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PRACTICAL TRADE & CUSTOMS STRATEGIES

March 31, 2013 Volume 2, Number 6

Compliance Concerns in Defense Contracting Opportunities Abroad

By Andy Irwin and Meredith Rathbone (Steptoe & Johnson LLP) In recent weeks, sequestration has gone from doomsday scenario to reality, with the prospect of decreased U.S. government defense spending becoming the new normal for all U.S. aerospace and defense contractors and their major domestic and foreign suppliers. As a practical matter, however, most contractors have been planning for the possibility of sequestration (or generally diminished domestic spending) for some time, recognizing that the high level of defense procurement of the preceding decade could not and would not last forever. In these uncertain times, major companies have been cutting costs and coordinating with uncertain U.S. government officials regarding prospects for their programs, while at the same time trying to maintain employee morale and pursue additional business opportunities. The new normal may herald an era of diminished expectations, greater risk of government terExport Controls, continued on page 12

In This Issue
Top 10 Export Control Issues
Sequestration has become a reality for all U.S. aerospace and defense contractors and their major domestic and foreign suppliers. The new normal may herald an era of greater risk of government terminations, and heightened investigation of contractor fraud and abuse. Page 1

Post-Clearance Recovery of Customs Duties

Importers in Good Faith and the Rectification of the Customs Duty

By Renato Antonini, Eva Monard and Lorenzo Di Masi (Jones Day) 1 Importers often understandably assume that once an import duty has been paid, their liability for customs duties has been definitively established. However, in certain circumstances, importers may be confronted with a request for payment of customs duties relating to imported goods that had been customs cleared a while before and for which import duties had already been paid. These amounts can be very significant and can in some situations even result in bankruptcy. In some cases, the reasons that led the customs authorities to revising the amounts initially collected are based on elements that are beyond the control of the importers themselves. In such cases, EU importers can try to obtain a waiver for the collection of these import duties. The present article describes the conditions that need to be fulfilled in case EU importers want to pursue this possibility. Introduction In general terms, under the customs law of the European Union (EU), the payment of customs duties is made right after the release for free circulation of the goods liable for customs duties, commonly known as customs
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Importers may be confronted with an unexpected request for payment of customs duties even after an import duty has been paid. In such cases, EU importers can try to obtain a waiver for the collection of these import duties given certain conditions. Page 1

International Trade Fraud Investigations

The U.S. Government recently announced another round of recordbreaking criminal charges filed in Honeygate, the largest food fraud investigation in U.S. history, and the latest example of the increased attention that U.S. Immigration and Customs Enforcement (ICE) has given to domestic producer complaints of customs and international trade fraud. Page 3

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clearance. After the payment of the duties owed, EU importers are in theory free from any customs debt. However, in certain cases, the national customs authorities can rectify the amount of the duty payable for the goods released for free circulation and impose to the importers a new, higher customs duty. This operation is technically referred to as post-clearance recovery of the customs duties. In most cases, the rectification of the duty comes as a complete surprise for the importer who has relied on the first determination of the amount payable made by the customs and, under certain circumstances, can be perceived as manifestly unjust. For instance, one very common situation in which rectification of the amount due can take place, relates to the importation of goods from third countries accompanied by certificates of preferential origin, which eventually turn out to be false or incorrect. Under EU law, certificates of preferential origin allow exporters from certain selected countries to export their goods to the territory of the EU at a 0 percent or reduced import duty. Such certificates are issued by the national customs authorities of the exporting country that have to verify that the goods accompanied by the

certificate are indeed originating in their country. EU importers of the goods covered by preferential certificates of origin do not have any control on the operations of the exporting countrys customs authorities issuing such certificates. Nevertheless, if the certificates are found to be false or incorrect (as a result of which the imported goods were not entitled to a preferential customs duty rate) after the release for free circulation of the goods, the national customs authorities are entitled to ask to the importers the payment of the often important amount of import duties not collected at the moment of the customs clearance. Faced with such or a similar situation, the importers can request the application of article 220 (2) (b) of Regulation (EEC) No 2913/92 establishing a Community Customs Code (the CCC).2 This article provides for a waiver to the post-clearance recovery of the duty and can be invoked by any importer when certain conditions are met. The present article aims at describing the conditions for the application of article 220 (2) (b) of the CCC, by referring to the interpretation of the provision given by European courts as well as to the European Commissions practice.
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Published by WorldTrade Executive, a part of Thomson Reuters

