A “minor” amendment to the U.S. Customs Broker Regulations has a broad reach: Looking at revised 19 C.F.R. 111.32

Last year, U.S. Customs and Border Protection (CBP) issued its final rules amending various sections of the Customs Broker Regulations. Public attention most notably fell on two aspects of the final rules: elimination of the district permits and conversion to the national permit system. The amendments also highlighted the “responsible supervision and control” requirements for customs brokers, moving those requirements from the “Definitions” section (19 C.F.R. § 111.1) to the specific section of the regulations in which those requirements are imposed - 19 C.F.R. § 111.28.

Barely noticed when compared to other provisions during the proposed rulemaking stages was an amendment to 19 C.F.R. § 111.32. This overlooked amendment, perhaps considered by many to be minor, may ultimately have a massive impact on brokers and their importer clients. Because the broker-importer client relationship underpins many U.S. customs laws and regulations, it is essential to take a closer look at the implications of this change.¹

About the amended regulation

19 C.F.R. § 111.32 now provides as follows:

False information.

A broker must not file or procure or assist in the filing of any claim, or of any document, affidavit, or other papers, known by such broker to be false. In addition, a broker must not give, or solicit or procure the giving of, any information or testimony that the broker knew or should have known was false or misleading in any matter pending before the Department of Homeland Security or to any representative of the Department of Homeland Security. A broker also must document and report to CBP when the broker separates from or cancels representation of a client as a result of determining the client is intentionally attempting to use the broker to defraud the U.S. Government or commit any criminal act against the U.S. Government. The report to CBP must include the client name, date of separation or cancellation, and reason for the separation or cancellation.
(Emphasis added)

As statutory background for section 111.32, 19 U.S.C. § 1641(d) “Disciplinary Proceedings” subsections (1)(C)(D) provide as follows:

“The Secretary may impose a monetary penalty in all cases with the exception of the infractions described in clause (iii) of subparagraph (B) of this subsection, or revoke or suspend a license or permit of any customs broker, if it is shown that the broker—
…

(C) has violated any provision of any law enforced by U.S. Customs and Border Protection or the rules or regulations issued under any such provision;

(D) has counseled, commanded, induced, procured, or knowingly aided or abetted the violations by any other person of any provision of any law enforced by U.S. Customs and Border Protection, or the rules or regulations issued under any such provision; …”

The CBP broker regulations, implementing Section 1641(c)(d), also provide as follows:

§ 111.53 Grounds for suspension or revocation of license or permit.

The appropriate CBP officer may initiate proceedings for the suspension, for a specific period of time, or revocation of the license or permit of any broker for any of the following reasons:
…

(c) The broker has violated any provision of any law enforced by CBP or the rules or regulations issued under any provision of any law enforced by CBP;

(d) The broker has counseled, commanded, induced, procured, or knowingly aided or abetted the violations by any other person of any provision of any law enforced by CBP or the rules or regulations issued under any provision of any law enforced by CBP;
…

If the broker itself has not committed a violation of a law or regulation enforced by CBP, it clearly has not violated section 1641(d)(1)(C) or the implementing regulation under 19 C.F.R. § 111.53(c).

Also, if the broker’s importer client, without the broker’s prior knowledge, has provided incorrect information to the broker for filing entry declarations to CBP that are incorrect, the filing of such entry declaration by the broker on behalf of the importer, in itself, also will not appear to be the “knowing aiding and abetting violation” prohibited under 19 U.S.C. § 1641(d)(1)(D) and 19 C.F.R. § 111.53(d).

So, there is no clear expression in the language of Section 1641 of a requirement for brokers to do more than just ensure that they themselves do not commit violations of the laws, or that they do not counsel or knowingly aid or abet others to commit violations of laws enforced by CBP.

Therefore, it is debatable whether section 111.32, as recently amended to compel reporting of importer violations to CBP, exceeds statutory authority. This question, however, will ultimately be decided by the U.S. Court of International Trade.²

In the meantime, however, 19 C.F.R. § 111.32 is in effect, which means that brokers and their importer clients may face a number of issues when they first realize that a false statement may have been made in entries already filed with CBP.

Brokers would like to ensure they do not violate the customs laws nor the broker law and implementing regulations. On the other hand, importers would like to be able to assess the full circumstances relating to the discovery, and then after such review disclose the circumstances of any possible violations to CBP pursuant to 19 U.S.C. § 1592(c)(4), ie, a “prior disclosure.”

