Prior Disclosure

DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Parts 162 and 178

[T.D. 98-49]

RIN 1515-AB98

Prior Disclosure

AGENCY: U.S. Customs Service, Department of the Treasury.

ACTION: Final rule.

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SUMMARY: This document amends the Customs Regulations governing ``prior

disclosure'', including implementation of the Customs modernization

provisions of the North American Free Trade Implementation Act (Mod

Act) concerning prior disclosure by a person of a violation of law

committed by that person involving the filing or attempted filing of a

drawback claim, or an entry or introduction, or attempted entry or

introduction of merchandise into the United States by fraud, gross

negligence, or negligence. Pursuant to the ``prior disclosure''

provision of 19 U.S.C. 1592(c)(4) as amended by the Mod Act, and 19

U.S.C. 1593a(c)(3), if a person commits a violation of 19 U.S.C. 1592

or 19 U.S.C. 1593a and discloses the circumstances of the violation

before, or without knowledge of, the commencement of a formal

investigation of such violation, merchandise shall not be seized and

any monetary penalty to be assessed shall be limited. ``Commencement of

a formal investigation'' for purposes of 19 U.S.C. 1592 and 1593a is

defined in these regulations. The document also amends the regulations

to give Fines, Penalties and Forfeitures Officers discretion to defer

Customs disclosure verification proceedings until the disclosing party

has an opportunity to explain all the circumstances underlying the

disclosed violation.

EFFECTIVE DATE: June 29, 1998.

FOR FURTHER INFORMATION CONTACT: Robert Pisani, Penalties Branch (202)

927-2344.

SUPPLEMENTARY INFORMATION:

Background

On December 8, 1993, the President signed the North American Free

Trade Agreement Implementation Act (Pub. L. 103-182). The Customs

modernization portion of this Act (Title VI), popularly known as the

Customs Modernization Act, or ``the Mod Act'' became effective when it

was signed. Section 621 of Title VI amended section 592 of the Tariff

Act of 1930 (19 U.S.C. 1592) (hereinafter referred to as section 592),

and section 622 of Title VI added new section 593a. On September 26,

1996, Customs published in the Federal Register (61 FR 50459) a notice

of proposed rulemaking to amend the Customs Regulations governing prior

disclosure as it relates to sections 592 and 593a. Pursuant to the

``prior disclosure'' provision of 19 U.S.C. 1592(c)(4) as amended by

the Mod Act, and 19 U.S.C. 1593a(c)(3), if a person commits a violation

of 19 U.S.C. 1592 or 19 U.S.C. 1593a and discloses the circumstances of

the violation before, or without knowledge of, the commencement of a

formal investigation of such violation, merchandise shall not be seized

and any monetary penalty to be assessed shall be limited.

It is noted that it is the policy of the Customs Service to

encourage the submission of prior disclosures.

The notice of proposed rulemaking invited public comments on the

proposals, which would be considered before adoption of a final rule.

The public comment period closed on November 25, 1996.

Analysis of Comments

A total of thirty-seven commenters responded to the solicitation of

comments during the public comment period. Many commenters applauded

Customs efforts to re-organize and simplify the regulations involving

prior disclosure. Ten of the commenters set forth specific

recommendations to change the proposed amendments on a ``section by

section'' basis. Five of these ten commenters made general comments

which were not directly related to a specific section of the proposal.

The remaining twenty-seven commenters set forth the single

recommendation to amend the proposal to include a regulatory

prohibition that would specify that a valid prior disclosure precludes

the assessment of a liquidated damage claim for the disclosed

violation.

The specific ``section by section'' recommendations and/or

suggestions, general recommendations and/or suggestions, and the

Customs responses thereto, are set forth below.

Proposed Sec. 162.74(a)

Comment: One commenter suggests that Sec. 162.74(a)(2) be amended

to preclude ``oral'' prior disclosures. If adopted, the commenter

recommends deleting all other references to oral prior disclosures in

the proposal. No reason is articulated for suggesting this change.

Customs Response: We can find no valid reason for precluding a

party from making an oral prior disclosure. Of course, as with a party

making a written prior disclosure, a party who elects to make an oral

disclosure must meet the regulatory criteria governing ``disclosure of

the circumstances of the violation'' before, or without knowledge of

the commencement of a formal investigation of such violation, in order

to obtain prior disclosure benefits.

Comment: One commenter suggests that Customs change proposed

Sec. 162.74(a)(2) to reflect that the ``appropriate Customs officer,''

rather than the Fines, Penalties and Forfeitures Officer, be the

deciding official regarding whether the party had included

substantially the information set forth in paragraph (b) of proposed

Sec. 162.74. The commenter is of the opinion that the decision-making

authority should be vested in a Customs officer not connected to a

potential penalty action. For similar reasons, another commenter

suggests that the port director should be the deciding official instead

of the Fines, Penalties and Forfeitures Officer.

Customs Response: We disagree. Inasmuch as the evaluation of

information regarding the potential assessment of penalties under 19

U.S.C. 1592 or 19 U.S.C. 1593a is within the province of the Fines,

Penalties and Forfeitures Officer, we are of the opinion that the

Fines, Penalties and

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Forfeitures Officer is the appropriate Customs official to determine

whether the criteria set forth in proposed Sec. 162.74(b) is met.

Comment: One commenter suggests that proposed Sec. 162.74(a)(2) be

amended to include language that indicates that a disclosing party is

presumed to have no knowledge of the commencement of a formal

investigation of the disclosed violation, unless Customs can rebut such

presumption by virtue of one or more of the events set forth in

proposed Sec. 162.74(i).