Editorial Staff Publisher: Gary A. Brown, Esq.; Senior Editor: Matthew Nolan (Arent Fox LLP) Development Editor: Linda Zhang; Assistant Editor: Dana Pierce
Renato Antonini (Jones Day-Brussels) Jim Bartlett (Northrop Grumman) Steven Becker (Becker Law Offices) Lisa Crosby (Sidley Austin LLP) Gary Clyde Hufbauer (Peterson Institute for International Economics) Justin Miller (White & Case LLP) Mark Neville (International Trade Counselors) Matthew Nolan (Arent Fox LLP) Suzanne Offerman (Thomson Reuters) Kristine Price (Ernst & Young) Laura Siegel Rabinowitz (Sandler, Travis & Rosenberg)

Practical Trade & Customs Strategies

Advisory Board

Practical Trade & Customs Strategies is published twice monthly, except in August and December, by WorldTrade Executive, a part of Thomson Reuters, P.O. Box 761, Concord, MA 01742 USA, Tel: (978) 287-0391, Fax: (978) 287-0302. Email: jay.stanley@thomsonreuters.com. www.wtexecutive.com. Subscriptions: $600 per year. Unauthorized reproduction in any form, including photocopying, faxing, image scanning, or electronic distribution is prohibited by law. Copyright 2013 by Thomson Reuters/WorldTrade Executive
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First, we will provide with some general background information on the concepts of customs debt and of post clearance recovery of the customs duty under EU law. Afterwards, we will analyze in general the four conditions that must be fulfilled for the application of article 220 (2) (b) waiver. Subsequently, we will discuss the application of article 220 (2) (b) to the case of incorrect certificates of preferential origin. Article 220, paragraph 2, point b): background information The CCC provides detailed rules on the incurrence of customs debt, that is, the moment in which the customs duty becomes collectable. In particular, according to Article 201 of the CCC, a customs debt is incurred through (a) the release for free circulation of goods liable to import duties, or (b) the placing of such goods under the temporary importation procedure with partial relief from import duties. Following the incurrence of the customs debt and the communication of its amount, the debtor, who is usually the declarant or its representative, has ten days to proceed with the payment. After its collection, the customs debt is inserted by the customs authorities into their accounts, in the timeframe indicated by Articles 219 and 220 of the CCC. Within the term of three years from the incurrence of the customs debt, the national customs authorities can rectify the amount of such debt and start its recovery in accordance with the procedure set out in article 78 of the CCC (post clearance recovery). The circumstances that can lead the customs to rectify the amount of the debt are numerous and include the case in which the goods were originally imported into the territory of the Union with a certificate of preferential origin, that was later on found to be incorrect. The amount rectified is then entered into the accounts according to the rules laid down in article 220 of the CCC. Article 220 (2) (b) CCC, provides for a waiver to the rectification of the customs debt and its subsequent entry into the accounts by the customs authorities. In the next section we will analyze article 220 (2) (b), describing the requirements to be fulfilled for its application. In doing so, we will refer to the relevant EU case law. The four conditions for the application of Article 220 (2) (b) Article 220, paragraph 2, point b), first subparagraph, reads:

[] subsequent entry in the accounts shall not occur where: [] b) the amount of duty legally owed was not entered in the accounts as a result of an error on the part of the customs authorities which could not reasonably have been detected by the person liable for payment, the latter for his part having acted in good faith and complied with all the provisions laid down by the legislation in force as regards the customs declaration. According to case-law of the Court of Justice of the European Union, the provision constitutes

