[Federal Register Volume 68, Number 154 (Monday, August 11, 2003)]
[Rules and Regulations]
[Pages 47455-47460]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20327]


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DEPARTMENT OF HOMELAND SECURITY

Bureau of Customs and Border Protection

19 CFR Part 111

[CBP Dec. 03-15]
RIN 1515-AD14


Performance of Customs Business by Parent and Subsidiary 
Corporations

AGENCY: Customs and Border Protection, Department of Homeland Security.

ACTION: Final rule.

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SUMMARY: This document adopts as a final rule, with some changes, 
proposed amendments to Customs Regulations to provide that corporate 
compliance activity engaged in by related business entities for the 
purpose of exercising ``reasonable care'' is not customs business and 
therefore is not subject to the customs broker licensing requirements. 
The 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. The amendments will 
improve the operational efficiency of the affected business entities 
and, thereby, enhance their ability to ensure compliance with 
applicable customs laws and regulations.

EFFECTIVE DATE: Final rule effective September 10, 2003.

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

SUPPLEMENTARY INFORMATION: 

Background

    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 provides for the 
issuance of 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) sets forth 
definitions that apply for purposes of part 111 and includes the 
following definition of ``customs business:''

    ``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 111.2 of the Customs Regulations (19 CFR 111.2) sets forth 
the basic rules regarding when a person (that is, an individual, 
partnership, association, or corporation) 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

[[Page 47456]]

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.
    The scope of ``customs business'' and the broker licensing 
requirement took on added importance as a result of the amendments made 
in 1993 by the Customs Modernization Act (the Mod Act) provisions of 
the North American Free Trade Agreement Implementation Act (Pub. L. 
103-182, 107 Stat. 2057). Those Mod Act amendments included a revision 
of section 484 of the Tariff Act of 1930 (19 U.S.C. 1484) to, among 
other things, add a requirement that an importer of record exercise 
``reasonable care'' in connection with the entry requirements under 
that section. In order 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 chose 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, the U.S. Customs Service (Customs, the predecessor agency to the 
current Bureau of Customs and Border Protection, referred to hereafter 
in this document as CBP) consistently took the position that many of 
the activities performed under this type of arrangement would involve 
the transaction of ``customs business,'' which would require a broker 
license under Sec.  111.2(a)(1). This conclusion was based on the 
reasoning that (1) the parent corporation and each subsidiary 
corporation is a separate legal ``person,'' 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 on a number of occasions had 
indicated to Customs that the result reached in the administrative 
rulings described above was unsatisfactory because it did not afford 
importers sufficient opportunity to address multiple related aspects of 
an individual customs transaction or groups of transactions. They 
believed that this was an impediment to their ensuring that reasonable 
care is exercised by all corporate affiliates for purposes of 19 U.S.C. 
1484.
    In response to the concerns expressed by the trade, Customs on 
October 15, 2002, published in the Federal Register (67 FR 63576) a 
notice setting forth proposed 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 would not fall within the definition of ``customs 
business'' in 19 U.S.C. 1641. The proposed amendments involved the 
addition of a new Sec.  111.1 definition for the term ``corporate 
compliance activity'' to describe the permissible activities (and with 
a specific exclusion for document preparation and filing); the addition 
of language at the end of the existing Sec.  111.1 definition of 
``customs business'' stating that it does not include a corporate 
compliance activity; and the addition of a new paragraph (a)(2)(vii) to 
Sec.  111.2 to clarify that a company performing a corporate compliance 
activity is not required to be licensed as a broker.
    The October 15, 2002, notice invited the submission of public 
comments on the proposed regulatory changes, and the public comment 
period closed on December 16, 2002. A total of 28 commenters responded 
to the solicitation of comments in the notice. The comments submitted 
are summarized and responded to below.

