[Federal Register Volume 63, Number 188 (Tuesday, September 29, 1998)]
[Proposed Rules]
[Pages 51868-51874]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25895]


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DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Parts 162, 171 and 191

RIN 1515-AC21


Penalties for False Drawback Claims

AGENCY: Customs Service, Department of the Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document proposes to amend the Customs Regulations to set 
forth the procedures to be followed when false drawback claims are 
filed and penalties are thereby incurred. The proposed regulatory 
changes would implement section 622 of the Customs modernization 
provisions of the North American Free Trade Agreement Implementation 
Act. These new provisions track, to the greatest extent possible, the 
procedures that have been set forth for section 592 of the Tariff Act 
of 1930, as amended (19 U.S.C. 1592). This document also sets forth 
proposed mitigation guidelines that Customs would follow in arriving at 
a just and reasonable assessment and disposition of liabilities when 
false drawback claims are filed and penalties are incurred. Finally, 
the document proposes to amend the Customs Regulations in order to 
provide more specificity regarding the grounds and procedures for 
removal of a participant from the drawback compliance program.

DATES: Comments must be received on or before November 30, 1998.

ADDRESSES: Written comments (preferably in triplicate) may be addressed 
to the Regulations Branch, Office of Regulations and Rulings, U.S. 
Customs Service, 1300 Pennsylvania Avenue, NW, Washington, DC 20229. 
Comments submitted may be inspected at the Regulations Branch, Office 
of Regulations and Rulings, U.S. Customs Service, 1300 Pennsylvania 
Avenue, NW, 3rd Floor, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Charles Ressin, Penalties Branch, 
Office of Regulations and Rulings, 202-927-2264.

SUPPLEMENTARY INFORMATION:

Background

    This document proposes to amend the Customs Regulations to 
implement section 622 of Title VI of the North American Free Trade 
Agreement Implementation Act (Pub. L. 103-182). Title VI of the North 
American Free Trade Agreement Implementation Act is popularly known as 
the Customs Modernization Act. Paragraph (a) of section 622 amended the 
Tariff Act of 1930, as amended, by adding section 593A, which prohibits 
the filing of false (fraudulent or negligent) drawback claims and 
prescribes the actions that Customs may take, including the assessment 
of monetary penalties, if such claims are filed (gross negligence is 
not separately set forth as a level of culpability in the new statutory 
provision). New section 593A was codified as section 1593a of Title 19 
of the United States Code (19 U.S.C. 1593a, hereinafter ``the 
statute'').
    As in the case of penalties under section 592 of the Tariff Act of 
1930, as amended (19 U.S.C. 1592), specific procedures and other 
requirements are set forth in the statute for prepenalty notices and 
penalty claims, the former not being required by the statute if the 
penalty is $1,000 or less. The statute provides that approval of 
Customs Headquarters is required if a prepenalty notice alleging fraud 
is contemplated. The statute also further provides for the 
applicability of section 618 of the Tariff Act of 1930, as amended (19 
U.S.C. 1618), which authorizes the administrative remission or 
mitigation of penalties. Written decisions, setting forth a final 
determination and findings of fact and conclusions of law upon which 
that determination was based, are also mandated by the statute.
    Rather than setting forth specific penalty amounts, the statute 
provides for the assessment of monetary penalties in amounts not to 
exceed a specific percentage of the actual or potential loss of 
revenue, with the applicable percentage depending on the level of 
culpability, whether there have been prior violations involving the 
same issue, and whether the violator is a participant in the Customs 
drawback compliance program (the statute provides for the establishment 
of a drawback compliance program, and regulatory provisions relating to 
the operation of that program were adopted as part of the amendments to 
the Customs Regulations regarding drawback published in the Federal 
Register as T.D. 98-16 on March 5, 1998, 63 FR 10970). For purposes of 
applying the monetary penalties prescribed in the statute, Customs 
proposes in this document to define loss of revenue with reference to 
the amount of drawback that is claimed and to which the claimant is not 
entitled.
    The statute further provides for limited penalty assessment for 
filing a false drawback claim if there is a prior disclosure of the 
violation. As in cases brought under section 592, the limited penalty 
assessment would be applicable only in those instances in which the 
circumstances of the violation are disclosed before, or without 
knowledge of the commencement of, a formal investigation. In this 
context, this document should be read in conjunction with the notice of 
proposed rulemaking regarding prior disclosure that was published in 
the Federal Register on September 26, 1996 (61 FR 50459).
    The statute provides for penalties, or notices of violation in lieu 
of penalties, as set forth below in cases involving negligent 
violations (under the statute, a repetitive violation is one which 
involves the same issue as a prior violation): 1. If the violator is 
not a participant in the drawback compliance program, Customs shall 
assess monetary penalties in amounts not to exceed the following:
    a. 20 percent of the loss of revenue for the first violation;
    b. 50 percent of the loss of revenue for the first repetitive 
violation; and
    c. The loss of revenue in the case of a second and each subsequent 
repetitive violation.