Post-clearance recovery of customs duty can have a significant financial impact on EU companies involved in import and export activities and can be perceived particularly unjust by those companies that have always acted in good faith and in compliance with EU customs law.
a fairness clause which precludes operators being penalized for the faults of the authorities3 and applies when the four cumulative conditions set out in the first subparagraphs are fulfilled, namely: a) the non-collection of the duties must have been due to an error made by the competent authorities themselves; b) the error made by the authorities must be such that the person liable could not reasonably have been able to detect it in spite of the professional experience and exercise of due care required of him; c) the person liable for payment must have complied with all the provisions laid down by the legislation in force as regards the customs declaration; and d) the person liable for payment was in good faith. The following subparagraphs provide a general description of each one of the above-mentioned conditions.4 The notion of error of the customs authorities The importer seeking the granting of the waiver must demonstrate, in the first instance, the existence of an error on the part of the customs authorities. Article 4(3) CCC defines customs authorities as the authorities responsible inter alia for applying customs rules. This includes the customs authorities of the EU Member States but can also
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include the customs authorities of a third country.5 According to the jurisprudence, only the errors attributable to acts of the customs authorities, and not their mere omissions, can justify the grant of the waiver. The errors recognized as such by the courts include, inter alia, the misapplication or the incorrect interpretation of the applicable customs laws, the publication of national tariffs containing incorrect information and the issue of an incorrect certificate of preferential origin.6 Error that could not reasonably have been detected by the person liable for payment Another condition is that the error could not reasonably have been detected by the person liable for the payment (that is, the importer) in spite of its professional experience and its diligence. According to the relevant case law, the waiver of article 220 (2) (b) cannot be granted to importers that have significant experience in the import and export of the goods in question and that had previously performed operations in

If faced with post-clearance recovery, the importers should verify the chances to obtain the waiver under article 220 (2) (b).

which the duties were correctly calculated. Conversely, have been considered as inexperienced, very small companies and companies performing imports and exports for the first time.7 With regard to the diligence of the operator, it has been observed that it is a precise responsibility of the importer to remain updated on the evolutions of EU legislation concerning the goods that are traded.8 Compliance with the provisions related to customs declaration In order to be eligible for the waiver, the person liable for payment must demonstrate to have complied with all the provisions laid down by the legislation in force as regards the customs declaration. The European Court of Justice has observed that, according to this third condition, the person making the declaration must supply the customs authorities with all the necessary information provided for by the Community rules and the national rules,

supplementing or transposing those rules, if necessary, according to the customs treatment requested for the goods in question. That obligation may not, however, go beyond production of the information and documents that the person liable may reasonably possess or obtain. It follows that if an economic agent produces in good faith information which, although incorrect or incomplete, is the only information which he can reasonably possess or obtain and therefore include in the customs declaration, the requirement of compliance with the provisions in force concerning the customs declaration must be considered to have been fulfilled.9 The good faith of the operator The waiver to post-clearance recovery of the duty does not apply in case there is fraud of the importer. In case there are evidences of fraud, the importer will have to demonstrate to have acted in good faith. 1. The application of article 220 (2) (b) in case of incorrect certificates of preferential origin As explained in the beginning of the present article, one of the most common errors within the meaning of article 220 (2) (b) of the CCC is the issue by the competent authorities of a third country of incorrect certificates of preferential origin. For this reason, by means of Regulation (EC) 2700/2000, article 220 (2) (b) of the CCC has been amended so as to include precise rules on the application of the waiver to this particular situation. According to article 220, (2) (b), second subparagraph, [w]here the preferential status of the goods is established on the basis of a system of administrative cooperation involving the authorities of a third country, the issue of a certificate by those authorities, should it prove to be incorrect, shall constitute an error which could not reasonably have been detected []. Therefore, according to the provision, the importer cannot be considered liable for a payment if the customs authorities of a third country have issued a certificate that is later proved to be incorrect. The general principle set in article 220, (2) (b), second subparagraph, has however certain exceptions. In particular, article 220, (2) (b), third subparagraph, states that the issue of an incorrect certificate shall not, however, constitute an error where the certificate is based on an incorrect account of the facts provided by the exporter, except where, in particular, it is evident that the issuing authorities were aware or should have been aware that the goods did not satisfy the conditions laid down for entitlement to the preferential treatment.

