CIT Denies CBP Penalty Motion for False Country of Origin; Failed to Show Materiality

August 31, 2012 by Brian Feito|Penalties and Courts

The Court of International Trade rejected CBP’s motion for over $80,000 in penalties from U.S. company Active Frontier International, Inc. (AFI) for falsely declaring country of origin on seven entries of apparel made during 2006 and 2007. CBP failed to establish that the misstatements were “material,” as required by 19 USC 1592 for imposition of a penalty, CIT said. The denial was without prejudice, so CBP is free to amend its complaint.

CBP argued that (1) the misstatements were material because the apparel would have been subject to quota if country of origin had been correctly identified; and (2) the misstatements were also material because CBP bases its policy decisions on import data, which are distorted by country of origin misstatements. But CIT said (1) CBP failed to identify whether all of the merchandise covered by the entries was subject to quota; and (2) basing materiality on distortion of import data is too broad of an interpretation of Section 1592.

(CBP alleged that AFI falsely declared the country of origin on seven entries of apparel made during 2006 and 2007. Each of AFI’s entries showed one of three countries, Indonesia, Korea, or the Philippines, as the country of origin. CBP alleged the apparel was actually of Chinese origin and subject to quota. CBP sought a civil penalty of $80,596.40, or 20 percent of the total aggregate entered value of $402,982 for all merchandise on the seven entries. API did not respond to CBP’s pre-penalty notice and penalty notice, nor did it plead or otherwise defend itself once CBP filed this court action, so CIT declared it to be in default.)

All False Country of Origin Statements not Subject to Penalties, says CIT

In its complaint, CBP said API’s misstatements were materially false as required by Section 1592 because they “influenced, among other things, CBP’s determinations as to the origin and admissibility of the merchandise entered by AFI.” But CIT found CBP’s arguments unpersuasive.

According to CIT, CBP cited no authority that any false statement of country of origin made upon entry is in itself material for penalty purposes, as CBP’s complaint suggested. While CBP’s 2006 Penalty Guidelines suggest that any false country of origin statement is material, CIT said, the document is not judicially binding. Furthermore, the legislative history shows the purpose of Section 1592 is to ensure CBP has accurate information to “assess duties and administer other customs laws,” it said. Therefore, said CIT, any false statement of country of origin is not material, but rather only those that affect, or potentially affect, “some determination CBP is called on to make with respect to the imported merchandise in question.”

CBP’s complaint also said the false statements were material because they affected admissibility determinations. Some of the merchandise in each entry was subject to quota, CBP said. CBP valued the quota merchandise at $190,000 out of the total value of $402,208 of the merchandise entered. But in requesting a penalty of 20 percent of the total value of all entered merchandise for false country of origin statements, CBP had to show that all, not only some, of the false country of origin statements were material, CIT said.

CBP argued that any false country of origin statement is material because any such false statement detracts from CBP’s ability to keep records and statistics upon which to base policy. CIT rejected CBP’s argument as too broad a construal of materiality. “Finding materiality to exist merely because a misstatement or material omission affected the accuracy of CBP record-keeping or of import statistics would impose serious penalty liability for any of a great number of common and inconsequential errors appearing in entry documentation,” it said.

CIT rejected CBP’s complaint, but did so without prejudice to allow CBP to amend its complaint by about Sept. 29.

(United States v. Active Frontier International, Inc., CIT Slip Op. 12-112, dated 08/30/12, Judge Stanceu)

(Attorneys: Melissa Devine for plaintiff United States; defendant API in default.)