[[Page 51869]]

    2. If the violator is a participant in the drawback compliance 
program and is generally in compliance with the provisions thereof, the 
following actions shall be taken by Customs:
    a. For a first violation and for any other violation that is not 
repetitive or that involves the same issue as a prior violation but 
does not occur within three years from the date of that prior 
violation, a notice of violation (warning letter) shall be issued;
    b. For the first violation that is repetitive and that occurs 
within three years from the date of the violation of which it is 
repetitive, a monetary penalty of up to 20 percent of the loss of 
revenue shall be assessed;
    c. For the second violation that is repetitive and that occurs 
within three years from the date of the first of two violations of 
which it is repetitive, a monetary penalty of up to 50 percent of the 
loss of revenue shall be assessed; and
    d. For a third and each subsequent violation that is repetitive and 
that occurs within three years from the date of the first of three or 
more violations of which it is repetitive, a monetary penalty not to 
exceed the loss of revenue shall be assessed.
    In the case of a fraudulent violation, the statute makes no 
distinction between drawback compliance program participants and those 
who do not participate in the program: a fraudulent violation gives 
rise to a monetary penalty in an amount not exceeding three times the 
loss of revenue or, if there has been a prior disclosure regarding the 
fraudulent violation, in an amount not exceeding the loss of revenue.
    If there has been a valid prior disclosure regarding a negligent 
violation, drawback compliance program participants and those who do 
not participate in that program are also treated the same: the violator 
is subject to a monetary penalty that may not exceed an amount equal to 
the interest computed on the basis of the prevailing rate of interest 
applied under 26 U.S.C. 6621 on the amount of actual revenue of which 
the United States is or may be deprived during the period from the date 
of overpayment of the claim to the date of tender of the overpaid 
amount.
    In order to obtain the benefits of prior disclosure in both fraud 
and negligence cases, tender of the amount of the overpayment is 
required either at the time of disclosure or within 30 days (or such 
longer period as Customs may provide) after Customs gives notice of its 
calculation of the amount of the overpayment.
    Paragraph (b) of section 622 of the Customs Modernization Act 
provides that the provisions of the statute shall apply only to 
drawback claims filed on and after Customs implements nationwide an 
automated drawback selectivity program, and mandates the publication in 
the Customs Bulletin of the effective date of the selectivity program.
    The proposed amendments set forth in this document to implement the 
statute involve changes to the penalty procedure provisions within 
parts 162 and 171 of the regulations and the addition of a new appendix 
D to part 171 to set forth guidelines for the imposition and mitigation 
of monetary penalties incurred under the statute. To the greatest 
extent possible, and except where the statute expressly mandates a 
different approach, the regulatory amendments set forth in this 
document are modeled on the section 592 regulatory provisions and thus, 
among other things, reflect the definitions of ``fraud'' and 
``negligence'' (which includes gross negligence) that are intended to 
be applied in cases brought under section 592 (see Senate Report 103-
189 at pages 73-74). As noted above, these proposed regulations, if 
adopted as a final rule, will not be effective until Customs implements 
an automated drawback selectivity program.
    Finally, with regard to the final amendments to the Customs 
Regulations regarding drawback published as T.D. 98-16 as mentioned 
above, Customs notes that the provisions regarding the operation of the 
drawback compliance program (set forth as subpart S within part 191) 
include, in Sec. 191.194 (e) and (f), procedures regarding the 
revocation of certification for participation in the program. However, 
contrary to the approach taken elsewhere in the Customs Regulations in 
the context of a revocation or removal of a privilege, those drawback 
compliance program provisions do not include specific grounds for such 
action. Moreover, those paragraph (e) and (f) texts only refer to 
proposed revocation actions (with a delayed effective date following 
notice of the proposed revocation). Thus, no provision exists in those 
regulatory texts for a revocation with immediate effect when the basis 
for the revocation involves willfulness on the part of the program 
participant or when public health, interest, or safety requires 
immediate revocation, notwithstanding the fact that such immediate 
action may be necessary and would be consistent with the license 
revocation principles enshrined in the Administrative Procedure Act 
(see 5 U.S.C. 558(c)). This document proposes to revise Sec. 191.194 
(e) and (f) in order to address the above points and in order to 
otherwise improve the organization of, and procedures reflected in, 
those texts. In addition, the proposed text revisions refer to 
``removal'' (rather than ``revocation'') of certification in order to 
reflect statutory terminology (see 19 U.S.C. 1593a(f)(1)).

Comments

    Before adopting these proposed amendments, consideration will be 
given to any written comments timely submitted to Customs. Comments 
submitted will be available for public inspection in accordance with 
the Freedom of Information Act (5 U.S.C. 552), Sec. 1.4, Treasury 
Regulations (31 CFR 1.4), and Sec. 103.11(b), Customs Regulations (19 
CFR 103.11(b)), on regular business days between the hours of 9 a.m. 
and 4:30 p.m. at the Regulations Branch, Office of Regulations and 
Rulings, U.S. Customs Service, 1300 Pennsylvania Avenue, NW., 3rd 
Floor, Washington, DC.

Regulatory Flexibility Act and Executive Order 12866

    Insofar as the proposed regulations closely follow legislative 
direction, pursuant to the provisions of the Regulatory Flexibility Act 
(5 U.S.C. 601, et seq.), it is certified that the proposed amendments, 
if adopted, will not have a significant economic impact on a 
substantial number of small entities. Accordingly, the amendments are 
not subject to the regulatory analysis requirements of 5 U.S.C. 603 and 
604. This document does not meet the criteria for a ``significant 
regulatory action'' as specified in E.O. 12866.

