CUSTOMS

Trade and Security

   It has been more than one year since the terrorist attacks on the United States .  It was a year that changed the country forever in many ways.  For those engaged in international trade the biggest changes may be yet to come. 

  Homeland Security Department

   On June 24, 2002 , H.R. 5005, a bill to create a new Department of Homeland Security, was introduced in the House of Representatives and referred to numerous committees.  The bill was introduced at the request of President Bush.  The amendments, committee reports, and comments of members on the same were forwarded to the House Select Committee, a special committee established by House Resolution charged with the task of reconciling all committee amendments and forming a comprehensive bill establishing the Department of Homeland Security.  The House Select Committee convened on Friday July 19, 2002 to produce the bill that reached the House floor.   On July 26th, the bill passed the House by a vote of 295-132 without significant amendment.

   In the Senate, S. 2452 was introduced on May 2, 2002 by Senators Lieberman, Specter and Graham and referred to the Committee on Governmental Affairs.  This bill incorporates substantial portions of two other bills that were introduced shortly after Sept. 11.  Since Sept. 11 the Government Affairs Committee held more than a dozen hearings on the subject of creating a new department.  The committee held mark up sessions on July 24th and 25th to produce a final bill.  The Senate leadership has vowed to make the Homeland Security bill the first order of business upon return from recess after Labor Day. 

   Debate emerged on the Homeland Security legislation over appropriations and spending authority for the new department, congressional oversight and jurisdiction over department activities, civil service rights of new department employees, and other matters that are not likely to directly impact companies engaged in international trade.  However, there are at least three issues related to the proposed department that are of direct concern to such companies.  They are: trade facilitation, carrier security measures, including public access to company information about the same, and liability limitations for persons deploying certain anti-terror technology.

Trade facilitation

   Business depends on the ability to expedite cargo across the border.  The biggest fear of our clients is that the new Homeland Security Department will not be focused on the commercial aspects of border operations and that this will cause difficulties for business.

   The House Ways and Means Committee made the facilitation of trade while enhancing security the primary focus of its hearings.  It issued recommendations and an amendment to H.R. 5005 that would transfer the Customs Service to the new department, but ensure that the core Customs Service components dedicated to trade and revenue collection remain a separate and distinct entity.  Moreover, the committee’s amendment would require that a portion of the Merchandise Processing Fee be used to fund the Automated Commercial Environment (ACE), an automated electronic import processing system.   The full implementation of ACE would greatly assist in the expeditious processing of commercial cargo.

   The House Select Committee adopted the Ways and Means Committee amendment, and the bill approved by the whole House contained these valuable provisions regarding Customs and trade facilitation.  The Senate bill does not provide as much detail about trade facilitation and the continued distinct commercial operations of the Customs Service; however, such provisions are likely to find support in the Senate.

Carrier security measures and access to information

   The House Committee on Energy and Commerce focused on technologies and infrastructure protection, which affect international transportation companies.  While during the course of the hearings there were occasional references or questions by members about whether voluntary implementation of anti-terror technologies was sufficient, no amendments emerged that imposed mandatory security requirements on companies.  In fact, the bill approved by the House expressly provides that the law confers no new regulatory authority on any federal agency.

   The bill passed by the House encourages private sector cooperation with the government to improve security by specifically providing that information voluntarily shared with the federal government by the private sector relating to infrastructure vulnerabilities may be exempted from disclosure under the Freedom of Information Act (FOIA).  This exemption from FOIA received attention in several House committee hearings.  The Senate bill does not include this type of express confidentiality provision for infrastructure information. 

Liability limitations

   The bill that passed the House incorporates novel liability limitations.  These provisions establish a system for the new Secretary of Homeland Security to certify anti-terrorism technologies based on specified criteria.  The bill would then establish a federal cause of action for claims related to acts of terrorism when certified antiterrorism technologies have been deployed in defense against such acts and the claims may result in loss to the seller of the technology. 

   The federal cause of action would not allow for payment of punitive or other non-pecuniary damages.  We believe the provisions could be interpreted to extend the liability protections to a user of anti-terror technology, like a transportation or manufacturing company, thus the extraordinary liability protections might serve as an incentive to deploy new anti-terror technologies.  However, there is no similar provision in the Senate bill and the Senate is not expected to approve such a program.

   It is almost certain that Congress will agree on legislation to create a new Department of Homeland Security, although it is not clear how soon this will happen.  The Department will take years to begin operating as envisioned so rushing it through the legislative process does not seem necessary.  Those businesses engaged in international trade should be more concerned that the final law that is passed includes sufficient protections for and continuity in U.S. Customs’ commercial trade operations and imposes no mandatory security measures on the private sector.

