Customs and International Trade Law Blog : International Trade Lawyer & Attorney : Becker & Poliakoff Law Firm : Customs Law, Border Protection

The annual International Boston Seafood Show is today and tomorrow at the Boston Convention Center.  The Show attracts 19,000 visitors, and is the largest seafood show in North America.  See www.bostonseafood.com.  I am again lecturing on the Food Safety and Compliance Track with emphasis on the implementation of the Food Safety Modernization Act of 2011: What every food importer and customs broker needs to know - now.

My topic is "Food Safety Compliance under the New Food Safety Modernization Act of 2011."  My fellow panelists discussing the FSMA, and import safety generally, include Ted Poplawski from the FDA, Judith Webster from U.S. Customs and Border Protection (CBP), Howard Tennen from Quirch Foods, Dean Leaman of ABC Research Laboratories, and Dan Fone of NSF International.  Since 80% of the seafood consumed in the United States is imported, compliance with the food safety laws and regulations that have now been implemented by the FDA, in cooperation with CBP, is critical.

There were a record number of FDA Import Alerts for seafood in 2011, and a higher number of imported shipments of seafood are now the subject of Detention Without Physical Examination (DWPE). What is surprising to many people is that the seafood is not just being stopped and inspected from China, but also Vietnam, Chile, and Canada, to name a few.  Moreover, seafood fraud in many forms such as species substitution or false country of origin to avoid the payment of anti-dumping duties is now being discovered by the FDA, CBP, and NOAA.  Criminal prosecutions and civil penalties by CBP are now front page news.

Thank you to Diversified Business Communications, based in Portland, Maine, for again inviting me to be a speaker at the Show.  See www.divbusiness.com.

By the way, the abundance of free seafood is FABULOUS at the Show!

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Our beloved Transportation Security Administration (TSA) has the responsibility of screening passengers to "ensure that certain items and persons prohibited from flying don’t board commercial airliners."  This is accomplished through 43,000 Transportation Security Officers (TSOs) located at 450 airports around the United States.  While I am waiting in line to be screened, there seems always to be one energetic TSO screaming at my fellow passengers to take our shoes off, remove most liquids, take our belts off, take out our laptops, etc.. it is hard to remember that the official Mission of the TSA is to "protect the Nation’s transportation systems to ensure freedom of movement for people and commerce."  I do have one funny story to tell you about the TSA and a certain passenger.

While the TSA regulations specifically prohibit the carrying on board an aircraft, or even into the airport, any weapon or explosive device, a particular passenger had a pepper spray pen with him. The pepper spray pen was not detected by the TSO when the passenger's body and luggage went through those radiation-emitting devices.

That is bad enough, but what the passenger did next was a mistake. After passing through TSA, he then approached the crew of the aircraft at his gate of departure, and handed over the pepper spray pen to the gate agents with some sort of statement that the TSOs did not detect the pen during the screening process.  Predictably, the passenger was then approached by law enforcement, interrogated, and not allowed to fly on that aircraft. The passenger subsequently received a Letter of Investigation from the TSA with the threat of a $11,000 penalty for attempting to compromise a security system utilized by TSA.

Seems to me that the gate agents and TSA should simply have said "thank you" to the passenger for turning over the pepper spray pen, rather than going on a witch hunt.  Perhaps the lesson the TSA wants to get across to people is not to tell the truth. If the passenger had kept his mouth shut, he would have kept his pepper spray pen, not missed his flight, and not have to pay a potential penalty of $11,000.  Plus, I guess now the TSOs will start yelling at passengers that the list of prohibited items includes pepper spray pens.

One more thing.  While it is prohibited to carry on board an aircraft any pepper spray, you may still transport it in your checked luggage, according to the TSA website. 

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The Office of Inspector General (OIG) of the U.S. Department of Homeland Security (DHS) issued a report criticizing U.S. Customs and Border Protection (CBP).  In a June 2011 report entitled "Efficacy of Customs and Border Protection's Bonding Process," DHS concluded that up to $12 billion in single transaction bonds for importers may fail to be collected.   Considering that approximately $2 trillion of goods are imported into the United States each year, and that CBP collects about $32 billion in duties, taxes, and fees, $12 billion is a heck of a lot of money to lose.