Depending upon the timing of the events, the intersection between the importer’s right to make a prior disclosure under 19 U.S.C. § 1592 and the broker’s desire to avoid violations of Section 111.53 may, as a result of the new amendment to Section111.32, create a conflict between parties of the oldest principal-agency relationship in U.S. customs and international trade practice: the customs broker-importer relationship.³

The rulemaking proceeding: How did we get here?

Let’s take a look at how CBP got to the point of creating the new broker reporting obligation in 19 C.F.R. § 111.32 through an examination of CBP’s public statements in the rulemaking proceeding.

In the Notice of Proposed Rulemaking for the amendment of Section 111.32, CBP stated:

“CBP proposes to modify the section to make clear that a broker must not give, or solicit or procure the giving of, any information or testimony showing that the broker should have known that the information is false or misleading. In addition, CBP proposes to add a new sentence requiring a broker to document and report to CBP when the broker separates or terminates the broker’s representation of a client as a result of the broker determining that the client is intentionally attempting to defraud or otherwise commit any criminal act against the U.S. Government. Under the current CBP regulations, when brokers discover that a client has not complied with the law or made errors or omissions in documents, affidavits, or other paper required by law, the broker must advise the client promptly of the noncompliance, error, or omission. See 19 CFR 111.39(b). The proposed new requirement puts an affirmative duty on the broker to document and report to CBP when the broker terminates representation of a client as a result of determining that the client is attempting to defraud or otherwise commit any criminal act against the U.S. Government. This requirement covers situations where a broker advises the client of a noncompliance, error, or omission, the client directs the broker to continue such noncompliance, error, or omission, and in response the broker terminates its relationship with the client. The proposed changes will allow brokers to act as ‘‘force multipliers’’ in combating fraud and other schemes against the government.”⁴

As expected, some commenters publicly raised questions about this section. The following are highlights:

• In response to comments regarding the false or misleading statements the broker “should have known” as stated in 19 CFR 111.32, the following:
  
  “CBP cannot provide a comprehensive list of facts and circumstances that a broker should have known. What a broker should have known is based on a reasonable person’s standard based on a broker’s customs business, and the information the broker has before him or her, the broker should be able to make the assessment whether certain information is false or misleading and whether the broker should have known. “Misleading” information is information that could be deceptive, confusing, misrepresentative or just false. Whether a misunderstanding qualifies as the broker’s having filed, solicited, or procured the giving of false or misleading informationdepends on the facts and circumstances of a broker’s knowledge, expertise, and actions.”


• In response to a comment that the new reporting requirement discourages confidential communication and collaboration between a broker and its client for improved compliance, CBP stated in the comment analysis in the Preamble to the Final Rule:
  
  “CBP proposed the change in § 111.32 to ensure that a broker not only advise a client after discovery that the client has not complied with the law or made errors or omissions in documents, but also document and report to CBP when a broker terminates the representation of the client who directs the broker to continue the noncompliance, error, or omission.”


• In response to a comment that the broker’s reporting duty under section 111.32 would deprive an importer of the ability to make a prior disclosure under 19 U.S.C. 1592 and that brokers already have an obligation under 19 U.S.C. 1641 to advise clients of errors and how to correct them, making this new requirement beyond the scope of Section 1641, CBP stated the following in the comment analysis in the Preamble to the Final Rule:
  
  “If an importer discloses the circumstances of a violation under 19 U.S.C. 1592(a) before, or without knowledge of, the commencement of a formal investigation of such violation (which could be triggered by a broker’s report), then full benefits of prior disclosure treatment will be afforded. As to the second commenter, a broker has a general duty to disclose any information that he or she has learned while exercising customs business which indicates that a client is attempting to defraud the government. If a broker learns of any noncompliance or errors, then the broker must not keep this information to himself or herself but must report it to CBP, which will assist in combating fraud and other schemes against the government.”