Discussion of Comments

    Comment: The proposed amendments will benefit the importing 
community for several different reasons. For example, divisions and 
sister subsidiaries will be better able to meet the standards of 
reasonable care. Similarly, subsidiaries will be able to better 
leverage and benchmark best practices from within the parent company 
and subsidiaries, thereby improving the compliance activities of the 
entire corporation. Under the proposed rule, centralized corporate or 
affiliate groups can be more flexible in their ability to hire 
qualified people to provide common expertise for subsidiary companies 
that small divisions may not be able to afford or justify by 
themselves. The commenter provided a number of other examples of the 
beneficial aspects of this proposed rule.
    Response: CBP agrees in principle with the general nature of these 
comments which reflect the purpose behind the regulatory proposal.
    Comment: The goal of this proposal, which is to enable related 
companies to engage in corporate compliance activity on behalf of one 
another, could best be achieved through the modification or revocation 
of the rulings which created the controversy in the first place.
    Response: CBP considered but rejected that option because a 
modification or revocation of those rulings might give rise to a false 
premise, that is, that the rulings were not legally correct when they 
were originally issued. To the extent that the rulings in question are 
inconsistent with the Part 111 texts as amended by this final rule 
document, those rulings will be considered to be modified or revoked 
without further action on the part of CBP--see Sec.  177.12(d)(1)(vi) 
of the Customs Regulations (19 CFR 177.12(d)(1)(vi)) which was adopted 
in T.D. 02-49, published in the Federal Register (67 FR 53483) on 
August 16, 2002.
    Comment: The proposed new definition of ``corporate compliance 
activity'' in Sec.  111.1 is imprecise and will only create confusion. 
By seeming to allow all activities that do not involve the preparation 
or filing of documents, the proposed amendment raises concerns that 
other inter-corporate activities set forth in the definition of 
``customs business'' will be allowed.
    Response: CBP does not agree that the definition is imprecise and 
will create confusion. The commenter has correctly understood the 
effect of the proposed regulatory amendment, that is, that related 
companies will be permitted to conduct any activities mentioned in the 
definition of ``customs business,'' other than the actual preparation 
and filing of documents, so long as those activities fall within the 
definition of ``corporate compliance activity.''
    Comment: It is improper for CBP to include corporate compliance 
activities in 19 CFR 111.2(a)(2) as an exception to the requirement 
that a license is required, since it has already been made clear that 
these activities do not fall within the definition of ``customs 
business.''
    Response: On further consideration of this matter, CBP agrees with 
the point made by this commenter, because the definition of ``customs 
business'' in 19 CFR 111.1 is being amended specifically to exclude 
corporate compliance activity from customs business, making an 
exception to the license requirement redundant. Accordingly, the 
regulatory changes adopted in this final rule

[[Page 47457]]