Let's discuss some fundamental customs laws and policies first.  A bond is a contract between a principal (i.e. importer) and a surety (i.e. insurance company), with CBP serving as the beneficiary when an importer fails to pay any duties, taxes, and fees assessed by CBP on the imported merchandise.  The single transaction bond amount for the importer established by CBP is typically 1 to 3 times the total value of the imported merchandise for that particular shipment, plus duties, taxes, and fees.  If the importer does not pay the assessed amounts promptly, a liquidated damages claim is issued by the Fines, Penalties, and Forfeitures (FP&F) Office of CBP against the importer and the surety company.  

Although in theory, this type of insurance policy should pay CBP in full every time, it does not really work that way.  Blame it, in part, on anti-dumping and countervailing duty cases.  The U.S. Government Accountability Office (GAO) estimates that it takes over 3 years in anti-dumping or countervailing duty cases between the initial entry of merchandise subject to an anti-dumping or countervailing duty order, and when the final duty bill is issued to the importer.   Importers that are unwilling or unable to pay, or have already gone out of business, result in a loss of revenue to CBP. 

According to the OIG Report, CBP has written off tens of millions of dollars "because of inaccurate, incomplete, or missing bonds" such as a lack of signatures or inaccurate transaction numbers.   Moreover, it turns out that CBP is not doing a good job of keeping copies of the bonds, but often relies upon the customs brokers to do so.  The OIG Report concluded that "there is a potential for collusion between the broker and the importer."  Well, at least, for once, DHS and CBP don't blame this problem on those pesky customs lawyers.

So, you ask, what will happen now.  No surprise this time - CBP will certainly re-evaluate its current monetary guidelines, last significantly updated in November 2010, to establishing higher bond limits, especially for food and drug products regulated by the FDA which pose a potential threat to the public health and safety.  Importers should expect to see such letters from CBP's Revenue Division at the National Finance Center located in Indianapolis, Indiana, and more liquidated damages claims from the FP&F offices around the country.

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 On Thursday, March 10, 2011, from 12 noon to 1:30 p.m. EST, Marc Rossi, Chief, Cargo Screening, TSA Headquarters, and Peter Quinter, Chair, Customs and International Trade Department, will be the speakers at a webinar hosted by the National Customs Brokers and Forwarders Association of America.  Shippers, indirect air carriers (IACs) or freight forwarders, and international airlines will benefit from learning about the newest policies and requirements by the Transportation Security Administration (TSA).  Sign up here to take advantage of this webinar opportunity.

A quick chronology is important.  On Aug. 3, 2007, President Bush signed into law the Implementing Recommendations of the 9/11 Commission Act of 2007 (9/11 Act). The 9/11 Act required TSA to establish a system for the air cargo industry to screen 100% of cargo transported on passenger aircraft in the United States at the piece level.  That goal was achieved in August 2010.

This webinar is a natural follow-up to my April 7, 2010 blog post entitled "TSA 100% CARGO SCREENING RULE EFFECTIVE AUGUST 1, 2010."  It is just over 6 months since the TSA had implemented its 100% cargo screening requirement, so it's time for a check-up. While Marc Rossi will focus on the operational requirements of 100% air cargo screening as part of the Certified Cargo Screening Program (CCSP), I will focus on the legal requirements of the TSA for IACs, as well as explain how to respond to a TSA Letter of Investigation and a TSA Notice of Proposed Penalty for any alleged failure to comply with some TSA requirement. 

The 100% Air Cargo Screening by TSA - How's it Going 6 Months Later? webinar is sponsored by the National Customs Brokers and Forwarders Association of America (NCBFAA), and you may participate in the webinar by registering on-line, or calling (202) 466-0222 .

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Sometimes it is beneficial for an exporter to voluntarily self-disclose its export violations to the U.S. Government.  Maybe an exportation of an item occurred without first obtaining the necessary license, or maybe the item was shipped to a company overseas other than allowed in a license. Both situations are violations of the Export Administration Regulations, and both violations could result in $250,000 penalties against the exporter. By voluntarily self-disclosing the violation, the exporter would reduce, and might even eliminate, such a penalty.