• In response to a comment that section 111.32 would add a burden requiring brokers to adjudicate an importer’s actions, CBP stated the following in the comment analysis in the Preamble to the Final Rule:
  
  “CBP is not asking brokers to adjudicate a client’s actions, but if brokers see any wrongdoing on the part of their clients, and they separate from or cancel representation of their clients as a result of having identified any wrongdoing, then brokers must alert CBP.”⁵

CBP provides some guidance for the trade community

In the Customs Broker Guidance for the Trade Community, issued on December 19, 2022, CBP set out the following bullet points to detail how brokers may comply with the requirement under 19 CFR 111.32 to “document and report to CBP when the broker separates from or cancels representation of a client as a result of determining the client is intentionally attempting to use the broker to defraud the U.S. Government or commit any criminal act against the U.S. Government.”⁶

• Documentation - A customs broker must document any information or records that the broker deems to be counterfeit, altered, or intended for fraudulent use, by a client which intentionally attempts to use the broker to defraud, or otherwise commit any criminal act, against the U.S. Government.
  • The information or records documented may constitute a violation of law, serve as potential evidence of criminal intent, or identify specific intent to deceive or cheat the U.S. government.
  • The information or records relevant for documentation may be in the format of an email, interview, consultation, or summarized phone conversation, etc.
  • Brokers should compile all documents relating to a client’s separation or termination in addition to documents evidencing why the broker determined the client had intentionally attempted to defraud the U.S. Government or commit a criminal act.
  • A broker should draft an explanation of their determination that a client intentionally attempted to defraud the U.S. government or commit a criminal act.
  
  
• Example of Reportable Offenses - A customs broker must notify CBP if it has determined that the client has intentionally violated or is attempting to violate U.S. laws or has intentionally attempted or is demonstrating intent to defraud the U.S. government, by utilizing the broker.
  • The violation or potential violation of a law which causes the broker to determine a client may have committed or is attempting to commit a criminal act is not limited to U.S. trade laws. However, brokers are not expected to make a determination as to the precise nature and repercussions of a suspected criminal act. Brokers need only report to CBP the identity of a client from whom the broker separates and retain any evidence documenting the client’s possible criminal act. Examples of conduct which may cause a broker to separate from a client and, therefore, would require a broker to report to CBP may include, but are not limited to, the following:
    • Providing any false or fraudulent statement, information, or documents to CBP to obtain an improper duty rate or duty refund etc. Falsely declaring country of origin information in order to avoid anti-dumping and/or countervailing duties, or to import restricted or prohibited merchandise to the U.S.
    • Any activity that is meant to deprive the government of duties, taxes, and fees, such as undervaluing or misclassifying imported goods to evade the actual customs duties owed.
    • Evidence of possible forced labor violations in the manufacturing or shipping documents a broker reviews as part of an entry.
    • Refusing to identify the anti-dumping and/or countervailing duty order which the broker cautioned is applicable to the listed merchandise.
    • Evidence of possibly illegal importation of prohibited or restricted merchandise, such as counterfeit/fake goods, narcotics, or weapons.
    • Importation of merchandise which threatens the health and safety of consumers, such as contaminated produce.
    • Any possible criminal activity arising from the shipment of merchandise, such as smuggling, Jones Act violations, improperly documented transshipment, or diversion of in-bond merchandise.
    • Financial crimes such as money laundering.
    • Cybercrimes such as website fraud.
    • International crimes such as theft of cultural artifacts, art, or antiquities.
      ….

• The following information should be reported:
  • The broker’s contact information.
  • The former client’s business name(s) and address(es).
  • Date of separation or cancellation.
  • A description of the potentially fraudulent or criminal activity conducted by the former client.
  • Documentation evidencing how/why the broker determined their former client was engaged in possible fraud or criminal activity.

Prior disclosures under 19 U.S.C. 1592(c)(4)

Since 1998, CBP has provided an Informed Compliance Publication (ICP) on prior disclosures, which always has encouraged importers to self-report violations discovered to CBP.⁷ This is in contrast to the tenor of the Customs Broker Guidance for the Trade Community. The most recent ICP on prior disclosures utilizes a Q & A format to illustrate factual scenarios and steps in the process for making and receiving the benefits of prior disclosures. In the context as illustrated in the following examples from the 2017 ICP, only the importer and CBP, Immigration and Customs Enforcement (ICE) or Homeland Security Investigators (HSI) are involved in the questions relating to a valid prior disclosure:

I have never been contacted by a CBP officer regarding the violation I wish to disclose. Does that mean I qualify for prior disclosure benefits if I fully disclose the circumstances of the violation and tender any duty loss associated with the violation?

