Tuesday, June 21, 2011

Importer Needed Assist in Court to Help with His Half Million Dollar Assist Problem

On June 15, 2011, the U.S. Court of International Trade (CIT) found that both importer Trek Leather, Inc. and the company’s president and sole shareholder, Harish Shadadpuri, were grossly negligent in violation of 19 U.S.C. § 1592 for the failure to report fabric assists in the dutiable value of imported men’s suits. Although it is expected that the defendants will appeal the CIT’s decision, if the decision stands, the defendants are jointly and severally liable to U.S. Customs and Border Protection in the amount of $45,245.39 plus interest in unpaid customs duty and $534,420.32 in penalties. Maybe the defendants are lucky – Customs had sought damages in the amount of over $2.3 million for fraudulently omitting the value of the assists on the entry documentation.

How did we get here? Trek is an importer of men’s suits. Mr. Shadadpuri, through the corporate entity, purchased fabric that he provided to the foreign manufacturer who incorporated the fabric into the suits that were later imported by Trek into the United States. In August 2004, the import specialist investigated Trek and discovered that Trek consistently neglected to declare the assists in the transaction value of the imported suits. The problem for the defendants is that two years earlier, Mr. Shadadpuri had also failed to declare assists for another company he owned, Mercantile Wholesale, Inc. Mercantile had paid approximately $46,000 in unpaid duty and interest for its failure to include the assist in the dutiable value, but Customs did not seek penalties. Apparently, Mr. Shadadpuri did not learn his lesson.

Customs alleged that Mr. Shadadpuri, as the owner of both Mercantile and Trek, should have known to include the value of the assists in the value of the imported suits. In failing to do so, Customs instituted an action against Trek and Shadadpuri, alleging that (1) they committed fraud by knowingly and intentionally omitting the value of the assists, (2) in the alternative, they were grossly negligent in omitting the value of the assists and (3) that Shadadpuri could be held personally liable.

This decision is significant for several reasons. First, although Trek was the importer of record and is a corporation and separate entity from Shadadpuri, the court found that Shadadpuri as the sole owner of Trek was personally liable for the back duty and the penalties. That means that if his company does not have the money to pay the penalties, he must pay it personally with his own assets—his bank account, house, car—anything he owns to pay off the debt to Customs. It is one thing if the company you own goes out of business; it is entirely another thing when you are not protected by the corporate veil. This should serve as a wakeup call to small and privately-owned importers.

Second, not having internal controls in place to ensure that assists are captured in transaction value can lead to big problems with Customs. Even if Customs did not seek penalties in the amounts of $500,000 + (grossly negligent) or $2.3+million (fraud), paying $40,000+ in unpaid duty and interest in one lump sum, as opposed to over the course of shipments, is not always easy when a company may not have the cash flow. Moreover, the goods have already been sold, making it impossible to recoup the additional duty from the customer.

Third, this case cautions an importer that once Customs discovers you have made a material error, particularly one that affects the value of goods and thereby the amount of duty collected, an importer would be wise not to make the same mistake again! The reason Customs and the court threw the book at the importer in this case was because Shadadpuri made the same mistake just two years earlier and admitted to the import specialist that he knew that Trek should have declared the assists. Shadadpuri’s credibility was questioned.
Finally, Customs is stepping up enforcement of importation activities. Customs considers assists a red flag issue for importers and will continue to pursue those that do not declare them. Customs has shown that it will even go after an importer for fraud, if the facts support it. This could lead to penalties large enough to put a company out of business and if nothing else, also leads to large legal bills that probably could have been avoided.

Moral of the story: declare assists, put internal controls in place and if Customs calls saying it is investigating you, say nothing and immediately contact customs counsel.

The case can be found at:

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