For a suspected violation of 15 CFR 764.2 of the Export Administration Regulations (EAR) enforced by the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce, an exporter may submit a voluntary self-disclosure (popularly known as a "VSD") to the Office of Export Enforcement of BIS at its Washington, D.C. headquarters office.  The contents of what must be included in a VSD are established in 15 CFR 764.5.

Procedurally, once a properly filed VSD is received by the BIS, it is investigated by a Special Agent from the Office of Export Enforcement. If a penalty or other sanction is contemplated, the case is referred to an attorney with the Office of Chief Counsel of BIS.  The BIS attorney will contact the exporter's attorney, eventually resulting in a written Settlement Agreement between the exporter and the BIS.  Negotiating the terms of the Settlement Agreement is critical.

The Obama Administration is actively pursuing export control reforms. Importantly, Kevin Wolf, Assistant Secretary of Commerce for Export Administration, on November 9, 2010, at the Global Trade Controls Conference in London, England, stated:

Enforcement will become an even higher priority...We have long promoted the submission of voluntary self-disclosures (VSDs).  We view VSDs, along with internal compliance programs, as important mitigating factors. 

There will always be occasional errors by exporters.  Exporters should consult with knowledgeable and experienced international trade attorneys before submitting a VSD.  With more enforcement, there are sure to be more investigations and more penalties assessed by the Government against exporters, and likely more VSDs submitted to the Government by exporters.

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Pinnacle Aircraft Parts, Inc., based in Miami, Florida, just paid $225,000 to the U.S. Office of Foreign Assets Control ("OFAC") regarding OFAC's investigation of a jet engine that may have been shipped to Iran.  This case is unique in that OFAC did not assess the fine because the jet engine was actually shipped to Iran, but because Pinnacle Aircraft Parts failed to properly comply with it subpoena to provide all records about that shipment.

OFAC certainly has the authority to issue an administrative subpoena, and to demand documents for any alleged sale of a jet engine to Iran. See 31 CFR Section 501.602, which states:  

Every person is required to furnish under oath, in the form of reports or otherwise, from time to time and at any time as may be required by the Director, Office of Foreign Assets Control, complete information relative to any transaction,...

Pinnacle received such a subpoena demanding "all correspondence and other documents" related to the payment and transportation of the jet engine.  Through its outside legal counsel, Pinnacle provided 260 pages of responsive documents, however, according to the OFAC's Enforcement Information notice for November 16, 2010. 

[Pinnacle] failed to submit a copy of a post-sale e-mail - which Pinnacle had provided to its [legal] counsel - indicating that the aircraft engine was likely destined for Iran...

OFAC determined that the failure to produce the responsive document was "egregious", resulting in almost the maximum penalty of $250,000. OFAC concluded that Pinnacle "knowingly withheld" the relevant documentation. Pinnacle's unfortunate reliance on the incorrect advice of its outside legal counsel, usually a huge mitigating factor, only resulted in a 10% discount.

I have only one question for the lawyer or law firm that advised its client not to disclosure the e-mail to OFAC:  Did you attend the International Law Section of the Florida Bar's September 24, 2010 seminar on OFAC at which I discussed this very topic?  See prior Blog post dated August 30, 2010 entitled "Forbidden Places for Tourism and Trade".

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The National Customs Brokers and Forwarders Association of America (NCBFAA) is hosting a webinar on the topic of "EPA Import Compliance - What To Do When Things Go Wrong".

The webinar will focus on the practical import compliance policies and procedures of both the U.S. Environmental Protection Agency (EPA) and U.S. Customs and Border Protection (CBP) for the importation of mobile source equipment such as non-road and marine spark ignition engines in motorcyles, generators, and lawn mowers. 

An introduction to the EPA's enforcement of the Clean Air Act through its regulations will be discussed.  Learn about 'EPA Certificates of Conformity,' ' EPA Administrative Settlement Agreements,' and the proper use of EPA Form 3520.

Real-life examples of detentions and seizures by CBP will be used, along with a step by step "how to" resolve seizures and penalties by CBP and settle civil penalty cases with the EPA.

