Ford Motor Co. dodged a $41.9 million bullet in December when U.S. Customs dropped its effort to collect a NAFTA recordkeeping penalty, but it’s too soon for importers to breathe a collective sigh of relief: The government won’t say why it dropped the penalty claim, and it remains unclear what NAFTA records it will demand when it takes aim at the next importer.
“It’s gratifying that Customs dropped the case, but it does leave the NAFTA importer up in the air,” says Lawrence Friedman, a partner with the law firm of Barnes, Richardson & Colburn, which specializes in trade law. “I know that some companies are reviewing their processes and reaching out to suppliers. I know that other people are taking comfort in the fact that Customs didn’t pursue the case any further.”
Ford is taking a lot of comfort from it. Its motion to dismiss the case was denied last fall, and the automaker was preparing for what many expected to be a tough battle. “It was a pleasant surprise to us when [the claim] was dropped,” says Joseph Hood, outside counsel for Ford.
The government for its part is remaining silent, other than to say that it is taking a new look at the NAFTA compliance obligations.
“The government is re-evaluating the recordkeeping requirements with respect to NAFTA, and as part of that re-evaluation it has elected not to continue to pursue this penalty action,” says Charles Miller, press officer at the Department of Justice, which brought the case on behalf of Customs. Miller declined to answer any other questions, and Lynn Hollinger, public affairs officer for Customs, said the agency could not comment on the case.
The mystery surrounding the government’s decision is a little worrisome, trade experts say. A revised policy on recordkeeping could make NAFTA compliance more cumbersome, but clarity would be largely appreciated either way.
Sawyer
“I think people are still nervous,” says James Sawyer, a partner in the Customs and Trade Team at the law firm Drinker Biddle, which represented the American Association of Exporters and Importers as an amicus curiae in the Ford case. “If the re-evaluation results in more transparency, I think that’s a good thing.”
At issue is whether importers are required to maintain not only certificates of origin provided by exporters, but also records supporting the certificates of origin. In 2001, Customs demanded that Ford turn over documents, including bills of material, for thousands of auto parts imported from Mexico. Ford refused, arguing that the requested documents went beyond the entry records NAFTA requires importers to keep. In 2006, the government filed the lawsuit in the U.S. District Court for the Western District of Texas to collect the penalty.
Customs’ position took the import community by surprise because it was widely believed—and still is—that maintaining production documents and other records supporting certificates of origin is the responsibility of foreign suppliers.
MOTION TO DISMISS
Below is an excerpt of Ford’s argument that the complaint filed by U.S. Customs should be dismissed.
Under NAFTA, for an importer such as Ford to claim duty-free benefits for qualifying imported goods, the importer must have a NAFTA Certificate of Origin (CO) for the imported goods at the time the import entry is filed. The NAFTA CO is a document prepared and issued by the foreign producer of the goods that certifies the goods meet the applicable Rules of Origin and qualify for NAFTA benefits. To support the NAFTA CO it has issued, the foreign producer must maintain supporting records that list all of the component parts and materials used to produce the finished good; NAFTA COs, manufacturers’ affidavits, or other origin documentation for all of the parts and materials listed in the bill of materials (BOM); and the HTS classification of the parts and materials listed in the BOM.
These supporting records are Foreign Producer Records. The only references in any literature and publications issued by Customs to these types of records are found in guidelines and procedures for conducting “origin verification” audits of foreign producers, who issue NAFTA COs. Origin Verifications are the exclusive procedures by which the Customs authorities in an importing NAFTA country (i.e., the United States) can verify the validity of NAFTA COs used by U.S. importers that have been issued by the foreign producers of the NAFTA-eligible goods. While Customs may request these backup records from an importer who has claimed NAFTA benefits, Customs cannot penalize the importer or deny that importer NAFTA benefits for failing to produce the requested records. Only a negative origin determination resulting from a NAFTA origin verification audit can invalidate a foreign producer’s NAFTA CO.
In sum, NAFTA’s and Customs’ own NAFTA regulations and publications establish that Foreign Producer Records need to be maintained by NAFTA producers who issue NAFTA COs. This is because the primary purpose of maintaining Foreign Producer Records is to support NAFTA COs if Origin Verification Audits are conducted. The records demanded by Customs from Ford in the summons undeniably constitute Foreign Producer Records.
Coclisa’s Foreign Producer Records were not records that Ford, as the importer of Coclisa’s goods, claiming NAFTA benefits on the basis of the NAFTA CO that Coclisa issued, was required to maintain or obligated to obtain from Coclisa. There is absolutely no authority to penalize Ford in any way for failing or refusing to produce Coclisa’s Foreign Producer Records. Indeed, not only do Customs’ regulations prohibit such a penalty, but Customs’ own procedure manuals for both NAFTA Audit Verifications and Focused Assessment Audits expressly prohibit the very action Customs has taken in this case.
Source
Ford Motor Co. (Jan. 12, 2007).
“Our fundamental objection to the case was that the records that were all of sudden being characterized as a demand were not entry records,” Hood says. “Our position was that we were only required to obtain the NAFTA certificate of origin as the entry document.”
Ford is far from alone in its interpretation of the importer’s compliance obligations. Having to maintain supporting records to verify certificates of origin would effectively mean monitoring foreign suppliers, which could be a disincentive to purchasing goods from the free trade agreement partners.
“Since NAFTA came into effect in 1994, importers have taken it as a matter of course that the exporter is required to maintain those documents and produce them upon request,” Friedman says. “The best-case scenario would be a return to what everyone believed the situation was, which is that the importer has to keep entry documents and the exporter is required to maintain all the back-up documents.”
What is more likely, Friedman and other trade compliance experts fear, is that the government will take its fight to another arena—perhaps suing another importer. If it takes that route, it already has the district court in El Paso on its side.
Well before Customs dropped the penalty claim in December, Ford tried to have the case dismissed. But in September, the district court denied Ford’s motion for dismissal, concluding that the records sought qualify as entry documents required under NAFTA and that the government has the right to sue to collect the penalty.
“The worst case scenario is that Customs pursues another Ford-style case and in part can rely on the same analysis and same legal arguments in the El Paso case,” Friedman says. “If that decision were to be followed by other courts or by Customs, it presents significant compliance concerns.”
In addition to the district court decision, Customs can turn to trade agreements signed subsequent to NAFTA for ideas on placing heavy recordkeeping burdens on importers. For example, the U.S.-Singapore Free Trade Agreement (signed in 2003) and the U.S.-Australia Free Trade Agreement (signed in 2004) impose stricter requirements.
The requirements Customs sought to apply against Ford were among the most restrictive and onerous of any trade agreement requirements, says Mark Neville, an attorney at the law firm of DLA Piper.
Neville
“I think [the government is] trying to circle back to NAFTA and apply the more robust requirement that came into play in later trade agreements,” Neville says. “I think what they’re looking for is another and stronger case to bring to court and force the issue.”
Given the many questions left unanswered by the case against Ford, importers would be wise to take stock of their recordkeeping practices, Neville and other trade experts advise.
“If you put in a claim for preference, you’ve got to be mindful of the fact that they’re raising the compliance stakes,” Neville says.
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