[Federal Register Volume 67, Number 199 (Tuesday, October 15, 2002)]
[Proposed Rules]
[Pages 63576-63578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26039]


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DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Part 111

RIN 1515-AD14


Performance of Customs Business by Parent and Subsidiary 
Corporations

AGENCY: Customs Service, Department of the Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document sets forth proposed amendments to Part 111 of 
the Customs Regulations to specify that corporate compliance activity 
engaged in for the purpose of exercising ``reasonable care'' under 19 
U.S.C. 1484 is not customs business and, therefore, such activity is 
not subject to the customs broker licensing requirements of 19 U.S.C. 
1641. The proposed amendments make clear that this corporate compliance 
activity concept does not extend to document preparation and filing, 
which is customs business subject to licensing requirements. It is 
anticipated that the proposed amendments will improve the operational 
efficiency of the affected corporate entities and, thereby, enhance 
their ability to ensure compliance with applicable customs laws and 
regulations.

DATES: Comments must be submitted on or before December 16, 2002.

ADDRESSES: Written comments are to be addressed to the U.S. Customs 
Service, Office of Regulations and Rulings, Attention: Regulations 
Branch, 1300 Pennsylvania Avenue NW., Washington, DC 20229. Submitted 
comments may be inspected at U.S. Customs Service, 799 9th Street NW., 
Washington, DC.

FOR FURTHER INFORMATION CONTACT: Gina Grier, Office of Regulations and 
Rulings (202-572-8730).

SUPPLEMENTARY INFORMATION:

Background

Statutory and Regulatory Framework

    Section 641 of the Tariff Act of 1930, as amended (19 U.S.C. 1641), 
provides that a person must hold a valid customs broker's license and 
permit in order to transact customs business on behalf of others, sets 
forth standards for the issuance of broker's licenses and permits, 
provides for disciplinary action against brokers in the form of 
suspension or revocation of such licenses and permits or assessment of 
monetary penalties, and provides for the assessment of monetary 
penalties against other persons for conducting customs business without 
the required broker's license. Section 641 also authorizes the 
Secretary of the Treasury to prescribe rules and regulations relating 
to the customs business of brokers as may be necessary to protect 
importers and the revenue of the United States and to carry out the 
provisions of section 641.
    The regulations issued under the authority of section 641 are set 
forth in part 111 of the Customs Regulations (19 CFR part 111). Part 
111 includes detailed rules regarding the licensing of, and granting of 
permits to, persons desiring to transact customs business as customs 
brokers, including the qualifications required of applicants and the 
procedures for applying for licenses and permits. Part 111 also 
prescribes recordkeeping and other duties and responsibilities of 
brokers, sets forth in detail the grounds and procedures for the 
revocation or suspension of broker licenses and permits and for the 
assessment of monetary penalties, and sets forth fee payment 
requirements applicable to brokers under section 641 and 19 U.S.C. 
58c(a)(7).
    Section 111.1 of the Customs Regulations (19 CFR 111.1) defines 
``customs business'' as follows for purposes of part 111:

    ``Customs business'' means those activities involving 
transactions with Customs concerning the entry and admissibility of 
merchandise, its classification and valuation, the payment of 
duties, taxes, or other charges assessed or collected by Customs on 
merchandise by reason of its importation, and the refund, rebate, or 
drawback of those duties, taxes, or other charges. ``Customs 
business'' also includes the preparation, and activities relating to 
the preparation, of documents in any format and the electronic 
transmission of documents and parts of documents intended to be 
filed with Customs in furtherance of any other customs business 
activity, whether or not signed or filed by the preparer. However, 
``customs business'' does not include the mere electronic 
transmission of data received for transmission to Customs.

    Section 111.1 also defines ``person'' for purposes of part 111 as 
including ``individuals, partnerships, associations, and 
corporations.''
    Section 111.2 of the Customs Regulations (19 CFR 111.2) sets forth 
the basic rules regarding when a person must obtain a customs broker 
license and permit. Paragraph (a)(2) of Sec.  111.2 specifies several 
exceptions to the license requirement including, in subparagraph (i), 
an exception for an importer or exporter (and his authorized regular 
employees or officers acting only for him) transacting customs business 
solely on his own account and in no sense on behalf of another. Section 
111.4 of the Customs Regulations (19 CFR 111.4) provides that any 
person who intentionally transacts customs business, other than as 
provided in Sec.  111.2(a)(2), without holding a valid broker's 
license, will be liable for a monetary penalty for each such 
transaction as well as for each violation of any other provision of 
section 641.