Customs Response: Proposed Sec. 162.74(i) sets forth events which

give rise to presumptions of knowledge of the commencement of a formal

investigation of the disclosed violation(s). Inasmuch as circumstances

may exist that demonstrate ``knowledge,'' but that are not included in

the list of events set forth in proposed Sec. 162.74(i), we do not

believe that adoption of this suggestion is warranted. Moreover, we

believe creating such a presumption would conflict with 19 U.S.C. 1592

and 1593a, which places the burden to demonstrate lack of knowledge on

the disclosing party.

Comment: One commenter recommends that the Fines, Penalties and

Forfeitures Officer should not be listed in proposed Sec. 162.74(a)(2)

as the sole officer to decide whether the disclosing party made a

``disclosure of the circumstances of a violation'' (i.e., the criteria

set forth in proposed Sec. 162.74(b)), and that any such decisions

should be subject to review or appeal. Further, for the sake of

grammatical continuity, the commenter recommends deletion of the word

``that'' after the word ``satisfied'' in proposed Sec. 162.74(a)(2).

Customs Response: For reasons discussed above, we are of the

opinion that the Fines, Penalties and Forfeitures Officer is the

appropriate Customs official to determine whether or not the party has

met the criteria set forth in proposed Sec. 162.74(b). With respect to

a right of review or appeal of such determinations, Customs notes that

such rights already are ensured by virtue of the disclosing party's

right to petition if Customs issues a prepenalty or penalty notice

initiating or assessing regular penalties. Lastly, we note that we have

adopted the commenter's grammatical recommendation.

Proposed Sec. 162.74(b)

Comment: One commenter recommends that the word ``violator'' in

proposed Sec. 162.74(b)(4) be changed to ``disclosing party.''

Customs Response: The recommendation is adopted.

Comment: One commenter suggests that proposed Sec. 162.74(b)(4)

should be clarified to indicate that requests for extensions apply to

all information specified in proposed Sec. 162.74(b).

Customs Response: We disagree. The adoption of the suggestion is

contrary to the principle of ``shared responsibility'' and would

eliminate the obligation to initially provide any information regarding

a claimed prior disclosure.

Comment: One commenter suggests that Customs change proposed

Sec. 162.74(b)(4) to reflect that extension requests should normally be

granted by Customs except in certain specified circumstances.

Customs Response: Customs believes that this change is not

necessary. We note that the commenter did not specify circumstances

that would warrant a denial of a request for an extension, and we

believe that the creation of such circumstances would not be in the

interests of either the disclosing party or the Customs Service.

Comment: One commenter recommends that proposed Sec. 162.74(b)(4)

be changed to specify that information provided to Customs pursuant to

this provision may not be used to initiate or develop a criminal

investigation or proceeding. The commenter suggests that use of such

information to develop criminal cases impinges on the disclosing

party's Constitutional 5th Amendment rights.

Customs Response: Customs disagrees. In addition to the fact that a

party elects to make a claimed prior disclosure, it should be noted

that current law requires referral of suspected criminal violations to

the concerned U.S. Attorney's office. Consequently, the decision to

prosecute a suspected violation of criminal statutes rests with the

concerned U.S. Attorney's office rather than the Customs Service.

Proposed Sec. 162.74(c)

Comment: One commenter suggests a change in the language in this

section to make it clearer that the disclosing party may decide to wait

to tender the actual loss of duties until Customs advises the party of

its calculation of the actual loss of duties. The commenter is of the

opinion that the current language is ambiguous, and that some ports

have insisted that lost duties be tendered at the time of disclosure.

Further, the commenter recommends that the period for tendering an

actual loss of duties after having been notified by Customs of such

loss be extended from 30 days to 60 days, and that the party may

request an extension of time to tender.

Customs Response: We agree that the language suggested by the

commenter regarding the timing of a tender is less ambiguous than the

proposed language and have revised this section in accordance with the

commenter's recommendation. On the other hand, we see no reason to

change the 30 day period to tender an actual loss calculated by Customs

to 60 days. We note that the proposed regulations do provide the Fines,

Penalties and Forfeitures Officer with the authority to extend the 30

day period if it is determined that there is good cause to do so.

Comment: One commenter recommends adding a subsection to proposed

Sec. 162.74(c) to provide for refund in the event that Customs

determines that the amount tendered is not, in fact, an actual loss of

duties. Three other commenters recommend that proposed Sec. 162.74(c)

be revised to provide the disclosing party with a mechanism to

challenge or protest Customs calculation of the actual loss of duties.

Two of these three commenters suggest that the inability to challenge

Customs actual loss calculation discourages prior disclosures.

Customs Response: We agree that where legitimate disputes exist

between a Customs field office and a disclosing party regarding the

amount of the actual loss of duties due the government, there should be

some mechanism for review at Customs Headquarters--provided that the

Customs claimed loss of duty is substantial (i.e., exceeds $100,000);

the disclosing party deposits the Customs claimed actual duty loss

amount; greater than one year remains under the statute of limitations;

and that the Headquarters review is limited solely to the basis for

Customs determination of the actual duty loss. In addition, we note

that granting such review is within the discretion of Customs

Headquarters, and that such review is conditioned upon the disclosing

party's compliance with all other provisions of the prior disclosure

regulations. We also note that where Headquarters review is afforded,

such review is not limited to the revenue loss claims raised by the

Customs field office or disclosing party, but could involve an

independent Headquarters determination. Lastly, although the

Headquarters decision on such review may result in a partial or total

refund of the deposited duty loss amount, the regulations indicate

that, in any case where such review is afforded, the Headquarters

decision is final and not subject to administrative or judicial appeal.