Registration may easily  be done on-line by clicking on this "Register Now"  link, or by calling Brian Barber, Director, NCBFAA Educational Institute, at (202) 466-0222.

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Maersk Line, Ltd. paid the U.S. Office of Foreign Assets Control (OFAC) $3 million to settle allegations of violations of the U.S. trade embargo with Sudan and Iran that Maersk committed between 2003 and 2007.   How the world's largest ocean transportation company committed such violations is a good story. How Maersk's lawyer was able to limit the payment to $3 million is also important to understand.

According to the OFAC Enforcement Information for July 28, 2010,

OFAC's investigation alleged that Maersk provided unlicensed shipping services for 4,714 shipments of cargo originating in or bound for Sudan and Iran. These services involved the transportation of such cargo on vessels owned, operated, and/or chartered by Maersk's parent, A.P. Moller-Maersk A/S on at least one leg of the cargo's journey to or from Sudan and Iran.

This is very interestingly worded by OFAC.  As A.P. Moller-Maersk A/S, a Danish conglomerate, is not bound by the U.S. laws regarding trade sanctions with Sudan and Iran, it could provide unrestricted vessels services in those countries.  If, however, any part of the cargo to or from those countries were transported on a U.S.-flagged vessel, then a violation of the U.S. laws would occur.  Cargo is often shifted from ship to ship between the port of departure and the port of delivery, and A.P. Moller -Maersk did not carefully trace the cargo from Sudan and Iran as well as it should have to prevent the cargo from touching a U.S.-flagged vessel.

Using OFAC's Economic Sanction Enforcement Guidelines effective November 9, 2009, the penalty against Maersk could have been $61 million.  Even though Maersk did not voluntarily self-disclosure the violations to OFAC, the Settlement and payment of only $3 million reflects the mitigating factors of:

• the non-egregious nature of the violation;
• no violations by Maersk in the prior 5 years;
• substantial and effective remediation measures were implemented by Maersk; and
• substantial and full cooperation with OFAC officials during the investigation.

For non-U.S. based multinationals, compliance with U.S. trade laws and regulations enforced by OFAC and the export controls enforced by the Bureau of Industry and Security of the U.S. Department of Commerce is often confusing.   Moreover, if the world's largest, most sophisticated shipping company, and one with an excellent reputation for service and integrity, is doing business with Iran and Sudan, what does that say about the effectiveness of the U.S. sanctions and trade embargo programs?

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The annual conference of the National Customs Brokers and Forwarders Association of America (NCBFAA) just concluded in San Antonio, Texas. Several prominent speakers from U.S. Customs, the Federal Maritime Commission, the U.S. Census Bureau, the Bureau of Industry and Security, the Office of Foreign Assets Control, Transportation Security Administration, and the Department of Homeland Security discussed new policies and procedures that every customs broker and international freight forwarder should use to serve their import and export clients.

Deputy Commissioner for U.S. Customs, David Aguilar, used a new talking point in his repeated use of the phrase "protect the American way of life" which apparently has replaced "protect the border" in his description of the mission of the U.S. Customs and Border Protection.  U.S. Customs Senior Attorney Susan Terranova stated that in 2009, Customs had issued over 500 penalties against exporters and freight forwarders for failing to file timely or accurately complete Automated Export System (AES) filings. Each penalty was issued in the amount of $10,000.

Marc Rossi, Branch Chief, Certified Cargo Screening Program, Air Cargo Division, TSA, stated that there are 98 foreign flagged airlines that fly into the United States, over 4,000 indirect air carriers (IACs), 52 independent cargo screening facilities, and only 403 IACs certified by the TSA as Certified Cargo Screening Facilities (CCSF), in preparation for the August 1, 2010 100% screening of air cargo aboard passenger aircraft in the United States.  More information about the implementation of the 100% screening rule is available at www.tsa.gov/ccsp. 

Along with Brandon Fried, Director, Air Forwarders Association, I lectured at the NCBFAA Conference about Export Compliance for Freight Forwarders.  The focus of my presentation was on exactly how to mitigate penalties once a Proposed Charging Letter, Pre-Penalty Notice, or Notice of Proposed Penalty has been issued by BIS, OFAC, or TSA.  The Power Point presentation is available only upon request.