List of Subjects

19 CFR Part 162

    Customs duties and inspection; Law enforcement; Penalties; Seizures 
and forfeitures.

19 CFR Part 171

    Administrative practice and procedure; Customs duties and 
inspection; Law enforcement; Penalties; Seizures and forfeitures.

19 CFR Part 191

    Administrative practice and procedure; Customs duties and 
inspection; Drawback.

Proposed Amendments to The Regulations

    For the reasons set forth above, it is proposed to amend parts 162, 
171 and 191 of the Customs Regulations (19 CFR parts 162, 171 and 191) 
as follows:

[[Page 51870]]

PART 162--RECORDKEEPING, INSPECTION, SEARCH, AND SEIZURE

    1. The general authority citation for part 162 is revised to read 
as follows:

    Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1592, 1593a, 1624.
* * * * *
    2. In Sec. 162.71, paragraphs (b) through (e) are redesignated as 
paragraphs (d) through (g) and the heading for paragraph (a) is 
revised, and new paragraphs (b) and (c) are added, to read as follows:


Sec. 162.71  Definitions.

* * * * *
    (a) Loss of duties under section 592. * * *
    (b) Loss of revenue under section 593A. When used in Sec. 162.73a, 
the term loss of revenue means the amount of drawback that is claimed 
and to which the claimant is not entitled and includes both actual and 
potential loss of revenue.
    (1) Actual loss of revenue. When used in Secs. 162.73a, 162.74(h), 
162.77a and 162.79b, the term actual loss of revenue means the amount 
of drawback that is claimed and has been paid to the claimant and to 
which the claimant is not entitled.
    (2) Potential loss of revenue. When used in Sec. 162.77a, the term 
potential loss of revenue means the amount of drawback that is claimed 
and has not been paid to the claimant and to which the claimant is not 
entitled.
    (c) Repetitive violation. When used in Sec. 162.73a to describe a 
violation, repetitive has reference to a violation by a person that 
involves the same issue as a prior violation by that person.
* * * * *
    3. A new Sec. 162.73a is added to read as follows:


Sec. 162.73a  Penalties under section 593A, Tariff Act of 1930, as 
amended.

    (a) Maximum penalty without prior disclosure for a drawback 
compliance program nonparticipant. If the person concerned has not made 
a prior disclosure as provided in Sec. 162.74 and has not been 
certified as a participant in the drawback compliance program under 
part 191 of this chapter, the monetary penalty under section 593A, 
Tariff Act of 1930, as amended (19 U.S.C. 1593a), shall not exceed:
    (1) For fraudulent violations, three times the loss of revenue; and
    (2) For negligent violations, (i) 20 percent of the loss of revenue 
for the first violation,
    (ii) 50 percent of the loss of revenue for the first repetitive 
violation, or
    (iii) One times the loss of revenue for the second and each 
subsequent repetitive violation.
    (b) Maximum penalty without prior disclosure for a drawback 
compliance program participant--(1) General. If the person concerned 
has not made a prior disclosure as provided in Sec. 162.74 and has been 
certified as a participant in, and is generally in compliance with the 
procedures and requirements of, the drawback compliance program 
provided for in part 191 of this chapter, the monetary penalty or other 
sanction under section 593A, Tariff Act of 1930, as amended (19 U.S.C. 
1593a), shall not exceed:
    (i) For fraudulent violations, three times the loss of revenue; and
    (ii) For negligent violations,
    (A) Issuance of a written notice of a violation (warning letter) 
for the first violation and for any other violation that is not 
repetitive or that is repetitive but does not occur within three years 
from the date of the violation of which it is repetitive,
    (B) 20 percent of the loss of revenue for the first repetitive 
violation that occurs within three years from the date of the violation 
of which it is repetitive,
    (C) 50 percent of the loss of revenue for the second repetitive 
violation that occurs within three years from the date of the first of 
two violations of which it is repetitive, or
    (D) One times the loss of revenue for the third and each subsequent 
repetitive violation that occurs within three years from the date of 
the first of three or more violations of which it is repetitive.
    (2) Notice of violation and response thereto. (i) The notice issued 
by Customs under paragraph (b)(1)(ii)(A) of this section shall:
    (A) State that the person concerned has violated section 593A;
    (B) Explain the nature of the violation; and
    (C) Warn the person concerned that future violations of section 
593A may result in the imposition of monetary penalties. The notice 
shall also warn the person concerned that repetitive violations may 
result in removal of certification under the drawback compliance 
program provided for in part 191 of this chapter until the person takes 
corrective action that is satisfactory to Customs.
    (ii) Within 30 days from the date of mailing of the notice issued 
under paragraph (b)(1)(ii)(A) of this section, the person concerned 
shall notify Customs in writing of the steps that have been taken to 
prevent a recurrence of the violation.
    (c) Maximum penalty with prior disclosure. If the person concerned 
has made a prior disclosure as provided in Sec. 162.74, whether or not 
such person has been certified as a participant in the drawback 
compliance program under part 191 of this chapter, the monetary penalty 
under section 593A, Tariff Act of 1930, as amended (19 U.S.C. 1593a), 
shall not exceed:
    (1) For fraudulent violations, one times the loss of revenue; and
    (2) For negligent violations, an amount equal to the interest 
accruing on the actual loss of revenue during the period from the date 
of overpayment of the claim to the date on which the person concerned 
tenders the amount of the overpayment based on the prevailing rate of 
interest under 26 U.S.C. 6621.
    4. A new Sec. 162.77a is added to read as follows:


Sec. 162.77a  Prepenalty notice for violation of section 593A, Tariff 
Act of 1930, as amended.