In effect, the disclosing party who elects to request such Headquarters

review should be aware that, if granted,

[[Page 29128]]

the party is waiving any right to contest Headquarters actual loss of

duties determination--either administratively or judicially.

Proposed Sec. 162.74(d)

Comment: One commenter recommends that proposed Sec. 162.74(d)(2)

be revised to require that Customs furnish a receipt that indicates the

time and date of Customs receipt of claimed prior disclosure documents

delivered in person. The commenter suggests that it is somewhat

anomalous to require a person delivering documents to Customs to

request a receipt, and that as part of ``shared responsibility'' it

seems more appropriate to provide that the person delivering the

documents would be furnished a receipt.

Customs Response: Customs agrees that the proposed regulation

should be amended to reflect that a receipt will be furnished to the

person delivering documents, but in keeping with the spirit of ``shared

responsibility,'' we remain of the opinion that the receipt will be

furnished upon request.

Comment: One commenter claims that proposed Sec. 162.74(d)(3) is

silent as to the specific time and date when a claimed oral prior

disclosure becomes effective. The commenter provides revised language

which indicates that orally provided information is ``deemed to have

occurred at the time the oral communication is made.''

Customs Response: We disagree with the premise of this

recommendation. The proposed regulation does, in fact, provide that

claimed oral prior disclosures are ``deemed to have occurred at the

time Customs was provided with the information which substantially

complies with the requirements set forth in paragraph (b) of this

section.''

Proposed Sec. 162.74(e)

Comment: Two commenters point out an apparent inconsistency between

proposed Sec. 162.74(e)(2) and proposed Sec. 162.74(a)(1), in that the

latter proposed section provides for making a claimed prior disclosure

to a ``Customs officer,'' whereas the former proposed section provides

for making a ``multi-port'' claimed prior disclosure to ``all concerned

Fines, Penalties and Forfeitures Officers.'' One of the commenters

suggests that Port Director be substituted for Fines, Penalties and

Forfeitures Officer.

Customs Response: We agree that there is an apparent inconsistency

between the two proposed sections. Customs is revising proposed

Sec. 162.74(e)(2) to reflect that although a ``multi-port'' claimed

prior disclosure may be made to a Customs officer, unless the claimed

prior disclosure is made directly to the concerned Fines, Penalties and

Forfeitures Officer, it is incumbent upon the Customs officer to refer

the claimed prior disclosure to the concerned Fines, Penalties and

Forfeitures Officer so that consolidation of the matter can be arranged

in accordance with internal procedures. We believe that a disclosing

party should not be limited to providing the claimed prior disclosure

to the concerned port director.

Proposed Sec. 162.74(f)

Comment: One commenter recommends that the word ``violator'' in

proposed Sec. 162.74(f) be changed to ``disclosing party.''

Customs Response: The recommendation is adopted.

Comment: One commenter recommends that the Fines, Penalties and

Forfeitures Officer be eliminated in proposed Sec. 162.74(f) as the

Customs official responsible for requests for the withholding of

initiation of disclosure verification proceedings. No specific reason

is suggested for this change.

Customs Response: Inasmuch as the concerned Fines, Penalties and

Forfeitures Officer is the Customs officer who is responsible for

ascertaining the validity of the claimed prior disclosure, we see no

reason to adopt the recommended change.

Comment: One commenter suggests that proposed Sec. 162.74(f) be

revised to include language indicating that requests to withhold

initiation of disclosure verification proceedings of the claimed prior

disclosure should be granted ``except for good cause.''

Customs Response: The suggestion is not adopted. In the event that

Customs learns of a serious abuse of discretion regarding such

requests, Customs can take measures to eliminate the problem through

either internal guidelines, regulatory revisions or whatever other

action is deemed appropriate.

Comment: One commenter suggests that proposed Sec. 162.74(f) be

revised to provide the Fines, Penalties and Forfeitures Officer with

the discretion to defer notification to the Office of Investigations of

a claimed prior disclosure. The commenter is of the opinion that the

deferral of notification should be predicated on a number of factors,

such as the gravity of the disclosed violation, any pattern of non-

compliance, etc.

Customs Response: The notification to the Office of Investigations

of the claimed disclosure serves to prevent delay in the administrative

disposition of the disclosure, in that the Office of Investigations can

take immediate action to initiate or coordinate disclosure verification

proceedings as well as ascertain whether or not Customs already had

commenced a formal investigation of the claimed prior disclosure.

Consequently, Customs is of the opinion that the proposed regulation

remain unchanged.

Comment: One commenter recommends that proposed Sec. 162.74(f) be

changed to reflect that a disclosing party may also request that

Customs audits be included in a request to withhold initiation of

disclosure verification proceedings.

Customs Response: Inasmuch as audits initiated solely to verify

disclosures would often be considered part of the disclosure

verification proceedings, Customs is of the opinion that the suggested

change is unnecessary.

Comment: One commenter suggests that Customs add to the end of the

first sentence in proposed Sec. 162.74(f) ``and the Office of

Investigations is requested to determine whether or not investigation

is pending or contemplated.'' The commenter does not provide a reason

for the suggested change.

Customs Response: In view of the fact that internal procedures

already exist regarding the handling of claimed prior disclosures by

the Office of Investigations, Customs is of the opinion that the

suggested change is unnecessary.

