Last week, the Court of Appeals for the Federal Circuit (CAFC) overturned the Court of International Trade (CIT) in a 19 U.S.C. § 1592 enforcement action, Trek Leather, Inc. v. United States. Trek in 2004 imported suits without disclosing the value of its U.S.-made fabric (“assists”), resulting in unpaid duties. The CIT in 2011 found Trek and its sole shareholder, Harish Shadadpuri, jointly and severally liable for a penalty of more than a half million dollars.
Trek conceded that it was grossly negligent and did not appeal. Mr. Shadadpuri – who was neither the importer of record (IOR) nor a customs broker – disputed his liability. The CIT agreed with CBP that the statutory term “person” covered Mr. Shadadpuri, who was informed by CBP about having to declare the value of assists in 2002 when another company partially owned by him paid more than $45,000 in unpaid duties for failing to do so. The CAFC ruled that only IORs are liable for penalties because the statutory scheme prevents the term “person” from being read in isolation. Given this legislative context, an individual who is not the IOR can only be liable for penalties through either personal fraud or piercing the corporate veil. The majority expressed bewilderment that the United States did not pursue such approaches to hold Mr. Shadadpuri liable, while the dissent said such steps were not necessary.
This ruling underscores the inadequacy of the current bare minimum IOR requirements. IORs can at present be “shell” corporations that go insolvent to avoid penalties, while related individuals are not automatically liable – even if they are the sole owner and have knowledge of the import impropriety, as Mr. Shadadpuri was alleged to have done. Fortunately, last year, Congress demonstrated awareness of this problem and proposed corrective measures as part of the Customs Trade Facilitation and Enforcement Act of 2012 (H.R. 6642). In particular, sections 221, 222, 223, and 224 of that proposed legislation would enhance regulatory control over IORs and discourage the proliferation of “shell” corporations created to evade U.S. law.