    (a) When required. If the appropriate Customs field officer has 
reasonable cause to believe that a violation of section 593A, Tariff 
Act of 1930, as amended (19 U.S.C. 1593a) has occurred, and determines 
that further proceedings are warranted, the officer shall issue to the 
person concerned a notice of intent to issue a claim for a monetary 
penalty.
    (b) Contents--(1) Facts of violation. The prepenalty notice shall:
    (i) Identify the drawback claim;
    (ii) Set forth the details relating to the seeking, inducing, or 
affecting, or the attempted seeking, inducing, or affecting, or the 
aiding or procuring of, the drawback claim;
    (iii) Specify all laws and regulations allegedly violated;
    (iv) Disclose all the material facts which establish the alleged 
violation;
    (v) State whether the alleged violation occurred as a result of 
fraud or negligence; and
    (vi) State the estimated actual or potential loss of revenue due to 
the drawback claim and, taking into account all circumstances, the 
amount of the proposed monetary penalty.
    (2) Right to make presentations. The prepenalty notice also shall 
inform the person of his right to make an oral and a written 
presentation within 30 days of mailing of the notice (or such shorter 
period as may be prescribed under Sec. 162.78) as to why a claim for a 
monetary penalty should not be issued or, if issued, why it should be 
in a lesser amount than proposed.
    (c) Exceptions. A prepenalty notice shall not be issued for a 
violation of 19 U.S.C. 1593a if the amount of the proposed monetary 
penalty is $1,000 or less.

[[Page 51871]]

    (d) Prior approval. If an alleged violation of 19 U.S.C. 1593a 
occurred as a result of fraud, a prepenalty notice shall not be issued 
without prior approval by Customs Headquarters.


Sec. 162.79a  [Amended]

    5. Section 162.79a is amended by removing the references 
``Sec. 162.76(b)(1) or Sec. 162.77(b)(1)'' and adding, in their place, 
``Sec. 162.76(b)(1), Sec. 162.77(b)(1) or Sec. 162.77a(b)(1) and 
(b)(2)''.
    6. Section 162.79b is revised to read as follows:


Sec. 162.79b  Recovery of actual loss of duties or revenue.

    Whether or not a monetary penalty is assessed under this subpart, 
the appropriate Customs field officer shall require the deposit of any 
actual loss of duties resulting from a violation of section 592, Tariff 
Act of 1930, as amended (19 U.S.C. 1592) or any actual loss of revenue 
resulting from a violation of section 593A, Tariff Act of 1930, as 
amended (19 U.S.C. 1593a), notwithstanding that the liquidation of the 
entry to which the loss is attributable has become final. If a person 
is liable for the payment of actual loss of duties or actual loss of 
revenue in any case in which a monetary penalty is not assessed or a 
written notification of claim of monetary penalty is not issued, the 
port director shall issue a written notice to the person of the 
liability for the actual loss of duties or actual loss of revenue. The 
notice shall identify the merchandise and entries involved, state the 
loss of duties or revenue and how it was calculated, and require the 
person to deposit or arrange for payment of the duties or revenue 
within 30 days from the date of the notice. Any determination of actual 
loss of duties or actual loss of revenue under this section is subject 
to review upon written application to the Commissioner of Customs.

PART 171--FINES, PENALTIES, AND FORFEITURES

    1. The authority citation for part 171 is revised to read in part 
as follows:

    Authority: 19 U.S.C. 66, 1592, 1593a, 1618, 1624. * * *

    2. Section 171.21 is revised to read as follows:


Sec. 171.21  Written decisions.

    If a petition for relief relates to a violation of section 592, 
593A or 641, Tariff Act of 1930, as amended (19 U.S.C. 1592, 19 U.S.C. 
1593a or 19 U.S.C. 1641), the petitioner shall be provided with a 
written statement setting forth the decision on the matter and the 
findings of fact and conclusions of law upon which the decision is 
based.
    3. Part 171 is amended by adding a new Appendix D to read as 
follows:

Appendix D To Part 171--Guidelines for the Imposition and 
Mitigation of Penalties for Violations of 19 U.S.C. 1593A

    A monetary penalty incurred under section 593A, Tariff Act of 
1930, as amended (19 U.S.C. 1593a; hereinafter referred to as 
section 593A), may be remitted or mitigated under section 618, 
Tariff Act of 1930, as amended (19 U.S.C. 1618; hereinafter referred 
to as section 618), if it is determined that there exist such 
mitigating circumstances as to justify remission or mitigation. The 
guidelines below will be used by Customs in arriving at a just and 
reasonable assessment and disposition of liabilities arising under 
section 593A within the stated limitations. It is intended that 
these guidelines shall be applied by Customs officers in prepenalty 
proceedings, in determining the monetary penalty assessed in the 
penalty notice, and in arriving at a final penalty disposition. The 
assessed or mitigated penalty amount set forth in Customs 
administrative disposition determined in accordance with these 
guidelines does not limit the penalty amount which the Government 
may seek in bringing a civil enforcement action pursuant to 19 
U.S.C. 1593a(i).