Proposed Sec. 162.74(g)

Comment: Two commenters indicate that, based upon Congressional

discussions involving the Customs Modernization Act, proposed

Sec. 162.74(g) should include language to require that records of a

``commencement of a formal investigation'' be maintained in the Office

of Investigations, Customs Headquarters or some other central unit. One

of these two commenters also suggests that the regulation specify the

official who is charged with recording the ``commencement''

information. Also, this commenter suggests that the words ``with regard

to the disclosing party'' be added after the word ``commenced'' in the

first sentence of the proposed section. A third commenter recommends

that this section be revised to indicate that only Customs agents from

the Office of Investigations can commence formal investigations for

prior disclosure purposes. Three other commenters recommend that the

proposed section be revised to require that a formal

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investigations control number be assigned to the written commencement

document or otherwise require the Office of Investigations to open an

investigation. Lastly, one other commenter suggests revisions to the

proposed section which specify the form and nature of the

``commencement'' document.

Customs Response: Customs is of the opinion that proposed

Sec. 162.74(g) fully comports with the Customs Modernization Act's

statutory language and intent regarding the definition of the term

``commencement of a formal investigation.'' The proposed language

requires that the Customs Service evidence the commencement by a

writing, as well as specifies that the disclosing party will receive

written evidence of such a ``commencement'' in any required notice

issued to the party pursuant to 19 U.S.C. 1592 or 1593a, in the event

the claimed prior disclosure is denied. We do not agree that the law

mandates that agents of the Office of Investigations are the only

Customs officials capable of commencing a formal investigation for the

purposes of prior disclosure. Further, in Customs view, additional

requirements involving custody of such records, or record forms/

formats, record maintenance or case control numbers are not properly

the province of regulation, but rather, concern internal procedures

developed by the agency. We do agree with the suggestion to include the

phrase ``with regard to the disclosing party'' after the word

``commenced'' in the first sentence, and have revised the proposed

section to reflect adoption of this recommendation.

Comment: One commenter states that proposed Sec. 162.74(g) should

indicate that a Customs Form 28 (Request for Information) and Customs

Form 29 (Notice of Action) cannot be considered written evidence of a

``commencement of a formal investigation.'' The commenter is of the

opinion that these documents will have a ``chilling'' effect on the

prior disclosure provisions if they are permitted to be construed as

``formal commencement'' documents, in that they, for the most part,

merely request information or propose rate or value advances.

Customs Response: As indicated above, Customs is of the opinion

that dictating the form of the ``commencement'' writing is not properly

the province of regulation. We do agree that Customs Forms 28 and 29

which merely request information or propose rate or value advances

could not be considered ``commencement'' documents for prior disclosure

purposes unless they articulate that a possibility of a violation

existed.

Comment: One commenter recommends deleting the phrase ``denied

prior disclosure treatment on the basis of the commencement of a formal

investigation of the disclosed violation'' in the second sentence of

proposed Sec. 162.74(g). The commenter points out that ``commencement

of a formal investigation is merely one fact bearing on the ultimate

resolution of the matter.''

Customs Response: Customs agrees with the commenter that

``commencement of a formal investigation of the disclosed violation''

is one of several issues concerning the disposition of the claimed

prior disclosure (e.g., a disclosing party may be unable to obtain

prior disclosure benefits if the party fails to ``disclose the

circumstances of the violation'' in accordance with Sec. 162.74(b)--and

this may occur in cases where Customs had not commenced a formal

investigation). Nevertheless, this provision of proposed Sec. 162.74(g)

addresses those instances where the denial of the prior disclosure is

predicated on the commencement of the formal investigation of the

disclosed violation. In such cases, the regulation requires a copy of a

writing evidencing the commencement of a formal investigation of the

disclosed violation. Accordingly, the recommendation is not adopted.

Comment: One commenter recommends that proposed Sec. 162.74(g) be

revised to indicate that any required notice issued pursuant to 19

U.S.C. 1592 or 1593a should specify the event listed in proposed

Sec. 162.74(i) that provided the disclosing party with knowledge of the

commencement of a formal investigation of the disclosed violation. The

commenter believes that inclusion of such a provision would eliminate

disputes regarding the issue of knowledge of the commencement.

Customs Response: We disagree. Customs notes that the purpose

underlying proposed Sec. 162.74(g) is to provide a definition of the

``commencement of a formal investigation'' for prior disclosure

purposes. We note that notices issued to the disclosing party pursuant

to 19 U.S.C. 1592 or 1593a may commence a formal investigation of the

disclosed violation and may be issued prior to the claimed disclosure.

It should also be noted that the law establishes the burden to

demonstrate lack of knowledge of the commencement of the formal

investigation upon the disclosing party.

Comment: One commenter suggests that proposed Sec. 162.74(g) be

revised to require that the disclosing party be notified of the

acceptance or denial of the claimed prior disclosure as soon as Customs

makes that decision, and that documentary evidence of the

``commencement of a formal investigation'' should be furnished to the

disclosing party well in advance of the initiation of penalty

proceedings.

Customs Response: Customs believes that the statutory and

regulatory procedures already in place are sufficient to advise parties

of the validity of a claimed prior disclosure. Also, it is well

established that an invalid prior disclosure may subject the disclosing

party to penalties.

Proposed Sec. 162.74(h)

Comment: One commenter recommends that proposed Sec. 162.74(h) be

revised to clarify that once an investigation begins with respect to a

disclosed violation, the disclosing party still may obtain prior

disclosure treatment for other violations not covered by the commenced

formal investigation.

Customs Response: Customs does not believe that clarification is

necessary. The proposed section makes clear that additional disclosed

violations not covered in the disclosing party's original prior

disclosure may receive prior disclosure benefits, provided that such

additional disclosures were made before ``the date recorded in writing

by the Customs Service as the date on which facts and circumstances

were discovered or information was received which caused the Customs

Service to believe that a possibility of such additional violations

existed.''