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With all of the complexities involved in the import process, even customs brokers can make mistakes such as by providing the wrong tariff classification of the imported item to U.S. Customs and Border Protection .  A customs broker who makes such a mistake may become the subject of an investigation by U.S. Customs which ultimately results in a $30,000 penalty against the broker.

Customs brokers are often the best choice for importers to take care of all the formalities in clearing imported cargo through U.S. Customs, however, a customs broker who makes a mistake when declaring certain information to U.S. Customs may put  the importer at risk of being accused  of  fraud by U.S. Customs in violation of 19 U.S.C. 1592.  Increasingly often, the customs broker may itself be investigated  by U.S. Customs for failing to exercise responsible supervision and control in violation of 19 U.S.C. 1641. 

It is standard practice for U.S. Customs to demand that the broker appear before the Broker Compliance Unit of U.S. Customs at the local port of entry to answer questions about the mistakes discovered by Customs regarding a particular importer or set of entries.  The broker is usually directed to bring with him/her certain documents for review by U.S. Customs at the meeting.  The broker may be accompanied by an attorney during this informal stage of the investigation. The customer of the customs broker, the importer, is generally not made aware by U.S. Customs that its customs broker has been summoned to a meeting with Customs for a counseling session.

If the U.S. Customs personnel are not satisfied with the answers by the broker at the meeting, U.S. Customs will issue a Notice of Pre-Penalty against the broker. The penalty may be up to $30,000. The broker will have 30 days to file a written petition, and request an oral presentation.  A lawyer who is an expert in customs law and procedure should be involved to advise and represent the broker to attempt to get the penalty canceled or mitigated.  The guidelines of what to say in such a Petition are set forth in an Appendix  C to Part 171 of the Customs Regulations.  U.S. Customs personnel must consider a certain set of factors before determining that the customs broker failed to exercise reasonable care and "responsible supervision and control".  Every customs broker should read, the U.S. Court of International Trade decision issued on January 28, 2010 in the case of United States v. UPS Customhouse Brokerage, Inc.. for a better understanding of both a customs brokers' and U.S. Customs' rights and responsibilities.

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As of January 26, 2010, U.S. Customs and Border Protection (CBP) will require that all importers comply with the Importer Security Filing (ISF), also popularly known as "10 +2" because of the 10 elements required to be provided to CBP relevant to the importer and 2 elements required to be provided to CBP relevant to the carrier.  CBP has announced that as of January 26, 2010, it will also begin to issue penalties of either $5,000 or $10,000 against importers who fail to comply with ISF; something CBP calls its "enforcement phase". Importers who self-file ISF, or their agents, must understand the changes, comply with them, and, when a penalty is issued by CBP, respond in writing to mitigate the penalty.

Fortunately, on January 28, 2010, from 11:00 a.m. to 2:30 p.m., the South Florida Chapter of the Council of Supply Chain Management Professionals (CSCMP), is hosting a seminar entitled "ISF 10+2 Reality Sinks In...What's Next?"  To register or learn more about CSCMP, click on http://www.cscmp-sofl.org/events.shtml. The impressive panel includes customs brokers, importers, carriers, consultants, an attorney, and Richard DiNucci, Director, Secure Freight Initiative, CBP Headquarters. 

As you should know, the ISF is filed via the Automated Broker Interface (ABI) or the Automated Manifest System (AMS), and it is always sent to the Automated Targeting System (ATS) for analysis and review by CBP officials.  Hence, it is obvious that CBP will use the ISF information to target, stop, and examine imported shipments.  Incorrectly or incompletely filing ISF will result in increased delays of imported shipments.  Moreover, CBP has announced that as of January 26, 2010, it will selectively penalize the more severely non-compliant importers, and will only more frequently issue such penalties over time.