document do not include the addition of proposed new paragraph 
(a)(2)(vii) to Sec.  111.2.
    Comment: CBP needs to narrow the definition of ``customs business'' 
and broaden the definition of ``corporate compliance activity.'' 
Specifically, the latter definition should not exclude document 
preparation and filing.
    Response: Document preparation is specifically mentioned as one of 
the activities falling within the statutory and regulatory meaning of 
``customs business.'' The filing with CBP of those prepared documents 
is the logical next step and involves direct representations to the 
Government agency responsible for administering the matters to which 
those documents pertain. These considerations formed the basis for 
excluding document preparation and filing from the definition of 
``corporate compliance activity.'' In defining ``corporate compliance 
activity,'' CBP endeavored to strike a balance between an importer's 
obligation to exercise reasonable care and the licensing requirements 
of 19 U.S.C. 1641. This balance is achieved by allowing related 
companies to provide advice while at the same time precluding them from 
preparing and filing documentation.
    Comment: The prohibition against document preparation and filing 
should be lifted if steps are taken to ensure that the importer of 
record remains liable.
    Response: By focusing on the liability of the importer of record, 
this comment appears to misconstrue CBP's primary focus in this matter, 
which was the customs broker statute and regulations. The exception 
regarding document preparation and filing by a related company was 
included in the definition of ``corporate compliance activity'' only in 
recognition of the explicit terms of 19 U.S.C. 1641 and not in order to 
suggest that an importer of record's liability would cease if the 
documents were prepared and filed by a related company. The legal 
obligations of importers of record, whether contractual under their 
bonds or otherwise imposed by other statutes or regulations, will 
remain undisturbed by this amendment to the customs broker regulations.
    Comment: The regulations pertaining to ``corporate compliance 
activity'' should restrict document preparation and filing to those 
entry documents that are required to be filed under 19 U.S.C. 1484.
    Response: CBP disagrees, because the document preparation and 
filing aspect of ``customs business'' extends to preparation and filing 
activities performed after the filing of the entry and entry summary. 
This rule is reflected in 19 CFR 111.2(b)(2)(i)(D), which provides that 
a broker who did not file the entry, but who is appointed by the 
importer of record to make written or oral representations to CBP after 
entry summary acceptance, must have a national permit if the broker 
does not have a district permit where the representations will be made.
    Comment: While the proposed amendment will be beneficial both to 
the industry and to CBP, it does not make clear whether related parties 
can assist each other in responding to Customs Form 28 Requests for 
Information or Customs Form 29 Notices of Action, or in preparing or 
filing Post Entry Amendments, Supplementary Information Letters, 
documents relating to compliance audits or assessments, or certificates 
of origin.
    Response: The prohibition against preparing and filing documents 
under the broker statute and regulations applies not just to the entry 
and entry summary, but to all other documents for which preparation and 
filing constitutes ``customs business'' or for which no explicit 
allowance is made by statute or regulation for preparation or filing by 
an ``authorized agent.'' Examples of documents for which there is an 
explicit allowance for action by an authorized agent are protests, 
ruling requests, and certain drawback documents. Since the proposed 
definition of ``corporate compliance activity'' contained no limitation 
or exception regarding the scope of document preparation and filing, 
the prohibition would apply to those specific examples mentioned by 
this commenter to the extent that they involve a customs business 
activity. However, a determination on whether a specific action 
constitutes a customs business activity can only be made on a case-by-
case basis, for example through the binding ruling process.
    Comment: Certain activities should be specifically authorized in 
the regulatory text (for example, classifying and valuing goods, 
providing advice on origin marking requirements, providing training to 
related companies, preparing responses to marking and penalty notices 
and prior disclosures, and representing companies before CBP in an 
audit). Alternatively, the definition of ``corporate compliance 
activity'' should be amended to include offering specific advice on the 
classification, valuation, or admissibility of merchandise.
    Response: CBP does not believe that it would be advisable to 
include specific authorized activities within the regulations, because 
it would be impractical to list every conceivable activity that related 
companies may perform for each other. Listing some but not others would 
potentially create confusion or uncertainty as regards activities not 
listed. Some of the responses to comments in this final rule document 
may provide guidance on which activities are or are not permissible. 
For example, it has already been explained above that advisory 
activities will be allowed, while written communications with Customs 
in most circumstances would not be permitted. Importers with questions 
on a particular activity may request that the matter be resolved 
through the binding ruling process.
    Comment: It is common for corporations to establish subsidiaries 
that have their own boards of directors and officers, but no employees. 
An example would be a sales or procurement subsidiary. In such cases, 
the parent may be preparing the subsidiary's documentation. The 
proposed regulations, with their restrictions on document preparation, 
are problematic in this regard.
    Response: The preparation of documents under the corporate 
organizational scenario described by this commenter would constitute 
the performance of customs business in violation of the broker statute. 
Adoption of the proposed regulatory amendments would not alter that 
fact. The purpose of this rulemaking initiative is to facilitate the 
exercise of reasonable care, not to facilitate circumvention of the 
statutory obligation to seek the assistance of a licensed broker when a 
company, for its own business reasons, chooses not to have employees 
who can prepare and file documents with CBP.
    Comment: CBP needs to further define what constitutes 
``preparation'' within the context of a corporate compliance activity. 
Does the gathering and organization of information fall within the 
definition? Does it include the preparation of background documentation 
whose contents will be reflected on the entry?
    Response: The proposed definition of ``corporate compliance 
activity,'' which precludes the ``actual preparation or filing of the 
documents or their electronic equivalents,'' in effect addresses the 
issue raised in this comment. The word ``actual'' is intended to 
emphasize that the documents in question are those that will be filed 
with CBP. Therefore, any work performed in anticipation of document 
preparation, including the gathering and organizing of information and 
its recordation on background paperwork, will be allowed under this 
provision.

