Recordkeeping Requirements

SUMMARY: This document adopts as a final rule, with some changes,

proposed amendments to the Customs Regulations to reflect changes to

the Customs laws regarding recordkeeping requirements, examination of

records and witnesses, regulatory audit procedures, and judicial

enforcement contained in the Customs Modernization provisions of the

North American Free Trade Agreement Implementation Act. The final

regulatory texts include detailed provisions regarding what records

must be maintained, who must maintain them, and how they must be

maintained and made available for examination by Customs. The final

regulations also provide for electronic or other alternate methods for

storage of records, set forth penalties for failure to maintain or

produce certain records, and establish a voluntary recordkeeping

compliance program as an alternative to penalties.

EFFECTIVE DATE: July 16, 1998.

FOR FURTHER INFORMATION CONTACT: For questions relating to

recordkeeping in general and the voluntary Recordkeeping Compliance

Program, call Stan Hodziewich, Regulatory Audit Division, Washington,

D.C. (202-927-0999), or Howard Spencer, Regulatory Audit Division,

Atlanta Branch (770-994-2273, Ext.158).

For questions relating to the Appendix ((a)(1)(A) list) and its

underlying documents and other entry records, call Jerry Laderberg,

Office of Regulations and Rulings (202-927-2269).

SUPPLEMENTARY INFORMATION:

Background

On December 8, 1993, the President signed into law the North

American Free Trade Agreement Implementation Act (the ``NAFTA

Implementation Act''), Public Law 103-182, 107 Stat. 2057. Title VI

thereof contained provisions pertaining to Customs Modernization and

thus is commonly referred to as the Customs Modernization Act or ``Mod

Act''. Sections 614, 615 and 616 within the Mod Act amended sections

508, 509 and 510 of the Tariff Act of 1930, as amended (19 U.S.C. 1508,

1509 and 1510) which pertain to recordkeeping requirements applicable

to importers and others. In addition, within Title II of the NAFTA

Implementation Act, entitled ``Customs Provisions'', section 205

amended sections 508 and 509 of the Tariff Act of 1930 to include

recordkeeping requirements for exportations to Canada and Mexico for

purposes of the United States-Canada Free Trade Agreement and the

NAFTA.

Before its amendment by the Mod Act, section 508 of the Tariff Act

of 1930 limited recordkeeping requirements to any owner, importer,

consignee, or agent thereof who imported, or knowingly caused to be

imported any merchandise into the Customs territory of the United

States. Section 614 of the Mod Act amended these requirements and

expanded the parties subject to Customs recordkeeping requirements to

include parties who file an entry or declaration, transport or store

merchandise carried or held under bond, file drawback claims, or cause

an importation, or transportation or storage of merchandise carried or

held under bond. Section 614 of the Mod Act further amended section 508

of the Tariff Act of 1930 to clarify that all parties who must keep

records for Customs purposes are subject to recordkeeping requirements.

In addition, in order to reflect the current electronic environment in

which both Customs and the importing and exporting community operate,

section 614 of the Mod Act expanded the concept of ``records'' set

forth in section 508 of the Tariff Act of 1930 to include information

and data maintained in the form of electronically generated or machine

readable data.

The Mod Act amended various provisions of the Customs laws to grant

to Customs authority not to require the presentation of certain

documentation or information at time of entry; these amendments were

intended to permit a reduction of the documentation and information

requirements at time of entry, thereby facilitating the entry process.

However, in exchange for not requiring presentation of documents at the

time of entry, and in order to not jeopardize the ability of Customs to

obtain those records at a later date, section 615 of the Mod Act

amended section 509 of the Tariff Act of 1930: (1) to authorize Customs

to examine, or to require the production of, inter alia, any records

which are required by law for the entry of merchandise, whether or not

Customs required their presentation at the time of entry; (2) to

provide for the imposition of substantial administrative penalties for

a failure to comply, within a reasonable time, with a demand for

production of such entry records; and (3) to require Customs to

identify and make available to the importing community, by publication,

a list of all such entry records or information (referred to as the

``(a)(1)(A) list'' based on the paragraph within 19 U.S.C. 1509 which

specifically concerns such records). Thus, the Mod Act amendments

resulted in a statutory distinction between those business, financial

or other records that pertain to activities listed in section 508 of

the Tariff Act of 1930 and are maintained in the normal course of

business and those that are required for the entry of merchandise and

are required to be identified in the ``(a)(1)(A) list'' and as to which

penalties may apply for a failure to produce if demanded by Customs. In

addition, section 615 of the Mod Act amended section 509 of the Tariff

Act of 1930: (1) to set forth procedures applicable to regulatory

audits conducted by Customs; and (2) to provide for a voluntary

recordkeeping compliance program under which program participants might

be eligible for alternatives to penalties for a failure to produce

demanded entry records and information.