Proposed Sec. 162.74(i)

Comment: Five commenters recommend that proposed Sec. 162.74(i) be

revised to require that for the ``presumption of knowledge'' to be

effective any Customs notification of the disclosed violation to the

disclosing party that precedes the claimed prior disclosure must be

evidenced by a ``writing.'' Four of the five commenters maintain that

such a requirement will avoid unnecessary conflict or misunderstandings

concerning the content or circumstances of an oral notification by

Customs. Two of the five commenters are of the opinion that a written

notification requirement also should require a return receipt. In

addition, two of the five commenters recommend that proposed

Sec. 162.74(i) be revised to ensure that ``general inquiries'' (e.g.,

Customs Forms 28 and 29) are not used as evidence of prior knowledge of

the commencement of a formal investigation of the disclosed

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violation. One of these two commenters suggests inclusion of the phrase

``so informed the person of that reasonable belief,'' immediately

following the statutory citations in proposed Sec. 162.74(i)(1)(i) in

order to clarify that ``general inquiries'' would not constitute a

presumption of knowledge.

Customs Response: Customs notes that although the Customs

Modernization Act prior disclosure changes added the requirement that a

``commencement of a formal investigation'' must be evidenced by a

writing, the Modernization Act changes did not impose such a writing

requirement regarding ``knowledge of the commencement of a formal

investigation'' involving Customs notification to the disclosing party.

Customs believes that the language of the proposed regulatory section

makes clear that ``general inquiries'' or mere ``contact'' with a

Customs officer prior to the submission of the claimed prior disclosure

is insufficient to create a ``presumption of knowledge'' of the

commencement of a formal investigation of the disclosed violation. In

those instances where oral notification pursuant to proposed

Sec. 162.74(i) renders the presumption operative, the concerned Customs

official must meet other criteria--such as informing the person of the

type of or circumstances of the disclosed violation.

Customs is of the opinion that its position regarding ``presumption

of knowledge'' is consistent with the underlying Modernization Act

theme of ``shared responsibility''--if a party receives oral

notification from a Customs officer of the type of or circumstances of

the violation(s) at issue before making the claimed prior disclosure,

Customs believes that prior disclosure benefits should not accrue--

unless, of course, the party is able to rebut the presumption of

knowledge as provided for under the proposed regulatory provision.

Also, it should be noted that even if one or more of the events have

taken place as set forth in the proposed Sec. 162.74(i), a party still

may wish to submit a claimed disclosure--either because the party

believes it can rebut the presumption of knowledge, or because the

party seeks to obtain substantial mitigation in an ensuing penalty

proceeding (despite the fact that the information provided to Customs

does not qualify for disclosure benefits).

Comment: One commenter suggests changing proposed Sec. 162.74(i) so

that it cannot be read to permit denial of prior disclosure benefits in

those instances where one of the events or notifications under the

proposed regulatory section takes place, but no formal investigation

has been commenced. Another commenter recommends that Customs should

eliminate the language in the proposed section which places the burden

of proving ``lack of knowledge'' on the disclosing party.

Customs Response: Customs believes the proposed section is clear.

The second sentence of proposed Sec. 162.74(i) sets forth the

requirement that the commencement of a formal investigation must occur

before there can be a presumption of knowledge. Consequently, Customs

sees no need to adopt the first commenter's suggestion. With respect to

the burden of proving lack of knowledge, we reject the commenter's

suggestion to eliminate this burden inasmuch as both concerned

statutory provisions (i.e., 19 U.S.C. 1592(c)(4) and 19 U.S.C.

1593a(c)(3)(c)) establish the burden of proving lack of knowledge.

General Comments

Comment: One commenter recommends that prior disclosure benefits

should extend to violations of the customs laws other than violations

of 19 U.S.C. 1592 or 1593a.

Customs Response: Customs notes that the proposed regulations are

being promulgated based upon the statutory authority establishing

``prior disclosure'' for violations of 19 U.S.C. 1592 and 1593a.

Currently, such statutory authority for permitting ``prior disclosure''

of other violations of the customs laws does not exist. Nevertheless,

it should be noted that in some instances, a party who discloses a

violation of the customs laws (other than 19 U.S.C. 1592 or 1593a) may

be entitled to substantial mitigation in the administrative disposition

of the offense under existing Customs guidelines for such violations.

Comment: Twenty-six commenters recommend that the proposed

amendments be revised to prohibit an assessment of liquidated damages

for a violation revealed in a 19 U.S.C. 1592 or 1593a prior disclosure.

The vast majority of these commenters are of the opinion that it is

unfair for the Customs Service to assess liquidated damages against a

Foreign-Trade Zone (FTZ) operator for breach of the FTZ operator's bond

based on information obtained from a prior disclosure submitted by an

operator. These commenters believe that inasmuch as most valid prior

disclosures by FTZ operators involve a tender of all lost revenue,

Customs is made whole and that the subsequent assessment of liquidated

damages should not be allowed. The FTZ commenters are of the opinion

that the proposed regulations unfairly discriminate against FTZ

operators, and serve to deter such parties from submitting prior

disclosures.

Customs Response: Customs notes that unlike the assessment of civil

penalties, the assessment of liquidated damages for a breach of bond

terms is based upon the contractual agreement with the bondholder.

Accordingly, although Customs may, under existing guidelines, reduce

liquidated damage amounts in administrative proceedings--particularly

in those cases where a valid prior disclosure is submitted, the agency

does not believe the suggestion should be adopted.

Comment: One commenter suggests that the proposed regulations

include a statement that indicates that the submission of valid prior

disclosures is encouraged.

Customs Response: Customs notes that the commenter's suggested

statement is not provided for by statute, but rather is a recommended

statement of agency policy. Inasmuch as it is the policy of the Customs

Service to encourage the submission of prior disclosures in accordance

with the proposed regulatory requirements, we have added such a

sentence to the preamble of this document.