(A) Violations of Section 593A

    A violation of section 593A occurs when a person, through fraud 
or negligence, seeks, induces, or affects, or attempts to seek, 
induce, or affect, the payment or credit to that person or others of 
any drawback claim by means of any document, written or oral 
statement, or electronically transmitted data or information, or act 
which is material and false, or any omission which is material, or 
aids or abets any other person in the foregoing violation. There is 
no violation if the falsity is due solely to clerical error or 
mistake of fact unless the error or mistake is part of a pattern of 
negligent conduct. Also, the mere nonintentional repetition by an 
electronic system of an initial clerical error shall not constitute 
a pattern of negligent conduct. Nevertheless, if Customs has drawn 
the person's attention to the nonintentional repetition by an 
electronic system of an initial clerical error, subsequent failure 
to correct the error could constitute a violation of section 593A.

(B) Degrees of Culpability

    There are two degrees of culpability under section 593A: 
negligence and fraud.
    (1) Negligence. A violation is determined to be negligent if it 
results from an act or acts (of commission or omission) done with 
actual knowledge of, or wanton disregard for, the relevant facts and 
with indifference to, or disregard for, the offender's obligations 
under the statute or done through the failure to exercise the degree 
of reasonable care and competence expected from a person in the same 
circumstances in ascertaining the facts or in drawing inferences 
therefrom, in ascertaining the offender's obligations under the 
statute, or in communicating information so that it may be 
understood by the recipient. As a general rule, a violation is 
determined to be negligent if it results from the offender's failure 
to exercise reasonable care and competence to ensure that a 
statement made is correct.
    (2) Fraud. A violation is determined to be fraudulent if the 
material false statement, omission or act in connection with the 
transaction was committed (or omitted) knowingly, i.e., was done 
voluntarily and intentionally, as established by clear and 
convincing evidence.

(C) Assessment of Penalties

    (1) Issuance of Prepenalty Notice. As provided in Sec. 162.77a 
of the Customs Regulations (19 CFR 162.77a), if Customs has 
reasonable cause to believe that a violation of section 593A has 
occurred and determines that further proceedings are warranted, a 
notice of intent to issue a claim for a monetary penalty shall be 
issued to the person concerned. In issuing such prepenalty notice, 
the appropriate Customs field officer shall make a tentative 
determination of the degree of culpability and the amount of the 
proposed claim. A prepenalty notice shall not be issued if the claim 
does not exceed $1,000.
    (2) Issuance of Penalty Notice. After considering 
representations, if any, made by the person concerned pursuant to 
the notice issued under paragraph (C)(1), the appropriate Customs 
field officer shall determine whether any violation described in 
section (A) has occurred. If a notice was issued under paragraph 
(C)(1) and the appropriate Customs field officer determines that 
there was no violation, Customs shall promptly issue a written 
statement of the determination to the person to whom the notice was 
sent. If the appropriate Customs field officer determines that there 
was a violation, Customs shall issue a written penalty claim to the 
person concerned. The written penalty claim shall specify all 
changes in the information provided in the prepenalty notice issued 
under paragraph (C)(1). The person to whom the penalty notice is 
issued shall have a reasonable opportunity under section 618 to make 
representations, both oral and written, seeking remission or 
mitigation of the monetary penalty. At the conclusion of any 
proceeding under section 618, Customs shall provide to the person 
concerned a written statement which sets forth the final 
determination and the findings of fact and conclusions of law on 
which such determination is based.

(D) Maximum Penalties

    (1) Fraud. In the case of a fraudulent violation of section 
593A, the monetary penalty shall be in an amount not to exceed 3 
times the actual or potential loss of revenue.
    (2) Negligence.
    (a) In General. In the case of a negligent violation of section 
593A, the monetary penalty shall be in an amount not to exceed 20 
percent of the actual or potential loss of revenue for the first 
violation.

[[Page 51872]]