On December 24, 2009, CBP amended the Interim Final Rule on November 25, 2008 entitled "Importer Security Filing and Additional Carrier Requirements." See  http://edocket.access.gpo.gov/2009/E9-30570.htm.  The amended rule clarified the ISF Bond Terms for all importers.  Knowing all aspects of this important new rule is necessary for the international trade community.  Click http://www.cscmp-sofl.org/events.shtml to register.  To learn more about the South Florida Chapter of the CSCMP, please contact a member of the Board of Directors at http://www.cscmp-sofl.org/board.shtml.

Happy New Year to all.

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Effective August 20, 2009, the new Transportation Security Administration (TSA) regulations increased the maximum amount of its monetary penalties against aircraft operators and freight forwarders/indirect air carriers (IACs) for violations of the Transportation Security Regulations.  TSA also made significant change to its Investigative and Enforcement Procedures in 49 CFR Part 1503.

Following the tragic events of September 11, 2001, when the United States was attacked by terrorists, the U.S. Congress and President George Bush quickly passed the Aviation and Transportation Security Act of 2001 which created the Transportation Security Administration (TSA). The primary responsibilities of the TSA was to ensure the security of passengers and cargo in air transportation.  Many responsibilities formerly handled by the Federal Aviation Administration (FAA) were transferred to the TSA.  After moving from the U.S. Department of Transportation to the U.S. Department of Homeland Security, as part of the Homeland Security Act of 2002, the TSA had its first Administrator to lead the agency, and moved into its current physical headquarters office in Arlington, Virginia.

In a critical U.S. General Accountability Office report entitled "Aviation Security: Vulnerabilities and Potential Improvements for the Air Cargo System," dated December 2002, the GAO stated:
 

U.S. air carriers transport billions of tons of cargo each year in both passenger planes and all-cargo planes. Typically, about one-half of the hull of each passenger aircraft is filled with cargo. As a result, any vulnerabilities in the air cargo security system potentially threaten the entire air transport system.  Numerous government and industry studies have identified vulnerabilities in the air cargo system. These vulnerabilities occur in the security procedures of some air carriers and freight forwarders and in possible tampering with freight at various hand-offs that occur from the point when cargo leaves a shipper to the point when it is loaded onto an aircraft. As a result, any weaknesses in this program could create security risks.

It was a serious and urgent challenge for the TSA to correct these weaknesses.

The Transportation Security Regulations, 49 CFR Parts 1500 to 1572, were issued on July 23, 2002, and implemented the various laws that created and outlined the functions and expanded powers of the TSA.  Important operational regulations are Part 1542 (Airport Security), Part 1544 (Aircraft Operator Security), Part 1546 (Foreign Air Carrier Security), and Part 1548 (Indirect Air Carrier Security) whereby the TSA sets forth all the many new and comprehensive requirements that attempt to prevent any person, luggage, provisions, or cargo getting aboard an aircraft that could cause it to crash.

What is most important for this discussion is the amended TSA regulation at 49 CFR Part 1503 (Investigative and Enforcement Procedures) whereby the TSA describes how and when it may issue a monetary civil penalty against an airline or IAC (a.k.a. "freight forwarder") for a violation of the Transportation Security Regulations.

In the new TSA regulations, the TSA announced that certain penalties that previously were at a maximum of $25,000 per violation are now $27,500, and those that were at a maximum of $10,000 per violation are now $11,000.  More importantly, the TSA announced:  "TSA may assess a maximum penalty per case of $50,000 if the violation is committed by an individual or small business.  TSA may assess a maximum penalty amount per case of $400,000 if the violation is committed by a person other than an individual or small business."  Those are big numbers by any count in the airline and cargo transportation business.

Often, a monetary civil penalty is issued months after the violation actually occurred. Typically a TSA Inspector visits the airline or warehouse of an IAC unannounced to verify that it is complying with all of the relevant TSA regulations.  If a violation is discovered, the TSA Inspector issues a Letter of Investigation (LOI) to the alleged violator, and allows 30 days for a written response. If the response is not forthcoming or is not satisfactory to the TSA Inspector, the case is referred to an attorney for TSA in its Office of Chief Counsel.  The TSA attorneys are located at all major international airports in the United States.

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If your company ships hazardous materials (a/k/a "HAZMAT"), a single misstep could cause your business to incur hundreds of thousands of dollars in penalties.

