role of the zone grantee is to provide general management of the zone to ensure that the reasonable needs of the business community are served, and it would not be in the public interest to discourage public entities from zone sponsorship because of concern about liability without fault.

However, the new regulations create an exception to the grantee exemption from liability. A grantee could create liability for itself that otherwise would not exist if the grantee undertakes detailed operational oversight or direction of zone participants (e.g., review of an operator’s inventory-control or recordkeeping systems, specifying requirements for such a system to be used by an operator, and review of CBP documentation related to an operator’s zone receipts and shipments).

Ability of FTZB to Impose Fines

With respect to fines, the prior regulations contained a reference only to the ability of the FTZB to impose fines for violations of the FTZ Act and 15 CFR Part 400. The new final rule clarifies in what circumstances and in what amounts fines can be imposed, and in conjunction with the section on grantee liability at 15 CFR 400.46, defines who is responsible for violations and resultant fines.

Specifically, the final rule states:

Fines of up to $1,000/day for Annual Report, Uniform Treatment Violations. Fines are authorized solely for specific violations of the FTZ Act or the FTZB regulations. Each specific violation is subject to a fine of not more than $1,000 (as adjusted for inflation pursuant to 15 CFR 400.62(j)), with each day during which a violation continues constituting a separate offense subject to imposition of such a fine. Fines may be assessed for the following violations:

• Violations Involving Requirement to Submit Annual Report: A grantee’s failure to submit a complete and accurate annual report pursuant to 15 CFR 400.51 constitutes a violation subject to a fine. Consistent with the grantee liability provisions at 15 CFR 400.46, if the grantee submits a timely report identifying any operator that has not provided complete and timely information in response to a timely request by the grantee, the grantee shall not be subject to a fine (i.e., only the operator will be subject to a fine).
• Violations Involving Uniform Treatment. Failure by the grantee or a person undertaking one or more zone-related functions on behalf of the grantee to comply with the uniform treatment requirement of the FTZ Act and 15 CFR 400.43 constitutes a violation subject to a fine.

(The FTZB states that it has specifically excluded imposing fines for violations of production activity Part 400 regulations, because such violations are already subject to fines by CBP, and the FTZB wants to avoid subjecting a zone participant to fines from two different agencies for a single action.)

Parties Given Opportunity to Dispute Assessment. When the FTZB or Executive Secretary has reason to believe that a violation warranting the imposition of a fine has occurred, the responsible party(ies) must be notified and provided with no less than 30 days to respond. The Executive Secretary shall conduct a hearing if requested or otherwise appropriate.

The Executive Secretary will then make a recommendation no earlier than 15 days after the deadline for the party(ies) response. If the recommendation is for an affirmative determination of a violation, the Executive Secretary will also recommend the amount of the fine to be imposed.

The FTZB will then make a determination regarding the violation and fine based on the Executive Secretary’s recommendation. However, for related actions where the total sum of the recommended fines is no more than $10,000 (or $50,000 in the case of annual report violations), the FTZB delegates to the Executive Secretary the authority to make a determination.

Mitigating Factors. Fines may be reduced or eliminated based on specific evidence presented by the affected party. Mitigating evidence and argument pertaining to mitigating factors must be submitted within 30 days of the determination to impose a fine.

Specifically, mitigating factors include: (1) a good record of a violator over the preceding 5 years with regard to the type of violation at issue; (2) the violation was due to the action of another party despite the violator’s adherence to the FTZ Act and the FTZB regulations; (3) immediate remedial action by the violator to avoid future violations; (4) the degree of a violator’s cooperation with the FTZB in ascertaining the facts establishing the violation; (5) a violation’s resulting from a clerical error or similar unintentional negligence; and (6) such other factors as the FTZB, or Executive Secretary, deems appropriate to consider.

Full Payment of Fine Within 30 Days. After the evaluation of mitigating factors, the fine is assessed. Full payment of an assessed fine must be made within 30 days of the date of the assessment (or a longer period if specified).

Suspension of Activated Status

According to the FTZB, in light of the narrowed focus of the fining provision, they have broadened the potential reach of suspension of activated status. The FTZB or Import Administration may, after allowing the responsible party(ies) to respond, instruct CBP to suspend the activated status of the zone operation in question if: (i) a fine has not been paid within 90 days of the specified deadline; (ii) there is a repeated and willful failure to comply with a requirement of the FTZ Act or the FTZB regulations; or (iii) there is a repeated and willful failure to comply with a prohibition or restriction on activity imposed by an order.

Suspension will remain in place until the fine is paid and/or the violation is corrected.

¹While the final rule is effective April 30, 2012, sections 400.21-400.23 (Application to establish a zone, Notification for production authority, and Application for production authority, respectively), 400.25 (Application for subzone designation) and 400.43(f) (certain waivers regarding uniform treatment), which contain information collection requirements that have not yet been submitted for OMB review, will be effective at a later date. In addition, the final rule has certain sections (e.g., regarding public utility, uniform treatment, and zone schedules) where compliance must occur no later than two years after the publication date of the final rule.

(See ITT’s Online Archives 12022730 for summary of FTZB issuance of final rule and webinar series to provide education on the new regulations.

See ITT’s Online Archives 12022109 for initial summary of FTZB final rule. See ITT’s Online Archives 12021744 for summary of OMB approving this final rule, just two days after extending its review.

See ITT’s Online Archives 10123022 (part I), 11010325 (part II), and 11010630 (part III) for multi-part series of summaries of proposed FTZ rule. See also ITT’s Online Archives 11071819 for summary of trade’s comments on the proposed regulations, which supported the underlying goals of the revisions but stated that the proposed rule must be revised, clarified, and made less burdensome.)

FTZB’s unofficial summary of key provisions of the revised regulations, full text of the revised regulations, as well as side-by-side comparison of the final, proposed, and prior regulations are available here.

FTZB contact - Andrew McGilvray (202) 482-2862

ITA Contact - Matthew Walden (202) 482-2963