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With regard to the third subparagraph of article 220, (2) (b), it is important to note that, according to the European Court of Justice, it is the responsibility of the customs authorities which wish to rely on the beginning of the third subparagraph of Article 220(2)(b) of the Customs Code to carry out post-clearance recovery to adduce, in support of their claim, evidence that the issue of incorrect certificates was due to an inaccurate account of the facts provided by the exporter. 10 However, the customs authorities do not have to prove that the issue of erroneous certificates was due to an incorrect representation of the facts provided by the exporter, when they are in the impossibility to do so.11 In this case, it is responsibility of the importer to prove that there has indeed been an incorrect representation of the facts provided by the exporter. This approach is justified by the fact that the European Community cannot be made to bear the adverse consequences of the wrongful acts of the suppliers of importers.12 The notion of impossibility includes, inter alia, the case in which the exporting company that has used the incorrect certificates of origin has ceased to exist. The third subparagraph of article 220, (2) (b) also states that the issue of an incorrect certificate of origin can be considered as an error when, it is evident that the issuing authorities were aware or should have been aware that the goods did not satisfy the conditions laid down for entitlement to the preferential treatment. In this case, the burden of proof lies on the importing company and not on the national customs authorities. To conclude, article 220, (2) (b), fifth subparagraph, establishes that [t]he person liable may not, however, plead good faith if the European Commission has published a notice in the Official Journal of the European Communities, stating that there are grounds for doubt concerning the proper application of the preferential arrangements by the beneficiary country. Final remarks As mentioned before, post-clearance recovery of customs duty can have a significant financial impact on EU companies involved in import and export activities and can be perceived particularly unjust by those companies that have always acted in good faith and in compliance with EU customs law. In order to safeguard the legitimate expectation of companies, the EU legislator has provided for a waiver to post-clearance recovery, namely article 220, (2) (b). A close analysis of the relevant EU case-law on the provisions, as well as of the practice of the national authorities and of the European Commission, seems to point to the rather exceptional character of the waiver to post-clearance recovery of customs duties. In other words, it seems that European courts, the European Commission and national customs authorities are in most of the cases reluctant to grant the waiver. In particular, it could be argued that the European institutions and the national customs are more inclined to preserve the EU legitimate interest to customs revenue than the legitimate expectations of companies that have carried out trades in good faith. Considering the difficulties in the application of article 220, (2) (b), the best option available for EU companies involved in international trade is probably trying to prevent post-clearance recoveries from the national customs. This could be done, inter alia, according to the following recommendations. First, in case on any doubt on the application or the interpretation of the provisions related to the customs declaration, it is highly advisable to stop from completing the declaration and immediately consult the customs authority and/or a specialized legal expert. Second, for the avoidance of post-clearance recovery of customs duties, it is extremely important to remain updated on the evolution of EU legislation with respect to the traded goods and the exporting countries. In particular, any announcement made by EU institutions on the opening of antidumping or anti-circumvention investigations in the exporting countries of a company, should be immediately submitted to the attention of the national customs or a specialized legal expert. In any event, if faced with post-clearance recovery, the importers should verify the chances to obtain the waiver under article 220 (2) (b). Indeed, by invoking the right factual and legal arguments, the granting of the waiver is possible and represents a valid instrument to avoid postclearance recovery. o
1 The views adopted in the present article represent the personal opinions of the authors and not the position of Jones Day. 2 OJ L 302, 19.10.1992, p. 1 3 Case T324/10, Firma Lon Van Parys NV, para. 61 4 For a detailed description of Article 220 (2) (b) see European Commission, Information paper on the application of Articles 220(2)(b) and 239 of the Community Customs Code, available at http://ec.europa.eu/taxation_customs/resources/documents/customs/proceCustoms Duty, continued on page 12

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