In fact, every day HAZMAT shippers are slapped with penalties issued by the Federal Aviation Administration (FAA)--and the penalty amounts sometimes reach seven figures or more.  

If you think "well, I made only one mistake--I won't get caught," or if you think you can talk yourself out of getting a penalty like you do a speeding ticket, think again.  When the FAA investigates an incident and issues a penalty, you can bet what you think is just one violation will quickly become multiple violations. 

FAA regulations require proper marking, printing, labeling, describing, packing, and classifying HAZMAT. Also, there is another set of regulations for the training of employees and recordkeeping of shipments.  Understanding the FAA's policies and procedures in HAZMAT penalty cases is a necessary first step to mitigating what can be exorbitant penalties.

The FAA issues the penalties for violations of the Department of Transportation Hazardous Materials Regulations (HMR) found at 49 CFR Parts 171 to 185 pursuant to the Federal Hazardous Materials Transportation Law, 49 U.S.C. Sections 5101 to 5127.  The FAA penalties have increased from $10,000 to now $50,000 for each violation of the HMR that occurred after August 10, 2005.  It is common for the FAA to issue a penalty for hundreds of thousands of dollars against a company for illegally shipping, or even attempting to ship, a HAZMAT on an aircraft, including shipments provided to FedEx, UPS, or DHL.  Penalties are often issued against any shippers, including Fortune 500 companies and even foreign companies shipping cargo to the United States. Penalties may be issued by the FAA if the HAZMAT is not packaged, marked, classed, described, documented, or in condition for shipment as required by regulations. 

The FAA HAZMAT Penalty Procedures

The most common scenario occurs when an undeclared HAZMAT shipment is provided to an airline, and the airline reports the suspected violation to the FAA.  An FAA Special Agent with extensive experience in HAZMAT is immediately dispatched, and the Agent conducts an inspection and investigation of (a) the shipper, (2) the freight forwarder, and/or (3) the airline.  The Agent often interviews, and obtains written statements, from persons involved in the incident.  The Agent then submits a Report of Investigation to the nearest FAA legal office, called the Office of the Regional Counsel for review by its lawyers. The FAA lawyers then decide whether or not the violation should result in a written warning or a civil monetary penalty, and if so, what the amount of the penalty should be, and to which individual or company should the penalty be issued. 

The FAA attorney then formally issues a "Notice of Proposed Civil Penalty" against the company or person who shipped or attempted to ship the HAZMAT. The Notice is usually addressed to the President or CEO of the company, and it specifies the facts and circumstances of the violation, cites the applicable sections of the HMR, and concludes with a demand for payment of the civil penalty. 

The FAA offers the alleged violator some choices in a standard form attached to the Notice. Basically, your options are to (1) pay the penalty in full, (2) deny any violation and ask for a formal hearing, (3) make an offer of settlement, (4) ask for a telephonic and/or in-person informal conference with the FAA attorney to explain what happened and negotiate a lower, or no, penalty, or(5) allege financial inability to pay the penalty.  The form must be completed and returned to the FAA attorney within 30 days with the selection of one of the choices above, and officially identifying the name and contact information for the attorney representing the company which received the penalty from the FAA.

I have handled many FAA HAZMAT cases from all over the United States. I have also lectured extensively on the topic of "Mitigating Civil Penalties Issued by the FAA For HAZMAT Violations", including at the Dangerous Goods by Air 2001 Conference & Exhibition (February 14, 2001) sponsored by the International Air Transport Association (IATA), Keeping Dangerous Goods Safe in a Secure World (May 1, 2003) also sponsored by IATA, and Dangerous Goods Symposium for Instructors (November 9, 2006), sponsored by Labelmaster.

In the many cases that I have handled, I have always requested an informal conference with the FAA attorney.  Requesting a formal hearing before an Administrative Law Judge should only be used when the FAA attorney is completely unreasonable in negotiating a settlement when there is a violation.  The FAA has issued a FAQ for attorneys unfamiliar with the formal hearing process regulated by 14 CFR Part 13.  Informal conferences give the company an opportunity to explain to the FAA its version of what happened and why it happened, and to allow the company, through its attorney, to present mitigating factors to reduce what otherwise may be a huge penalty.