Reasons for Proposed Change

    The amendments made in 1993 by the Customs Modernization Act 
provisions of the North American Free Trade Agreement Implementation 
Act (Public Law 103-182, 107 Stat. 2057) included the requirement to 
exercise ``reasonable care'' in connection with the entry requirements 
set forth in 19 U.S.C. 1484. To foster compliance with the customs laws 
and regulations under this added statutory responsibility, many 
importer groups consisting of a parent corporation and one or more 
subsidiary corporations have chosen to centralize their in-house 
customs experts into one corporate entity and to make the services of 
those experts available to the group as a whole. However, when 
requested to issue an administrative ruling on the issue, Customs has 
consistently taken the position that many of the activities performed 
under this type of arrangement would involve

[[Page 63577]]

the transaction of ``customs business,'' which would require a broker 
license under Sec.  111.2(a)(1). See HQ 115248 dated August 26, 2001, 
and HQ 115278 dated November 13, 2001. In this regard, Customs has 
considered the fact that (1) the parent corporation and each subsidiary 
corporation is a separate legal ``person'' both under longstanding 
legal precedent and under the definition of ``person'' in Sec.  111.1, 
and (2) therefore, the parent or subsidiary corporation in which the 
customs expertise resides would be transacting customs business not 
solely on its own account as provided under Sec.  111.2(a)(2)(i) but 
rather on behalf of another ``person.''
    Members of the trade community have indicated to Customs that the 
present situation is unsatisfactory because it does not afford 
importers sufficient opportunity to address multiple related aspects of 
an individual customs transaction or groups of transactions and thus is 
an impediment to their ensuring that reasonable care is exercised by 
all corporate affiliates for purposes of 19 U.S.C. 1484.
    An example will illustrate the basis for the trade community 
concerns: Under the current regulations as interpreted by Customs, if 
an unlicensed corporation in a parent and subsidiary relationship 
wished to engage a licensed individual broker as an employee of the 
corporation to give customs business advice to its related company 
regarding specific transactions, there would be certain legal 
limitations. The rendering of advice under the described circumstances 
would be permissible only if the licensed broker employee were to 
become a bona fide employee of each of the two involved companies, or 
if the employing corporation were to obtain a corporate broker license, 
or if the licensed broker employee were to set up business to operate 
as a broker during non-work hours.
    Accordingly, Customs is proposing for public comment amendments to 
the Customs Regulations that would expand the permissible use of in-
house experts by corporations and their affiliates to include activity 
that is intended to meet the corporation's ``reasonable care'' 
obligations under 19 U.S.C. 1484 and that, as such, does not fall 
within the definition of ``customs business'' in 19 U.S.C. 1641. The 
proposed amendments are discussed below.

Discussion of Proposed Amendments

    Customs believes that the definition concepts in Sec.  111.1 should 
be amended to recognize corporate compliance activity as falling under 
the term reasonable care and, as such, as not falling within the term 
``customs business.'' This would allow parent, subsidiary, and sister 
subsidiary corporations to structure their corporate compliance 
activities to ensure an effective and efficient exercise of 
``reasonable care'' under 19 U.S.C. 1484. Accordingly, this document 
proposes to add a definition of the term ``corporate compliance 
activity'' to Sec.  111.1 and to amend the existing definition of 
``customs business'' by adding conforming exception language at the end 
of the last sentence. Under these proposed amendments, the limitations 
on the activities described in the previously discussed example would 
no longer apply because those activities would not be considered 
``customs business.'' Rather, they would be allowed as a corporate 
compliance activity under the ``reasonable care'' standard in 19 U.S.C. 
1484.
    The new definition limits the corporate compliance activity that 
the in-house experts may perform to those activities that do not 
involve the preparation of documents or their electronic equivalents to 
be filed with Customs and the filing of documents or their electronic 
equivalents with Customs, because Customs believes that these 
specialized activities clearly fall within the term ``customs 
business.''
    Finally, this document proposes to amend Sec.  111.2 by adding a 
new paragraph (a)(2)(vii) which states that a company performing a 
corporate compliance activity is not required to be licensed as a 
broker.