    (b) Repetitive Violations. For the first negligent violation 
that is repetitive (i.e., involves the same issue and the same 
violator), the penalty shall be in an amount not to exceed 50 
percent of the actual or potential loss of revenue. The penalty for 
a second and each subsequent repetitive negligent violation shall be 
in an amount not to exceed the actual or potential loss of revenue.
    (3) Prior Disclosure. 
    (a) In General. Subject to paragraph (D)(3)(b), if the person 
concerned discloses the circumstances of a violation of section 593A 
before, or without knowledge of the commencement of, a formal 
investigation of such violation, the monetary penalty assessed under 
this Appendix may not exceed:
    (i) In the case of fraud, an amount equal to the actual or 
potential revenue of which the United States is or may be deprived 
as a result of overpayment of the claim; or
    (ii) If the violation resulted from negligence, an amount equal 
to the interest computed on the basis of the prevailing rate of 
interest applied under 26 U.S.C. 6621 on the amount of actual 
revenue of which the United States is or may be deprived during the 
period that begins on the date of overpayment of the claim and ends 
on the date on which the person concerned tenders the amount of the 
overpayment.
    (b) Condition Affecting Penalty Limitations. The limitations in 
paragraph (D)(3)(a) on the amount of the monetary penalty to be 
assessed apply only if the person concerned tenders the amount of 
the overpayment made on the claim either at the time of the 
disclosure or within 30 days (or such longer period as Customs may 
provide) from the date of notice by Customs of its calculation of 
the amount of overpayment.
    (c) Burden of Proof. The person asserting lack of knowledge of 
the commencement of a formal investigation has the burden of proof 
in establishing such lack of knowledge.
    (d) Commencement of Investigation. For purposes of this 
Appendix, a formal investigation of a violation is considered to be 
commenced with regard to the disclosing party, and with regard to 
the disclosed information, on the date recorded in writing by 
Customs as the date on which facts and circumstances were discovered 
which caused Customs to believe that a possibility of a violation of 
section 593A existed.
    (e) Exclusivity. Penalty claims under section D shall be the 
exclusive civil remedy for any drawback-related violation of section 
593A.

(E) Deprivation of Lawful Revenue

    Notwithstanding section 514, Tariff Act of 1930, as amended (19 
U.S.C. 1514), if the United States has been deprived of lawful 
duties and taxes resulting from a violation of section 593A, Customs 
shall require that such duties and taxes be restored whether or not 
a monetary penalty is assessed.

(F) Final Disposition of Penalty Cases When the Drawback Claimant 
Is Not a Certified Participant in the Drawback Compliance Program

    (1) In General. Customs shall consider all information in the 
petition and all available evidence, taking into account any 
mitigating, aggravating, and extraordinary factors, in determining 
the final assessed penalty. All factors considered should be stated 
in the decision.
    (2) Penalty Disposition When There Has Been No Prior Disclosure. 

    (a) Nonrepetitive Negligent Violation. The final penalty 
disposition shall be in an amount ranging from a minimum of 10 
percent of the actual or potential loss of revenue to a maximum of 
20 percent of the actual or potential loss of revenue.
    (b) Repetitive Negligent Violation. 
    (i) First Repetitive Negligent Violation. The final penalty 
disposition shall be in an amount ranging from a minimum of 25 
percent of the actual or potential loss of revenue to a maximum of 
50 percent of the actual or potential loss of revenue.
    (ii) Second and Each Subsequent Repetitive Negligent Violation. 
The final penalty disposition shall be in an amount ranging from a 
minimum of 50 percent of the actual or potential loss of revenue to 
a maximum of 100 percent of the actual or potential loss of revenue.
    (c) Fraudulent Violation. The final penalty disposition shall be 
in an amount ranging from a minimum of 1.5 times the actual or 
potential loss of revenue to a maximum of 3 times the actual or 
potential loss of revenue.
    (3) Penalty Disposition When There Has Been a Prior Disclosure. 
    (a) Negligent Violation. The final penalty disposition shall be 
in an amount equal to the interest determined in accordance with 
paragraph (D)(3)(a)(ii).
    (b) Fraudulent Violation. The final penalty disposition shall be 
in an amount equal to 100 percent of the actual or potential loss of 
revenue.
    (4) Mitigating Factors. The following factors shall be 
considered in mitigation of the proposed or assessed penalty claim 
or final penalty amount, provided that the case record sufficiently 
establishes their existence. The list is not exclusive.
    (a) Contributory Customs Error. This factor includes misleading 
or erroneous advice given by a Customs official in writing to the 
alleged violator, but this factor may be applied in such a case only 
if it appears that the alleged violator reasonably relied upon the 
written information and the alleged violator fully and accurately 
informed Customs of all relevant facts. The concept of comparative 
negligence may be utilized in determining the weight to be assigned 
to this factor. If the Customs error contributed to the violation, 
but the alleged violator is also culpable, the Customs error is to 
be considered as a mitigating factor. If it is determined that the 
Customs error was the sole cause of the violation, the proposed or 
assessed penalty is to be cancelled.
    (b) Cooperation with the Investigation. To obtain the benefits 
of this factor, the alleged violator must exhibit cooperation beyond 
that expected from a person under investigation for a Customs 
violation. An example of the cooperation contemplated includes 
assisting Customs officers to an unusual degree in auditing the 
books and records of the alleged violator (e.g., incurring 
extraordinary expenses in providing computer runs solely for 
submission to Customs to assist the agency in cases involving an 
unusually large number of entries and/or complex issues). Another 
example consists of assisting Customs in obtaining additional 
information relating to the subject violation or other violations. 
Merely providing the books and records of the alleged violator may 
not be considered cooperation justifying mitigation inasmuch as 
Customs has the right to examine an importer's books and records 
pursuant to 19 U.S.C. 1508-1509.
    (c) Immediate Remedial Action. This factor includes the payment 
of the actual loss of revenue prior to the issuance of a penalty 
notice and within 30 days after Customs notifies the alleged 
violator of the actual loss of revenue attributable to the 
violation. In appropriate cases, where the alleged violator provides 
evidence that, immediately after learning of the violation, 
substantial remedial action was taken to correct organizational or 
procedural defects, immediate remedial action may be granted as a 
mitigating factor. Customs encourages immediate remedial action to 
ensure against future incidents of non-compliance.
    (d) Prior Good Record. Prior good record is a factor only if the 
alleged violator is able to demonstrate a consistent pattern of 
filing drawback claims without violation of section 593A, or any 
other statute prohibiting the making or filing of a false statement 
or document in connection with a drawback claim. This factor will 
not be considered in alleged fraudulent violations of section 593A.
    (e) Inability to Pay the Customs Penalty. The party claiming the 
existence of this factor must present documentary evidence in 
support thereof, including copies of income tax returns for the 
previous 3 years and an audited financial statement for the most 
recent fiscal quarter. In certain cases, Customs may waive the 
production of an audited financial statement or may request 
alternative or additional financial data in order to facilitate an 
analysis of a claim of inability to pay (e.g., examination of the 
financial records of a foreign entity related to the U.S. company 
claiming inability to pay). In addition, the alleged violator must 
present information reflecting ownership and related domestic and 
foreign parties and must provide information reflecting its current 
financial condition, including books and records of account, bank 
statements, other tax records (for example, sales tax returns) and a 
list of assets with current values; if the alleged violator is a 
closely held corporation, similar current financial information must 
be provided on the shareholders, wherever they are located.
    (f) Customs Knowledge. This factor may be used in non-fraud 
cases if it is determined that Customs had actual knowledge of a 
violation and failed, without justification, to inform the violator 
so that it could have taken earlier remedial action. This factor 
shall not be applicable when a substantial delay in the 
investigation is attributable to the alleged violator.
    (5) Aggravating Factors. Certain factors may be determined to be 
aggravating factors in calculating the amount of the proposed or 
assessed penalty claim or the amount of the