[[Page 47458]]

    Comment: It is unclear whether employees of a corporate compliance 
office will be able to discuss with CBP issues concerning a related 
company's import transactions.
    Response: Discussions with CBP regarding import transactions may 
amount to the transaction of customs business given that the statutory 
definition of ``customs business'' includes ``those activities 
involving transactions with the Customs Service * * *'' However, CBP 
recognizes that preventing communication between corporate compliance 
offices and CBP would frustrate the primary purpose of such an office, 
that is, to provide accurate advice to the related company. In another 
example of making an accommodation between broker licensing and 
reasonable care requirements, CBP has determined that representatives 
of corporate compliance offices may communicate directly with CBP on 
behalf of related companies regarding the activities performed by the 
corporate compliance office to ensure that reasonable care was used in 
connection with preparation and filing of Customs documents. However, 
they should be prepared to demonstrate their authority to represent the 
interests of the related companies by presentation of a power of 
attorney or other letter of authorization.
    Comment: It is unclear whether there would be a violation of the 
proposed rule if a corporate compliance office were to supply specific 
tariff information in writing to a related company. This needs to be 
clarified, as do questions arising over whether related companies can 
file ruling requests or protests on behalf of each other.
    Response: No violation would occur if the compliance office were 
simply supplying the specific tariff information to the related 
company. The related company importer could then use the information to 
fill out the documentation to be filed with CBP, or turn it over to a 
broker for that purpose. On the issue of ruling requests and protests, 
19 CFR 177.1(c) and 19 CFR 174.12(a)(6), respectively, permit an 
``authorized agent'' to file those documents.
    Comment: Please explain why companies that employ in-house customs 
brokers cannot provide advice, or prepare and file documents, on behalf 
of related companies. Such centralization would help to achieve high 
compliance rates.
    Response: The broker statute makes provision for various types of 
broker's licenses: individual, corporate, association, or partnership. 
While the mere providing of advice to a related company may present no 
problem, if a corporation wishes to transact customs business (for 
example, prepare and file documents) for others, it must obtain a 
corporate license of its own. This requirement does not disappear 
simply because the corporation has a person on its payroll who is 
individually licensed, because the employee's licensed status does not 
confer a similar status on the employer. Furthermore, the actions of 
the employee performed during the regular course of his employment will 
be attributed to his employer, not to him individually. An analogy may 
be drawn to the situation in which an insurance company hires an 
attorney to work in its policy underwriting department: the employment 
of the attorney does not entitle the insurance company to practice law.
    Comment: Most corporations with centralized customs compliance 
functions have put into place standard operating procedures (``SOPs'') 
for responding to CBP inquiries, submitting documents to CBP, and 
working with their various customs brokers. If CBP takes a strict 
approach to what constitutes the actual preparation and filing of 
documents, corporations will be forced to redesign their SOPs to limit 
their compliance activities. Such changes would probably include a 
restructuring of the corporation's relationship with its customs 
brokers to ensure that in-house customs compliance personnel only 
provide information to customs brokers and, perhaps, review any 
documents to be filed with CBP. Restricting the in-house compliance 
activities in this manner does not advance the policy goal of fostering 
reasonable care under the Mod Act.
    Response: A reference to document ``preparation'' was added to the 
definition of ``customs business'' in the broker statute by section 648 
of the Mod Act, and this statutory change has been in effect since 
December 8, 1993. The proposed regulatory changes at issue here did not 
attempt to impose a change in the meaning of document preparation. 
Moreover, as already pointed out in this comment discussion, the 
reference to ``actual'' preparation in the proposed regulatory text was 
intended to clarify that permissible corporate compliance activities 
include activities leading up to, but not in fact directly involving, 
document preparation. Therefore, to the extent that a corporation has 
been in compliance with the statutory standard since the adoption of 
the Mod Act amendment in 1993, the proposed regulatory amendments would 
not require any change in the corporation's SOPs as regards compliance 
activities.
    Although the Mod Act amended 19 U.S.C. 1484 by imposing a 
reasonable care responsibility on importers of record, it did not 
eliminate or modify the requirement in 19 U.S.C. 1641 that a person 
have a broker's license to conduct customs business on behalf of 
others. The Mod Act also made no changes to the identity of the persons 
who, pursuant to 19 U.S.C. 1484, have the right to make entry. Those 
persons are the owner or purchaser of the imported merchandise, or a 
licensed broker who has been appointed by the owner, purchaser or 
consignee. Consequently, CBP in defining ``corporate compliance 
activity'' had to take into account the requirements of the broker and 
entry statutes. By proposing the addition of an explicit provision 
allowing related companies to have centralized compliance departments 
whose role would be advisory in nature, CBP attempted to strike a 
balance between an importer's reasonable care obligations and the 
proscription regarding the performance of customs business on behalf of 
others without a broker's license. It is the position of CBP that the 
proposed amendments are not restrictive in their effect and that they 
will foster compliance with importers' reasonable care obligations.
    Comment: The development of the Automated Commercial Environment 
(ACE), and the possibility that future entries will be filed over the 
Internet, provides the perfect opportunity for CBP to look at changing 
practices. ACE will allow all parties to a customs transaction the 
ability to input information about the transaction. It is out of step 
for CBP to restrict these activities to independent customs brokers.
    Response: The proposed regulations would enhance, not restrict, the 
ability of related companies (including those that have in-house 
brokers) to engage in certain activities that previously under the 
broker regulations were restricted to importers or their appointed 
brokers. The liberalization in the proposed regulatory changes had to 
stop at document preparation and filing in order to ensure the most 
appropriate balance between reasonable care obligations and the terms 
of the broker statute.
    Comment: CBP has recognized that the effectiveness of its new 
security measures (for example, C-TPAT, Account Management, Importer 
Self-Assessment) are enhanced by corporate centralization of customs 
functions, yet the proposed rule limits the ability of