Comments

    Before adopting the proposed amendments as a final rule, 
consideration will be given to any written comments timely submitted to 
Customs, including comments on the clarity of this proposed rule and 
how it may be made easier to understand. Comments submitted will be 
available for public inspection in accordance with the Freedom of 
Information Act (5 U.S.C. 552), Sec.  1.4 of the Treasury Department 
Regulations (31 CFR 1.4), and Sec.  103.11(b) of the 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 Office of Regulations and Rulings, 
U.S. Customs Service, 799 9th Street, NW., Washington, DC. Arrangements 
to inspect submitted comments should be made in advance by calling Mr. 
Joseph Clark at (202) 572-8768.

Executive Order 12866

    This document does not meet the criteria for a ``significant 
regulatory action'' as specified in E.O. 12866.

Regulatory Flexibility Act

    Pursuant to the provisions of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), it is certified that, if adopted, the proposed 
amendments will not have a significant economic impact on a substantial 
number of small entities. Customs believes that the proposed amendments 
will have only a minimal impact on overall customs broker operations 
because they do not authorize the preparation of documents and the 
filing of documents with Customs, which constitute the bulk of customs 
business services provided by brokers, and the proposed amendments will 
provide positive economic and related benefits to other members of the 
import community. Accordingly, the proposed amendments are not subject 
to the regulatory analysis or other requirements of 5 U.S.C. 603 and 
604.

Drafting Information

    The principal author of this document was Francis W. Foote, Office 
of Regulations and Rulings, U.S. Customs Service. However, personnel 
from other offices participated in its development.

List of Subjects in 19 CFR Part 111

    Administrative practice and procedure, Brokers, Customs duties and 
inspection, Imports, Licensing, Penalties, Reporting and recordkeeping 
requirements.

Proposed Amendments to the Regulations

    For the reasons stated above, it is proposed to revise Part 111 of 
the Customs Regulations (19 CFR Part 111) as set forth below.

PART 111--CUSTOMS BROKERS

    1. The authority citation for Part 111 continues to read in part as 
follows:

    Authority: 19 U.S.C. 66, 1202 (General Note 23, Harmonized 
Tariff Schedule of the United States), 1624, 1641;
* * * * *
    2. In Sec.  111.1, the definition of ``customs business'' is 
amended by adding at the end of the last sentence before the period the 
words ``and does not include a corporate compliance activity'', and a 
new definition of ``corporate compliance activity'' is added in 
appropriate alphabetical order to read as follows:


Sec.  111.1  Definitions.

* * * * *
    Corporate compliance activity. ``Corporate compliance activity'' 
means activity performed by a parent company or subsidiary company or 
sister subsidiary company to ensure that

[[Page 63578]]

documents for a parent company or subsidiary company or sister 
subsidiary company are prepared and filed with Customs using 
``reasonable care'', but such activity does not extend to the actual 
preparation or filing of the documents or their electronic equivalents. 
For purposes of this definition, a parent company is a corporation that 
owns more than 50 percent of the voting shares of another corporation, 
a subsidiary company is a corporation in which a parent company owns 
more than 50 percent of the voting shares, and a sister subsidiary 
company is one of two or more corporations in which the same parent 
company owns more than 50 percent of the voting shares.
* * * * *
    3. In Sec.  111.2, a new paragraph (a)(2)(vii) is added to read as 
follows:


Sec.  111.2  License and district permit required.

    (a) * * *
    (2) * * *
    (vii) Corporate compliance activity. A company performing a 
corporate compliance activity is not required to be licensed as a 
broker.
* * * * *

Douglas M. Browning,
Acting Commissioner of Customs.
    Approved: October 8, 2002.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 02-26039 Filed 10-11-02; 8:45 am]
BILLING CODE 4820-02-P