Comment: One commenter is of the opinion that the annual reporting

burden set forth in the section under Paperwork Reduction Act heading

is understated. The commenter believes that it also would be helpful

for the estimated number of respondents shown to be based on the actual

number of prior disclosures filed annually in the last several years.

Customs Response: Customs notes that the figures set forth in the

notice of proposed rulemaking are Customs best estimates of both the

annual reporting burden, estimated annual number of respondents and

estimated average annual burden per respondent. Inasmuch as a prior

disclosure may involve one Customs entry with one line item, or several

thousand Customs entries involving hundreds of line items, it is

virtually impossible to predict either the frequency at which

disclosures will be made, or the amount of time necessary to complete a

disclosure. It should also be noted that the simplicity or complexity

of the ``disclosed violation,'' as well as the number of line items at

issue may involve a completion time that is either substantially more

or less than the ``one hour for each Customs entry'' set forth in the

notice of proposed rulemaking. In view of these considerations and the

voluntary nature of the prior disclosure

[[Page 29131]]

provisions, Customs is of the opinion that its estimates comport with

the regulatory requirements of the Paperwork Reduction Act.

Comment: One commenter believes that it would be helpful to

acknowledge in this document that there may be instances where the

disclosing party requires several months--or even longer--to submit all

of the required information to complete its disclosure of the

circumstances of the violation.

Customs Response: Customs acknowledges that in certain cases a

claimed prior disclosure may involve numerous transactions, multiple

ports, and/or complex issues and information--all of which require

adequate research and compilation time. The agency is of the opinion

that the proposed regulations accommodate such prior disclosures by

virtue of the ability of the party to request extensions of time to

research and compile such information.

Comment: One commenter recommends that the proposed regulations

include a provision that either establishes a procedure for appealing a

denial of a claimed prior disclosure, or references such a procedure

found elsewhere in the Customs Regulations. The commenter is of the

opinion that such a provision or statement would serve to avoid

unnecessary litigation.

Customs Response: Customs notes that, ordinarily, the denial of a

prior disclosure is manifested by Customs initiation of administrative

penalty proceedings at ordinary penalty amounts under either 19 U.S.C.

1592 or 1593a. Inasmuch as the disclosing party may avail itself of

administrative petitioning rights in such cases (including the right to

petition Customs denial of prior disclosure treatment), Customs

believes it is unnecessary to enact a separate or additional appeal

procedure.

Comment: Four commenters are of the opinion that Customs should

reinstate the ``minor violations'' section of the regulations governing

prior disclosure (former Sec. 162.74(j)). The commenters believe that

the proposed regulations should state that minor, non-fraudulent

violations should not be subject to penalty, and one commenter believes

that such infractions should not be referred to the Office of

Investigations. Another commenter believes that the deletion of former

Sec. 162.74(j) will discourage prior disclosure of minor violations.

Customs Response: Customs notes that despite the deletion of former

Sec. 162.74(j), the agency does not anticipate any change of practice

with respect to minor violations. It should be noted that inasmuch as

``minor violations'' already are addressed in Customs revised penalty

guidelines (19 CFR Part 171, Appendix B), former Sec. 162.74(j) is

unnecessary.

Conclusion

Accordingly, based on the comments received and the analysis of

those comments as set forth above, and after further review of this

matter, Customs believes that the proposed regulatory amendments should

be adopted as a final rule with certain changes thereto as discussed

above and as set forth below. This document also includes an

appropriate update of the list of information collection approvals

contained in Sec. 178.2 of the Customs Regulations (19 CFR Sec. 178.2).

Regulatory Flexibility Act

Insofar as this amendment closely follows legislative direction,

pursuant to the provisions of the Regulatory Flexibility Act (5 U.S.C.

601, et seq.), it is certified that the amendment will not have a

significant economic impact on a substantial number of small entities.

Accordingly, it is not subject to the regulatory analysis or other

requirements of 5 U.S.C. 603 and 604.

Executive Order 12866

This amendment does not meet the criteria for a ``significant

regulatory action'' as specified in E.O. 12866.

Paperwork Reduction Act

The collection of information contained in this final regulation

was submitted to the Office of Management and Budget (OMB) in

accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d))

and approved under OMB control number 1515-0212. An agency may not

conduct or sponsor, and a person is not required to respond to a

collection of information unless the collection of information displays

a valid control number assigned by OMB.

The collection of information in this final rule is in Sec. 162.74.

This information is required in connection with prior disclosure by a

person of a violation of law committed by that person involving the

filing or attempted filing of a drawback claim, or an entry or

introduction, or attempted entry or introduction of merchandise into

the United States by fraud, gross negligence or negligence. This

information will be used by Customs to determine if the party discloses

the circumstances of a violation before, or without knowledge of, the

commencement of a formal investigation of such violation, so that

merchandise would not be seized and any monetary penalty to be assessed

would be limited. The collection of information is required to obtain a

benefit. The likely respondents are business organizations including

importers, exporters, and manufacturers.

The estimated average burden associated with the collection of

information in this final rule is 1 hour per respondent or recordkeeper

for each Customs entry involved in prior disclosure. Comments

concerning the accuracy of this burden estimate and suggestions for

reducing this burden should be directed to the U.S. Customs Service,

Paperwork Management Branch, 1300 Pennsylvania Avenue, N.W.,

Washington, D.C. 20229, and to the OMB, Attention: Desk Officer for the

Department of the Treasury, Office of Information and Regulatory

Affairs, Washington, D.C. 20503.

Drafting Information: The principal author of this document was

Keith B. Rudich, Regulations Branch, Office of Regulations and Rulings,

U.S. Customs Service. However, personnel from other offices

participated in its development.