[[Page 47459]]

companies to effectively centralize import operations.
    Response: As stated throughout this comment discussion, both CBP 
and importers must operate within the confines of existing law. In this 
case due regard must be given to the entry and broker provisions of 19 
U.S.C. 1484 and 1641. CBP believes that the proposed regulatory changes 
will enhance, rather than limit, the ability of related companies to 
centralize their import operations. To the extent that the proposed 
amendments may not go as far as the commenter would like, that is a 
function of the limits imposed by the statutory provisions in question.
    Comment: As an alternative to the suggested changes, the definition 
of ``person'' in 19 CFR 111.1 could be changed so that the 
parenthetical phrase ``(including subsidiaries and sister companies)'' 
is added after the word ``corporation.'' With a definition such as 
this, corporations could conduct the same activities for subsidiaries 
as they do for themselves.
    Response: CBP examined but rejected this approach when drafting the 
proposed regulations. Altering the definition of ``person'' in such a 
manner that subsidiaries are considered to be the same person as their 
parent would have consequences that go beyond the corporate compliance 
issue at hand. This is because the new definition will apply to 
everything that takes place under part 111 of the Customs Regulations, 
not just to corporate compliance activities. Since a person must obtain 
a license to conduct customs business as a broker, questions would 
inevitably arise whenever a parent or subsidiary corporation applied 
for a license. For example, would a license granted to a parent also 
cover its subsidiaries, since by definition they would be one and the 
same person? Or would a subsidiary even have the right to apply for a 
license in its own name, given that its identity had been subsumed into 
that of the parent? Furthermore, the legal separation between parent 
and subsidiary corporations is recognized elsewhere in the Customs 
Regulations, and thus the elimination of that separation from the 
broker regulations would not only create a legal inconsistency but 
would also have the potential to create confusion in other regulatory 
contexts.
    Comment: A better approach would be to change the definition of 
``for one's own account'' to clearly encompass the transaction of 
customs business on behalf of subsidiary companies. In this manner, the 
definition of ``customs business'' could remain unchanged, and it would 
be unnecessary to carve out limited exceptions when interpreting the 
definition.
    Response: CBP also considered this option when formulating the 
regulatory proposals. However, for essentially the same reasons stated 
in the preceding comment response for not changing the definition of a 
``person,'' CBP decided not to adopt this approach.
    Comment: The proposed rule does not clarify the distinction between 
the assigning of a Harmonized Tariff Schedule number to inbound items 
for entry submission to CBP and the review of internal classification 
databases. The former is a part of the entry process, and is thus 
customs business, while the latter is merely a corporate compliance 
activity.
    Response: While CBP agrees that the tariff classification of items 
to be entered may constitute a customs business activity depending on 
the context in which it is done, this regulatory initiative also 
recognizes that some accommodation must be made to enable companies to 
meet their reasonable care obligations. To this end, the proposed 
regulations would allow a compliance department to provide tariff 
classification advice to a sister or parent entity for all purposes, 
including advice regarding the assigning of tariff numbers for 
placement on an entry. However, that compliance department may not 
