In 2022, Customs and Border Protection (“CBP” or “Customs”) processed $3.35 trillion in imports, issued 2,121 penalties, and collected $19.3 million from penalties and liquidated damages. [1] Section 1592 of the Tariff Act of 1930 is the primary customs penalty provision and is the enforcement tool used by CBP to ensure compliance with Harmonized Tariff Schedule of the United States (“HTSUS”) classification, valuation, and other entry requirements.
19 USC § 1592
Section 1592 prohibits the importation or attempt to import merchandise by means of (1) false and material documents or electronic data or (2) material omissions. It also prohibits any person from aiding or abetting any other individual to violate the statute. Importantly, § 1592 is violated even when the government does not lose any duties or other revenue. The statute gives CBP authority to impose penalties for customs law violations and provides three levels of culpability with respect to the penalties that may be imposed: fraud, gross negligence, and negligence.
The statutory scheme puts primary responsibility on the importer of record, who must demonstrate that it has met its duty of informed compliance and reasonable care. However, this does not mean all other players in the transaction are immune from liability; the statute is not limited to the importer of record. Any other party who has participated in the transaction leading to a violation may also be held liable. In some cases, personal liability may attach for § 1592 penalties.
What is the difference between fraud, gross negligence, and negligence?
When assessing penalties, CBP charges the violator with one of three levels of culpability. The amount of the penalties assessed against the importer depends on what level of culpability was ultimately assigned by CBP.
The regulations establish the following standards:
- Negligence: defined by Customs as the failure to exercise reasonable care;
- Gross Negligence: defined by Customs as “actual knowledge or wanton disregard”; and
- Fraud: defined by Customs as “voluntary and intentionally.”
To put it simply, negligence occurs when the importer did not know that its conduct was a violation; gross negligence occurs when the importer should have known of a violation or did not care whether it was a violation or not; and fraud occurs when the importer knew of the falsity and intentionally committed a violation.
It is important to note that clerical errors or mistakes of fact are excepted from the statutory penalties. Unless the error or mistake was part of a pattern of negligent conduct, this event would not be considered a violation under the regulations.
How does CBP make the penalty determinations?
CBP determines whether a penalty is assessed by looking into several different factors. Various mitigating factors may be considered and include (1) contributing CBP error, (2) cooperation with the investigation, (3) immediate remedial action, (4) inexperience in importing, (5) prior good record, (6) inability to pay the customs penalty, and (7) CBP knowledge of the violation and failure to inform the violator so that the violator could have taken earlier corrective action. These factors are considered in mitigating the proposed or assessed penalty claim.
If an importer discovers Customs violations, it has the option to file a prior disclosure with CBP. A prior disclosure will mitigate any potential penalties for the violations by voluntarily offering an explanation regarding why the violation happened and paying any owed duties. Importantly, prior disclosures must be submitted before CBP begins an investigation into the disclosed matter for the disclosure to be considered voluntary and, therefore, a mitigating factor. Importers should proceed with caution and seek legal advice and assistance in preparing and filing the prior disclosure. The filing of a prior disclosure demands a certain set of skills that is often beyond the reach of most nonlawyers.
Maximum Civil Penalty Levels-19 USC § 1592(c)
Whether or not there has been an actual duty loss can also affect the penalty assessment. For violations with a loss of duty, the penalties are:
- Fraud: the maximum statutory penalty is the domestic value of the merchandise.
- Gross negligence: the maximum statutory penalty is the lesser of the domestic value or four times the loss of duties.
- Negligence: the maximum statutory penalty is the lesser of the domestic value or two times the loss of duties.
For violations without a loss of duty the penalties are:
- Fraud: the statutory maximum is the domestic value of the merchandise.
- Gross negligence: the statutory maximum is 40% of the domestic value of the merchandise.
- Negligence: the statutory maximum is 20% of the domestic value of the merchandise.
We strongly recommend that importers get acquainted with CBP’s penalty assessment procedure. Knowing how CBP’s penalty determination process operates can help importers to be better prepared in the unfortunate event they are involved in an import violation.
[1] Trade Statistics, U.S. Customs and Border Protection, https://www.cbp.gov/newsroom/stats/trade (Nov. 6, 2023).