Good Arguments to the FAA

The FAA has certain criteria set forth at 14 CFR Section 13.16(c)  that it uses to evaluate the amount of a penalty. They generally are categorized as:

(1) the nature, circumstances, extent, and gravity of the violation;

(2) the degree of culpability, and history of prior violations, and the ability to pay; and

(3) "such other matters as justice may require".

What is not stated is perhaps more important, and that is what corrective action has been taken by the company to prevent a recurrence of a similar violation.  The extent and timing of such corrective action are significant factors in successfully mitigating penalties.  A violation that occurred because of reasonable reliance on incorrect information from another source may be another successful argument.  Companies should always seek mitigation pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA).  Finally, companies should consult the current Hazardous Materials Sanction Guidance Matrix found at Appendix A to 49 CFR Part 107.

Bad Arguments to the FAA

The FAA assesses penalties against companies and persons who "knowingly" commit a HAZMAT violation.  Arguing that an employee of the company that illegally shipped the HAZMAT should not subject the company to the penalty is not a persuasive argument to the FAA attorney. Arguing that the airline did not know it had accepted the illegally shipped HAZMAT is equally unsuccessful because the FAA regulations require the shipper and the airline to exercise reasonable care, and therefore, it should have known that the shipment was an undeclared HAZMAT or has some other particular violation.

Concluding the FAA Case

After the informal conference has completed, and hopefully a reasonable settlement was achieved, the FAA attorney will issue a formal "Order Assessing Civil Penalty" which restates the agreed facts, the relevant sections of the HMR which the company admits to violating, and the amount of the agreed settlement penalty.   The penalty may be paid within 60 days to the FAA by electronic payment or paper check.

 Some Things to Remember

1.  Educate and regularly train employees on HAZMAT;

2.  Immediately get a knowledgeable attorney involved as soon as a HAZMAT incident occurs which could lead to an FAA investigation and penalty.  Communicating with the assigned Special Agent during the investigation, and then the attorney within the Office of Regional Counsel before the issuance of a penalty can be critical; and

3.  Take corrective action before the FAA issues its recommendations to do so.

With the penalties now $50,000 for each HAZMAT violation combined with more than 100 Special Agents within the FAA's Office of Hazardous Materials, and a priority of the FAA to enforce hazardous materials regulations, 2009 and 2010 are very likely to be record years for collection of penalties by the FAA.

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The U.S. Court of Appeals for the Federal Circuit just issued an important decision that will help all customs brokers who are facing a broker penalty action pursuant to 19 U.S.C. 1641 and 19 CFR Part 111.  The Court held that U.S. Customs and Border Protection (CBP) must consider all ten factors specifically identified at 19 CFR 111.1 when determining whether or not to mitigate a penalty issued by CBP against a customs broker for failing to excercise "responsible supervision and control."  CBP had argued to the Court that it only needed to consider those factors it thought were relevant.  The Court disagreed with CBP, and reversed the decision of the U.S. Court of International Trade. The Court stated:

"Because Customs did not consider all ten factors listed in 19 CFR 111.1, its determination that UPS violated 19 U.S.C. 1641 was improper. Accordingly, we vacate that portion of he Court of International Trade's judgment and remand for further proceedings."

So, even though the Court determined that UPS was wrong in its tariff classification of imported merchandise, and even though UPS paid CBP $15,000 in penalties for failing to exercise responsible supervision and control, it remains to be seen whether CBP will assess another $75,000 in penalties against UPS.   My guess is that CBP will pursue the remaining penalties against UPS which were also for alleged misclassification of the same merchandise on different entries.  The Court required CBP to at least consider all ten factors, but also explicitly stated that CBP has the discretion to weigh each of the factors as it deems appropriate in determining whether to mitigate a penalty against a customs broker.

If CBP does pursue the penalties, no doubt UPS will challenge them, especially because another remaining legal question will be whether the CBP regulation at 19 CFR 111.91 which limits penalties to a maximum of $30,000 will apply.  That is another issue of importance to all licensed customs brokers. If interested, please read the complete Federal Circuit decision.

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