prepare the actual entry document.
    Comment: The proposed definitions of eligible related parties are 
clear and do not create any particular problems.
    Response: CBP agrees that the definitions are clear. However, as 
indicated later in this comment discussion, some adjustments to the 
proposed text are made in this final rule document in response to 
concerns raised in other comments.
    Comment: CBP should replace the proposed related party definition 
with the related party standard employed for customs valuation 
purposes. One commenter specifically suggested that CBP should resort 
to the more limited related party definition as expressed in 19 U.S.C. 
1401a(g)(1)(G).
    Response: CBP believes that the related party definition used 
generally for valuation purposes is too broad for application in the 
context under review here. For example, the valuation definition 
includes relationships between family members. Its wholesale adoption 
would thus be inappropriate.
    The narrower suggestion, that CBP use the more limited related 
party definition as set forth in 19 U.S.C. 1401a(g)(1)(G), is also 
unacceptable. That provision confers a relationship on ``[t]wo or more 
persons directly or indirectly controlling, controlled by, or under 
common control with, any person.'' According to a notice entitled 
``Transfer Pricing; Related Party Transactions'' published in the 
Federal Register (58 FR 5445) on January 21, 1993, determinations of 
``control'' must be made on a case by case basis within the context of 
the administrative review procedures available to the importing public 
under parts 174 and 177 of the Customs Regulations. The adoption of a 
definition that requires the issuance of a protest review decision or a 
ruling to determine if a party qualifies would be difficult to 
administer, and, as such, would not be appropriate in the present 
regulatory context.
    Comment: As an alternative to the 50 percent ownership requirement, 
the rule should allow ownership of some equity or voting shares coupled 
with proof of the retention of substantive management rights, such as 
the right to designate officers or directors. Such a standard would 
take into account modern forms of corporate organization while also 
assuring that only those entities exerting control were engaged in 
permissible compliance activity.
    Response: Receiving accurate information from importers is crucial 
to CBP's mission. The agency fosters accuracy through the issuance of 
informed compliance publications and binding rulings and by offering 
outreach programs to the importing community. It also makes use of the 
procedures that enable it to seek redress against persons who file 
inaccurate or incomplete entry documentation. Among its options in this 
regard, CBP can assess liquidated damages against an importer of record 
for a breach of the basic importation bond, or discipline licensed 
brokers pursuant to 19 U.S.C. 1641. Corporate compliance offices under 
this new regulatory scheme will not be subject to similar actions by 
CBP, because they will not be importers of record or, in most cases, 
licensed brokers. Absent some assurance of accountability, CBP would be 
reluctant to allow an unlicensed third party to participate in the 
entry process, because the accuracy of the information generated by 
that third party may be questionable. CBP, in imposing a substantial 
ownership standard (that is, more than 50 percent of the voting 
shares), seeks to establish what might be best described as cascading 
accountability by ensuring that entities offering compliance services 
are accountable to importers who are, in turn, accountable to CBP. 
Accordingly, the proposed standard is retained in the final rule. With 
regard to the point concerning modern forms of corporate organization, 
see the response to the next comment, which also

