U.S. Customs Modernization Act 2.0? Not Quite

The idea of “Mod Act 2.0” has been floating around the import community for the past several years. Industry expectations of Mod Act 2.0 are about modernizing customs filings in a manner that would lessen the burden on importers — such as shifting the entry process from a transaction-based system toward an account-based system. Rather than focusing on the needs of the trade community, the draft bill seeks to amend multiple statutes to increase CBP enforcement authority by, inter alia, pulling e-commerce companies within the full scope of U.S. customs laws and imposing additional recordkeeping and data-sharing requirements on not just importers but also those that “facilitate” imports and modifying applicable penalties to expand the scope and reach of civil liability. To the extent that the draft bill addresses customs modernization, it amends various statutes to require electronic filing of entry documentation — which most importers have been doing for years — unless otherwise exempted by CBP.

While few of the proposed changes benefit importers, this presents an opportunity for members of the trade to engage with Congress to advocate for amendments that would bring the bill closer to a true Mod Act 2.0. We explore the most notable amendments in the draft legislation, and their impact, below.

There is a defined focus in Sen. Cassidy’s proposal on bringing e-commerce companies — namely, marketplaces — within the scope of U.S. customs laws (the recordkeeping and penalty provisions, in particular), and the proposed changes could have even farther-reaching effects. For example, the draft bill imposes recordkeeping requirements, and provides CBP with examination and summons authority, on those who own or operate “a commercial or marketing platform or marketplace through which merchandise imported into the United States is offered for sale or purchase in the United States.” Notably, this language is broad enough to potentially cover any domestic company that sells an imported product, not just e-commerce marketplaces. Additionally, the draft proposes to expand the type of documentation and information CBP could require for de minimis (also called Section 321) entries (certain entries valued at under $800), which are often used by e-commerce companies, beyond that currently required for the admission of merchandise. Specifically, the draft authorizes CBP to seek any documentation or information “related to an offer for sale or purchase” or that the agency believes is “reasonably necessary” to determine the admissibility of merchandise, and it imposes civil penalties on those who fail to provide such documentation. In practical terms, these changes would raise the burden on importers, and those that facilitate the importation of merchandise, to provide more information to CBP, while simultaneously expanding their liability.

Beyond the specific focus on e-commerce, the draft legislation proposes other changes to the statutes that govern entry requirements for de minimis and other entries, that would give CBP the authority to use information collected “for any lawful purposes.” Entry documentation and information is currently confidential, but the proposed changes beg the question: Will such information continue to be confidential? The draft also adds that a party must ensure that any entry documentation or information provided to CBP is “true and correct to the best of the knowledge and belief of the party” and imposes civil penalties on any party that fails to do so. These changes appear to elevate the responsibilities of importers beyond the presently accepted meaning of reasonable care.

Other changes in the draft legislation would overhaul CBP’s capabilities with regard to enforcement of intellectual property rights in a manner that appears to implement the Department of Homeland Security’s recommendations in its January 2020 report on Combating Trafficking in Counterfeit and Pirated Goods (the IPR Report). Notably, Section 107 of the draft bill broadens CBP’s authority to share nonpublic information with intellectual property rights (IPR) holders, online marketplaces, express consignment operators, freight forwarders, and other entities that play a role in facilitating the import or sale of imported merchandise in cases where CBP suspects that infringing merchandise is being imported into the United States. Increased information-sharing will enhance both CBP’s and stakeholders’ ability to correctly identify and take action against infringing merchandise, representing a win for IPR holders. This would provide e-commerce marketplaces with additional tools to combat IPR-violative merchandise on their platforms but would likely also raise the government’s expectations on marketplaces to take action on such information and use the information to better seller due diligence. Additionally, proposed changes in Section 202 of the bill would expand the scope of those subject to civil penalties for the import or export of counterfeit goods from anyone who “aids or abets” an importation to anyone “in any way concerned in any unlawful activity.” These changes are an attempt to penalize stakeholders, such as (but not necessarily limited to) marketplaces, who may inadvertently be “concerned in any unlawful activity” if merchandise sold on their platforms and imported into or exported from the United States by a third-party seller is later discovered to be counterfeit. 

Finally, the draft bill makes a number of changes to CBP enforcement procedures and authority. Significantly, Section 206 amends CBP’s general civil penalties statute, 19 U.S.C. § 1592, to remove gross negligence as a standard of liability, leaving fraud and negligence as the two levels of culpability for customs violations, and aligns the definitions of “fraud” and “negligence” with other civil fraud statutes such as the False Claims Act. Additionally, similar to the changes made for IPR-violative merchandise, the proposed amendments to § 1592 widen the scope of liability for those involved in the entry or introduction of merchandise by material and false information, or omission of material information, from those who “aid or abet” to those who “direct or facilitate the entry or introduction of merchandise.” The draft bill also reduces the procedural protections built into the CBP administrative penalty process by raising the threshold that triggers CBP to send a pre-penalty notice from $1,000 to instances where CBP seeks a penalty of more than $500,000. This means that unless CBP assesses a penalty of more than $500,000, the person facing the penalty will lose the opportunity to engage with CBP at the pre-penalty stage. That person will have just one bite at the apple to seek cancellation or mitigation of the penalty after the penalty notice is issued. While the regulations provide for a second, supplemental petition, CBP is not always required to grant importers the right to file such absent an agreement to waive the statute of limitations. Therefore, this change will reduce the procedural protections for many against whom CBP attempts to collect penalties unless the party is willing to waive its rights under the statute of limitations. This may force parties to either pay penalties they believe are too high or unjustified or to engage in costly litigation at the Court of International Trade.

In light of the bill’s lack of meaningful modernization for traditional importers and other shortcomings discussed above, members of the trade may wish to engage with the Senator’s office in the coming weeks. CBP has indicated that it considers this bill to be a meaningful part of its 21st Century Customs Framework initiative. As a result, it would be worthwhile to submit comments on the draft in an effort to urge the inclusion of amendments that would be beneficial to the modern importer.