List of Subjects

19 CFR Part 162

Customs duties and inspection, Law enforcement, Seizures and

forfeitures.

19 CFR Part 178

Administrative practice and procedure, Exports, Imports, Reporting

and recordkeeping requirements.

Amendment to the Regulations

In accordance with the preamble, Parts 162 and 178 of the Customs

Regulations (19 CFR Parts 162 and 178) are amended as set forth below:

PART 162--RECORDKEEPING, INSPECTION, SEARCH AND SEIZURE

1. The general authority citation for Part 162 continues to read as

follows:

Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1624.

* * * * *

2. Section 162.71 is amended by removing paragraph (e).

3. Section 162.74 is revised to read as follows:

Sec. 162.74 Prior disclosure.

(a) In general.--(1) A prior disclosure is made if the person

concerned discloses the circumstances of a violation (as defined in

paragraph (b) of this section) of 19 U.S.C. 1592 or 19 U.S.C. 1593a,

either orally or in writing to a Customs officer before, or without

knowledge of, the commencement of a

[[Page 29132]]

formal investigation of that violation, and makes a tender of any

actual loss of duties in accordance with paragraph (c) of this section.

A Customs officer who receives such a tender in connection with a prior

disclosure shall ensure that the tender is deposited with the concerned

local Customs entry officer.

(2) A person shall be accorded the full benefits of prior

disclosure treatment if that person provides information orally or in

writing to Customs with respect to a violation of 19 U.S.C. 1592 or 19

U.S.C. 1593a if the concerned Fines, Penalties and Forfeitures Officer

is satisfied the information was provided before, or without knowledge

of, the commencement of a formal investigation, and the information

provided includes substantially the information specified in paragraph

(b) of this section. In the case of an oral disclosure, the disclosing

party shall confirm the oral disclosure by providing a written record

of the information conveyed to Customs in the oral disclosure to the

concerned Fines, Penalties and Forfeitures Officer within 10 days of

the date of the oral disclosure. The concerned Fines, Penalties and

Forfeiture Officer may, upon request of the disclosing party which

establishes a showing of good cause, waive the oral disclosure written

confirmation requirement. Failure to provide the written confirmation

of the oral disclosure or obtain a waiver of the requirement may result

in denial of the oral prior disclosure.

(b) Disclosure of the circumstances of a violation. The term

``discloses the circumstances of a violation'' means the act of

providing to Customs a statement orally or in writing that:

(1) Identifies the class or kind of merchandise involved in the

violation;

(2) Identifies the importation or drawback claim included in the

disclosure by entry number, drawback claim number, or by indicating

each concerned Customs port of entry and the approximate dates of entry

or dates of drawback claims;

(3) Specifies the material false statements, omissions or acts

including an explanation as to how and when they occurred; and

(4) Sets forth, to the best of the disclosing party's knowledge,

the true and accurate information or data that should have been

provided in the entry or drawback claim documents, and states that the

disclosing party will provide any information or data unknown at the

time of disclosure within 30 days of the initial disclosure date.

Extensions of the 30-day period may be requested by the disclosing

party from the concerned Fines, Penalties and Forfeitures Officer to

enable the party to obtain the information or data.

(c) Tender of actual loss of duties. A person who discloses the

circumstances of the violation shall tender any actual loss of duties.

The disclosing party may choose to make the tender either at the time

of the claimed prior disclosure, or within 30 days after Customs

notifies the person in writing of his or her calculation of the actual

loss of duties. The Fines, Penalties and Forfeitures Officer may extend

the 30-day period if there is good cause to do so. The disclosing party

may request that the basis for determining Customs asserted actual duty

loss be reviewed by Headquarters, provided that the actual duty loss

demanded by Customs exceeds $100,000 and is deposited with Customs,

more than one year remains under the statute of limitations involving

the shipments covered by the claimed disclosure, and the disclosing

party has complied with all other prior disclosure regulatory

provisions. A grant of review is within the discretion of Customs

Headquarters in consultation with the appropriate field office, and

such Headquarters review shall be limited to determining issues of

correct tariff classification, correct rate of duty, elements of

dutiable value, and correct application of any special rules (GSP, CBI,

HTS 9802, etc.). The concerned Fines, Penalties and Forfeitures Officer

shall forward appropriate review requests to the Chief, Penalties

Branch, Customs Headquarters, Office of Regulations and Rulings. After

Headquarters renders its decision, the concerned Fines, Penalties and

Forfeitures Officer will be notified and the concerned Customs port

will recalculate the loss, if necessary, and notify the disclosing

party of any actual duty loss increases. Any increases must be

deposited within 30 days, unless the local Customs office authorizes a

longer period. Any reductions of the Customs calculated actual loss of

duty shall be refunded to the disclosing party. Such Headquarters

review decisions are final and not subject to appeal. Further,

disclosing parties requesting and obtaining such a review waive their

right to contest either administratively or judicially the actual loss

of duties finally calculated by Customs under this procedure. Failure

to tender the actual loss of duties finally calculated by Customs shall

result in denial of the prior disclosure.

(d) Effective time and date of prior disclosure.--(1) If the

documents that provide the disclosing information are sent by

registered or certified mail, return-receipt requested, and are

received by Customs, the disclosure shall be deemed to have been made

at the time of mailing.

(2) If the documents are sent by other methods, including in-person

delivery, the disclosure shall be deemed to have been made at the time

of receipt by Customs. If the documents are delivered in person, the

person delivering the documents will, upon request, be furnished a

receipt from Customs stating the time and date of receipt.