Answer: Ordinarily in such cases where there has been no CBP or ICE/HSI contact, you will receive prior disclosure benefits, assuming that you satisfy all of the requirements set forth in 19 CFR § 162.74 and 19 U.S.C. § 1592(c)(4). You should be aware, however, that CBP or ICE/HSI may have already commenced a formal investigation of the circumstances regarding the violation before you submitted the disclosure. In all cases, before submitting any prior disclosure, you should review the provisions in 19 CFR § 162.74(i) to ensure that none of the events listed in that section has taken place. The events listed in 19 CFR § 162.74(i) can give rise to a presumption that a disclosing party had knowledge of the commencement of a formal CBP and/or ICE/HSI investigation. You should remember that the disclosing party has the burden to prove lack of knowledge of the commencement of a formal investigation.

I have reviewed my import transactions and have discovered a mistake on my entry documents relating to the value of the merchandise. Although the value I reported was too low, I have not been contacted by CBP or ICE/HSI and I know that this was not an intentional error. Should I submit a prior disclosure?

Answer: We recommend that you submit a prior disclosure. If you submit a prior disclosure and CBP determines that no violation took place, there are no penalty consequences under 19 U.S.C. § 1592 and, therefore, no record of the disclosure is made. On the other hand, if you submit the prior disclosure and CBP determines that a 19 U.S.C. § 1592 violation did occur, you will be accorded the full benefits of prior disclosure treatment for that violation, assuming of course that you fully disclosed the circumstances of the violation before or without knowledge of the commencement of a formal investigation of what was disclosed and tendered any loss of duties on liquidated entries.

See The ABCs of Prior Disclosure (cbp.gov) at 11.

Broker reporting versus importer disclosing: Moving forward in light of the new amendments

With the recent amendment to 19 CFR 111.32, both customs brokers and importers face decisions and even quandaries in their relationships. For example, the following questions may exist about theoretical scenarios:

• Should the importer inform the broker about the error in order to avoid future incorrect entries before making a prior disclosure to CBP?


• If the importer informs the broker as noted above, should the broker terminate its relationship if the importer wishes to delay making corrections until after it has made a prior disclosure because of the importer’s stated belief that such corrections might trigger an investigation before it has made such disclosure? In this situation, should the broker assume that the later filings will be intentional violations?


• Would the above scenario for later entries represent a “knew” or “should have known” circumstance in section 111.32 for the broker that cooperates with the importer in delaying corrections before a prior disclosure can be made?


• If the broker does terminate the relationship with the importer because the importer does not wish to file corrections right away in order to avoid triggering an investigation before it can make a prior disclosure, will this trigger the reporting requirement?


• If the broker does terminate the relationship with its importer client based and reports to CBP about circumstances that the broker believes to be intentional violations, will this report to CBP automatically trigger the commencement of a formal investigation and “knowledge” thereof in light of the broker’s obligation under 111.32 to disclose such information to CBP in these circumstances?

There are no readily available answers to the above questions, but these scenarios likely already exist in the real world. Practitioners representing both brokers and importers must be mindful of these circumstances in order to avoid disrupting the relationships between two essential characters in the international trade and customs world – the importer and the customs broker – while remaining in compliance with U.S. customs laws.

Therefore, while the new amendment to 19 C.F.R. § 111.32, may present challenges to both brokers and importers, these challenges can be overcome if the two parties continue doing what they have historically done: working hand in hand to ensure they both are not just meeting but exceeding the bar for U.S. customs and international trade compliance.

The broker-importer client relationship underpins many U.S. customs laws and regulations. Keeping the positive foundation of this relationship in mind will support importers, brokers, and CBP going forward.

¹ See 87 Fed. Reg. 63262 and 87 Fed. Reg. 63267, Oct. 18, 2022

² See 28 U.S.C. 1581(g) (1)(2), providing for exclusive jurisdiction of the U.S. Court of International Trade over civil actions involving 19 U.S.C. 1641.

³ See Historical Background in CBP’s Informed Compliance Publication: ICP - Customs Brokers (cbp.gov) at 10.

⁴ See Notice of Proposed Rulemaking Preamble at 85 Fed. Reg. 34836, 34844 (June 5, 2020).

⁵ See 87 Fed. Reg. 63267, supra at 63287-632288.

⁶ See Customs Broker Guidance for the Trade Community (cbp.gov) at page 65.

⁷ See The ABCs of Prior Disclosure (cbp.gov) at 2