Customs and Trade Partnership Against Terrorism (C-TPAT)

   Regardless the creation of a new Homeland Security Department, the U.S. Customs Service has continued to develop and implement its voluntary security enhancement program for importers and other companies participating in the international supply chain.  Much has been reported on C-TPAT and many companies have already agreed to join the program or have been asked by Customs to do so.  Details on C-TPAT are still lacking.  We have been engaged in discussions with Customs officials to learn more about how the application process and program is working in practice.

   The biggest myth that we have seen reported is that security will be an element of future Customs audits.  Security has not been integrated into the Focused Assessment evaluation of trade compliance.  Officials in Customs Headquarters’ Regulatory Audit Division have confirmed that there is “no link between C-TPAT and Audits.”  In fact, we do not believe that Customs has the legal authority to include security measures in the audit program.  Of course, Congress could, in the future, give Customs the authority to require security measures by importers and to test those measures in audits.  However, there is no such legislative proposal pending.

   Unlike in the past, being found to be low risk for trade compliance as a result of an audit is not enough to obtain overall low risk status.  In other words, a company needs to be a C-TPAT member to enjoy fewer cargo inspections.  In our discussions with Customs it has also become apparent that not all C-TPAT members will be granted this status.  Rather, among C-TPAT enrolled companies some will be reviewed and judged by Customs to be low risk.  Those are the companies that can expect to enjoy the lower inspection rate.

   It has been reported that importers who have not previously been designated low risk may apply for C-TPAT but must be the subject of  risk assessments (covering both security and trade compliance).  Customs officials have advised us that the only reviews are internal reviews conducted by committees of Customs staff from various offices.  There is a committee that reviews C-TPAT applicants for trade compliance and one that reviews applicants for security.  Customs’ preference is to accept all people and definitely not to audit people based on a C-TPAT application. 

   The security profile that C-TPAT applicants must prepare and submit will probably be the primary focus of Customs’ internal review.  There is no formal approval system.  We expect Customs will respond to each profile submission in some way, and if a response does not contain expressed concerns, recommendations or requests for additional measures, then Customs has ostensibly blessed the profile and system. 

   Customs is also placing emphasis on importers getting to know the companies with which they do business in the international supply and logistics chain.  This is good for business and good for security.  However, we have some concerns over the extent to which Customs will try to influence transportation and supply chain decisions.  There is also concern over whether Customs will attribute poor security, or lack of information about security by third parties, to importer C-TPAT applicants. 

   Another concern is that Customs is developing C-TPAT programs for many types of participants in the logistics chain, i.e., brokers, forwarders and carriers, and that C-TPAT approved low risk importers’ shipments will not necessarily enjoy reduced inspections unless every company in the logistics chain of the shipment is also proactive, secure and approved.  The C-TPAT program is designed to make importers only deal with brokers who are C-TPAT approved, and ensure that those brokers only use C-TPAT approved forwarders and that the forwarders only use C-TPAT carriers.  This could disrupt long-effective supply chains and business relationships.  Even if a company wants to only work with low risk C-TPAT approved members to ensure that its cargo is expedited at the border, the fact that parties can apparently be approved C-TPAT members, yet not be considered low risk because Customs believes that they need improved security measures will make it difficult for the discerning logistics customer.

   We will continue to monitor developments in the C-TPAT program.  So far Customs has received several hundred Memorandums of Understanding from importers agreeing to enter the C-TPAT program.  Customs has not yet received many security profiles.  We were advised that Customs has granted extensions of the time to prepare the profiles.  Now that C-TPAT is opening up to parties other than importers, applications will increase and it is not clear how promptly Customs will process them 

   Because the profiles are reviewed and used as the basis for Customs to either accept a C-TPAT member as low risk or request that additional measures be taken, we recommend importers take the time to properly review their security procedures and policies and present them to Customs in the most comprehensive and best light with a view to immediate low risk designation. 

   Freight forwarders and customs brokers often have difficulties processing cargo because the current system is over taxed and sometimes breaks down or performs poorly.

  Jason Waite is an attorney in the Washington , D.C. office of Alston & Bird LLP. He specializes in international trade regulation and Customs law. Alston & Bird represents a broad range of clients in virtually every area of practice related to international business and trade. Waite can be reached at jwaite@alston.com, and at (202) 756-3300.