[[Page 51873]]

final administrative penalty. The presence of one or more 
aggravating factors may not be used to raise the level of 
culpability attributable to the alleged violations, but may be used 
to offset the presence of mitigating factors. The following factors 
shall be considered ``aggravating factors'', provided that the case 
record sufficiently establishes their existence. The list is not 
exclusive.
    (a) Obstructing an investigation or audit.
    (b) Withholding evidence.
    (c) Providing misleading information concerning the violation.
    (d) Prior substantive violations of section 593A for which a 
final administrative finding of culpability has been made.
    (e) Failure to comply with a Customs summons or lawful demand 
for records.
    (G) Drawback Compliance Program Participants 
    (1) In General. Special alternative procedures and penalty 
assessment standards apply in the case of negligent violations of 
section 593A committed by persons who are certified as participants 
in the Customs drawback compliance program and who are generally in 
compliance with the procedures and requirements of that program. 
Provisions regarding the operation of the drawback compliance 
program are set forth in part 191 of the Customs Regulations (19 CFR 
part 191).
    (2) Alternatives to Penalties. When a participant described in 
paragraph (G)(1) commits a violation of section 593A, in the absence 
of fraud or repeated violations and in lieu of a monetary penalty, 
Customs shall issue a written notice of the violation (warning 
letter).
    (a) Contents of Notice. The notice shall:
    (i) State that the person has violated section 593A;
    (ii) Explain the nature of the violation; and
    (iii) Warn the person that future violations of section 593A may 
result in the imposition of monetary penalties and that repetitive 
violations may result in removal of certification under the drawback 
compliance program until the person takes corrective action that is 
satisfactory to Customs.
    (b) Response to Notice. Within 30 days from the date of mailing 
of the written notice, the person shall notify Customs in writing of 
the steps that have been taken to prevent a recurrence of the 
violation. If the person fails to provide such notification in a 
timely manner, any penalty assessed for a repetitive violation under 
paragraph (G)(3) shall not be subject to mitigation under this 
Appendix.
    (3) Repetitive Violations.
    (a) In General. A person who has been issued a written notice 
under paragraph (G)(2) and who subsequently commits a negligent 
violation that is repetitive (i.e., involves the same issue), and 
any other person who is a participant described in paragraph (G)(1) 
and who commits a repetitive negligent violation, is subject to one 
of the following monetary penalties:
    (i) An amount not to exceed 20 percent of the loss of revenue 
for the first repetitive violation that occurs within three years 
from the date of the violation of which it is repetitive;
    (ii) An amount not to exceed 50 percent of the loss of revenue 
for the second repetitive violation that occurs within three years 
from the date of the first of two violations of which it is 
repetitive; and
    (iii) An amount not to exceed 100 percent of the loss of revenue 
for the third and each subsequent repetitive violation that occurs 
within three years from the date of the first of three or more 
violations of which it is repetitive.
    (b) Repetitive Violations Outside 3-year Period. If a 
participant described in paragraph (G)(1) commits a negligent 
violation that is repetitive but that did not occur within 3 years 
of the violation of which it is repetitive, the new violation shall 
be treated as a first violation for which a written notice shall be 
issued in accordance with paragraph (G)(2), and each repetitive 
violation subsequent thereto that occurs within any 3-year period 
described in paragraph (G)(3)(a) shall result in the assessment of 
the applicable monetary penalty prescribed in that paragraph.
    (4) Final Penalty Disposition When There Has Been No Prior 
Disclosure. 
    (a) In General. Customs shall consider all information in the 
petition and all available evidence, taking into account any 
mitigating factors (see paragraph (F)(4)), aggravating factors (see 
paragraph (F)(5)), and extraordinary factors in determining the 
final assessed penalty. All factors considered should be stated in 
the decision.
    (b) First Repetitive Negligent Violation Within 3 Years of 
Violation Handled Under Paragraph (G)(2). The final penalty 
disposition shall be in an amount ranging from a minimum of 10 
percent of the loss of revenue to a maximum of 20 percent of the 
loss of revenue.
    (c) Second Repetitive Negligent Violation Within 3 Years of 
Violation Handled Under Paragraph (G)(2) or (G)(3). The final 
penalty disposition shall be in an amount ranging from a minimum of 
25 percent of the loss of revenue to a maximum of 50 percent of the 
loss of revenue.
    (d) Third and Each Subsequent Repetitive Negligent Violation 
Within 3 Years of Violation Handled Under Paragraph (G)(2) or 
(G)(3). The final penalty disposition shall be in an amount ranging 
from a minimum of 50 percent of the loss of revenue to a maximum of 
100 percent of the loss of revenue.
    (e) Fraudulent Violations. The final penalty disposition shall 
be the same as in the case of fraudulent violations committed by 
persons who are not participants in the drawback compliance program 
(see paragraph (F)(2)(c)).
    (5) Final Penalty Disposition When There Has Been A Prior 
Disclosure. The final penalty disposition shall be the same as in 
the case of persons who are not participants in the drawback 
compliance program (see paragraph (F)(3)).