[[Page 47460]]

discusses the replacement of the reference to ``voting shares.''
    Comment: The proposed definition of related parties only refers to 
voting shares of corporations and does not address other voting 
interests such as joint ventures, partnerships, limited partnerships, 
limited liability companies, or any other legal structure now or 
hereafter existing. Such situations should be considered, and all 
possible business entities should be addressed, by the regulations.
    Response: Even though CBP believes that the 50 percent ownership 
standard should be retained as stated above, CBP also recognizes that 
in today's business environment relationships may be forged between 
companies that fall outside of the traditional corporate parent/
subsidiary structure. Accordingly, in the regulatory text adopted in 
this final rule document, references to parent, subsidiary, and sister 
corporations are replaced with the more generic terms ``business 
entity'' and ``related business entity or entities,'' with ``business 
entity'' defined as ``an entity that is registered or otherwise on 
record with an appropriate governmental authority for business 
licensing, taxation, or other legal purposes.'' In addition, because 
voting shares are not the exclusive basis for determining the ownership 
level in a business, the references to ``more than 50 percent of the 
voting shares'' have been replaced in the final regulatory text with 
more general references to ``more than a 50 percent ownership 
interest.''
    Comment: CBP should adopt a regulation to allow those entities 
transacting customs business on behalf of related affiliates to certify 
to CBP, upon request, that the entity exercises ``responsible 
supervision and control'' over the affiliate's customs activity.
    Response: CBP is uncertain as to the purpose behind this 
suggestion. The exercise of responsible supervision and control is a 
concept that applies to licensed customs brokers, upon whom that duty 
falls whenever they engage in customs brokerage activities. A broker 
can be sanctioned by CBP for failing to exercise responsible 
supervision and control. Since compliance departments will not be 
required to have broker licenses in cases covered by this new 
regulatory provision, the suggestion of this commenter does not appear 
to be relevant to the present exercise. For this reason, CBP declines 
to adopt the suggested certification procedure.

Conclusion

    Based on the comments received and the analysis of those comments 
as set forth above, CBP believes that the proposed regulatory 
amendments should be adopted as a final rule with the changes discussed 
above.

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 the amendments will not have 
a significant economic impact on a substantial number of small 
entities. CBP believes that the 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 
CBP, which constitute the bulk of customs business services provided by 
brokers. CBP also believes that the amendments will provide positive 
economic and related benefits to other members of the import community. 
Accordingly, the 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, Bureau of Customs and Border Protection. 
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.

Amendments to the Regulations

0
For the reasons stated in the preamble, part 111 of the Customs 
Regulations (19 CFR part 111) is amended as set forth below.

PART 111--CUSTOMS BROKERS

0
1. The general authority citation for Part 111 continues to read as 
follows:

    Authority: 19 U.S.C. 66, 1202 (General Note 23, Harmonized 
Tariff Schedule of the United States), 1624, 1641.

* * * * *
0
2. In Sec.  111.1:
0
a. 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
0
b. 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 business entity to ensure that documents 
for a related business entity or entities 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 ``business entity'' is 
an entity that is registered or otherwise on record with an appropriate 
governmental authority for business licensing, taxation, or other legal 
purposes, and the term ``related business entity or entities'' 
encompasses a business entity that has more than a 50 percent ownership 
interest in another business entity, a business entity in which another 
business entity has more than a 50 percent ownership interest, and two 
or more business entities in which the same business entity has more 
than a 50 percent ownership interest.
* * * * *

Robert C. Bonner,
Commissioner, Customs and Border Protection.
[FR Doc. 03-20327 Filed 8-8-03; 8:45 am]
BILLING CODE 4820-02-P