(3) The provision of information that is not in writing but that

qualifies for prior disclosure treatment pursuant to paragraph (a)(2)

of this section shall be deemed to have occurred at the time that

Customs was provided with information that substantially complies with

the requirements set forth in paragraph (b) of this section.

(e) Addressing and filing prior disclosure.--(1) A written prior

disclosure should be addressed to the Commissioner of Customs, have

conspicuously printed on the face of the envelope the words ``prior

disclosure,'' and be presented to a Customs officer at the Customs port

of entry of the disclosed violation.

(2) In the case of a prior disclosure involving violations at

multiple ports of entry, the disclosing party may orally disclose or

provide copies of the disclosure to all concerned Fines, Penalties and

Forfeitures Officers. In accordance with internal Customs procedures,

the officers will then seek consolidation of the disposition and

handling of the disclosure. In the event that the claimed ``multi-

port'' disclosure is made to a Customs officer other than the concerned

Fines, Penalties and Forfeitures Officer, the disclosing party must

identify all ports involved to enable the concerned Customs officer to

refer the disclosure to the concerned Fines, Penalties and Forfeitures

Officer for consolidation of the proceedings.

(f) Verification of disclosure. Upon receipt of a prior disclosure,

the Customs officer shall notify Customs Office of Investigations of

the disclosure. In the event the claimed prior disclosure is made to a

Customs officer other than the concerned Fines, Penalties and

Forfeitures Officer, it is incumbent upon the Customs officer to

provide a copy of the disclosure to the concerned Fines Penalties and

Forfeitures Officer. The disclosing party may request, in the oral or

written prior disclosure, that the concerned Fines, Penalties and

Forfeitures Officer request that the Office of Investigations withhold

the initiation of disclosure verification proceedings until after the

party has provided the information or data within the time limits

specified in

[[Page 29133]]

paragraph (b)(4) of this section. It is within the discretion of the

concerned Fines, Penalties and Forfeitures Officer to grant or deny

such requests.

(g) Commencement of a formal investigation. A formal investigation

of a violation is considered to be commenced with regard to the

disclosing party on the date recorded in writing by the Customs Service

as the date on which facts and circumstances were discovered or

information was received that caused the Customs Service to believe

that a possibility of a violation existed. In the event that a party

affirmatively asserts a prior disclosure (i.e., identified or labeled

as a prior disclosure) and is denied prior disclosure treatment on the

basis that Customs had commenced a formal investigation of the

disclosed violation, and Customs initiates a penalty action against the

disclosing party involving the disclosed violation, a copy of a

``writing'' evidencing the commencement of a formal investigation of

the disclosed violation shall be attached to any required prepenalty

notice issued to the disclosing party pursuant to 19 U.S.C. 1592 or 19

U.S.C. 1593a.

(h) Scope of the disclosure and expansion of a formal

investigation. A formal investigation is deemed to have commenced as to

additional violations not included or specified by the disclosing party

in the party's original prior disclosure on the date recorded in

writing by the Customs Service as the date on which facts and

circumstances were discovered or information was received that caused

the Customs Service to believe that a possibility of such additional

violations existed. Additional violations not disclosed or covered

within the scope of the party's prior disclosure that are discovered by

Customs as a result of an investigation and/or verification of the

prior disclosure shall not be entitled to treatment under the prior

disclosure provisions.

(i) Knowledge of the commencement of a formal investigation.--(1) A

disclosing party who claims lack of knowledge of the commencement of a

formal investigation has the burden to prove that lack of knowledge. A

person shall be presumed to have had knowledge of the commencement of a

formal investigation of a violation if before the claimed prior

disclosure of the violation a formal investigation has been commenced

and:

(i) Customs, having reasonable cause to believe that there has been

a violation of 19 U.S.C. 1592 or 19 U.S.C. 1593a, so informed the

person of the type of or circumstances of the disclosed violation; or

(ii) A Customs Special Agent, having properly identified himself or

herself and the nature of his or her inquiry, had, either orally or in

writing, made an inquiry of the person concerning the type of or

circumstances of the disclosed violation; or

(iii) A Customs Special Agent, having properly identified himself

or herself and the nature of his or her inquiry, requested specific

books and/or records of the person relating to the disclosed violation;

or

(iv) Customs issues a prepenalty or penalty notice to the

disclosing party pursuant to 19 U.S.C. 1592 or 19 U.S.C. 1593a relating

to the type of or circumstances of the disclosed violation; or

(v) The merchandise that is the subject of the disclosure was

seized; or

(vi) In the case of violations involving merchandise accompanying

persons entering the United States or commercial merchandise inspected

in connection with entry, the person has received oral or written

notification of Customs finding of a violation.

(2) The presumption of knowledge may be rebutted by evidence that,

notwithstanding the foregoing notice, inquiry or request, the person

did not have knowledge that an investigation had commenced with respect

to the disclosed information.

PART 178--APPROVAL OF INFORMATION COLLECTION REQUIREMENTS

1. The authority citation for part 178 continues to read as

follows:

Authority: 5 U.S.C. 301; 19 U.S.C. 1624; 44 U.S.C. 3501 et seq.

2. Section 178.2 is amended by adding a new listing to the table in

numerical order to read as follows:

Sec. 178.2 Listing of OMB control numbers.

------------------------------------------------------------------------

OMB control

19 CFR section Description No.

------------------------------------------------------------------------

* * * * *

Sec. 162.74................ Prior disclosure.......... 1515-0212

* * * * *

------------------------------------------------------------------------

Samuel H. Banks,

Acting Commissioner of Customs.

Approved: May 12, 1998.

John P. Simpson,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 98-14154 Filed 5-27-98; 8:45 am]

BILLING CODE 4820-02-P