PART 191--DRAWBACK

    1. The authority citation for part 191 continues to read in part as 
follows:

    Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1202 (General Note 20, 
Harmonized Tariff Schedule of the United States), 1313, 1624.
* * * * *
Secs. 191.191-191.195 also issued under 19 U.S.C. 1593a.

    2. In Sec. 191.194, paragraphs (e) and (f) are revised to read as 
follows:


Sec. 191.194  Action on application to participate in compliance 
program.

* * * * *
    (e) Certification removal--(1) Grounds for removal. The 
certification for participation in the drawback compliance program by a 
party may be removed when any of the following conditions are 
discovered:
    (i) The certification privilege was obtained through fraud or 
mistake of fact;
    (ii) The program participant is no longer in compliance with the 
Customs laws and regulations, including the requirements set forth in 
Sec. 191.192;
    (iii) The program participant repeatedly files false drawback 
claims or false or misleading documentation or other information 
relating to such claims; or
    (iv) The program participant is convicted of any felony or has 
committed acts which would constitute a misdemeanor or felony involving 
theft, smuggling, or any theft-connected crime.
    (2) Removal procedure. If Customs determines that the certification 
of a program participant should be removed, the applicable drawback 
office shall serve the program participant with written notice of the 
removal. Such notice shall inform the program participant of the 
grounds for the removal and shall advise the program participant of its 
right to file an appeal of the removal in accordance with paragraph (f) 
of this section.
    (3) Effect of removal. The removal of certification shall be 
effective immediately in cases of willfulness on the part of the 
program participant or when required by public health, interest, or 
safety. In all other cases, the removal of certification shall be 
effective when the program participant has received notice under 
paragraph (e)(2) of this section and either no appeal has been filed 
within the time limit prescribed in paragraph (f)(2) of this section or 
all appeal procedures thereunder have been concluded by a decision that 
upholds the removal action. Removal of certification may subject the 
affected person to penalties.
    (f) Appeal of certification denial or removal--(1) Appeal of 
certification denial. A party may challenge a denial of an application 
for certification as a participant in the drawback compliance program 
by filing a written appeal, within 30 days of issuance of the notice of 
denial, with the applicable drawback

[[Page 51874]]

office. A denial of an appeal may itself be appealed to Customs 
Headquarters, Office of Field Operations, Office of Trade Operations, 
within 30 days after issuance of the applicable drawback office's 
appeal decision. Customs Headquarters will review the appeal and will 
respond with a written decision within 30 days after receipt of the 
appeal unless circumstances require a delay in issuance of the 
decision. If the decision cannot be issued within the 30-day period, 
Customs Headquarters will advise the appellant of the reasons for the 
delay and of any further actions which will be carried out to complete 
the appeal review and of the anticipated date for issuance of the 
appeal decision.
    (2) Appeal of certification removal. A party who has received a 
Customs notice of removal of certification for participation in the 
drawback compliance program may challenge the removal by filing a 
written appeal, within 30 days after issuance of the notice of removal, 
with the applicable drawback office. A denial of an appeal may itself 
be appealed to Customs Headquarters, Office of Field Operations, Office 
of Trade Operations, within 30 days after issuance of the applicable 
drawback office's appeal decision. Customs Headquarters shall consider 
the allegations upon which the removal was based and the responses made 
thereto by the appellant and shall render a written decision on the 
appeal within 30 days after receipt of the appeal.

    Approved: August 3, 1998.
Robert S. Trotter,
Acting Commissioner of Customs.
Dennis M. O'Connell,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 98-25895 Filed 9-28-98; 8:45 am]
BILLING CODE 4820-02-P