Section 205 of the Mod Act amended section 508 of the Tariff Act of

1930, inter alia, to provide (1) that any person who completes and

signs a NAFTA Certificate of Origin for a good for which preferential

treatment is claimed under the NAFTA shall make, keep, and render for

examination and inspection all records relating to the origin of the

good (including the Certificate or copies thereof) and the associated

records and (2) that such records shall be retained for at least 5

years from the date of signature of the NAFTA Certificate of Origin.

Section 205 of the Mod Act also made a conforming amendment to section

509 of the Tariff Act of 1930 regarding persons to whom a summons may

be issued, involving the addition of a reference to persons who

exported merchandise, or knowingly caused merchandise to be exported,

to a NAFTA country or to Canada during such time as the United States-

Canada Free Trade Agreement is in force. Section 616 of the Mod Act

amended section 510 of the Tariff Act of 1930 by adding the assessment

of a monetary penalty as a sanction that may be applied by a U.S.

district court if a person does not comply with a summons issued by

Customs under section 509 of the Tariff Act of 1930.

On April 23, 1997, Customs published in the Federal Register (62 FR

19704) a notice setting forth proposed

[[Page 32917]]

amendments to the Customs Regulations to implement the changes to the

statutory recordkeeping provisions effected by the NAFTA Implementation

Act as summarized above. Customs stated in that notice of proposed

rulemaking that a new, separate part within the Customs Regulations,

dealing solely with recordkeeping and related requirements, would be

the appropriate approach. Accordingly, the notice proposed to add a new

Part 163 (19 CFR Part 163) entitled ``Recordkeeping'' which would

contain the recordkeeping and related provisions previously set forth

in Part 162 of the Customs Regulations (19 CFR Part 162) and would also

reflect the amendments to sections 508, 509 and 510 of the Tariff Act

of 1930 effected by sections 205, 614, 615 and 616 of the NAFTA

Implementation Act. In addition, that notice: (1) set forth, as an

appendix to proposed new Part 163, the (a)(1)(A) list that had been

previously published in the Customs Bulletin on January 3, 1996, as

T.D. 96-1 and in the Federal Register on July 15, 1996, at 61 FR 36956;

and (2) included proposed conforming or collateral amendments to

various provisions within Parts 24, 111, 143 and 162 of the Customs

Regulations (19 CFR Parts 24, 111, 143 and 162). The notice of proposed

rulemaking made provision for the submission of public comments on the

proposed regulatory changes for consideration before adoption of those

changes as a final rule, and the prescribed public comment period

closed on June 23, 1997. A correction document pertaining to the April

23, 1997, notice of proposed rulemaking was published in the Federal

Register on May 5, 1997 (62 FR 24374).

Discussion of Comments

Twenty-three commenters responded to the solicitation of comments

in the April 23, 1997, notice of proposed rulemaking referred to above.

The comments submitted are summarized and responded to below.

Treatment of Express Consignment Carriers

Comment: Two commenters complained that the proposed regulations do

not adequately reflect, nor address, the unique role that express

consignment carriers play in the import process. These commenters noted

that express consignment carriers, as nominal consignees, have the

right under 19 U.S.C. 1484 to designate a customs broker to make entry

of merchandise and that, in order to deliver an integrated service,

they frequently designate their own brokerages which make entry in

their own names; thus, express consignment carriers play multiple roles

with regard to customs processing as a carrier, broker, and importer of

record, and they also operate as transporters and storers of

merchandise carried or held under bond. The proposed regulations, on

the other hand, simply list together all of the different parties

required to make, keep, and produce records without making any clear

distinction between those parties with reference to the roles they play

in the import process (for example, the distinction between an express

consignment carrier and the actual importer or consignee). Thus, under

the proposed regulations an express consignment carrier would be

required to make, keep, and produce records for each of its import-

related activities, including, as nominal consignee, every document

that accompanies a shipment and is identified in the (a)(1)(A) list as

being necessary for the entry of merchandise. The commenters further

asserted that the burden imposed by the regulatory proposals is

accentuated in the case of express consignment carriers by virtue of

the very large volume of shipments that they handle.

In addition to the above general comments regarding the unique

nature of the express consignment industry, these two commenters made

the following specific recommendations or observations:

1. In order to avoid redundancy and unnecessary burdens in the

recordkeeping requirements, separate and distinct recordkeeping

requirements should be established for express consignment carriers and

that those requirements should appear in Part 128 of the Customs

Regulations (19 CFR Part 128) which sets forth requirements and

procedures for the clearance of imported merchandise carried by express

consignment operators and carriers. These commenters suggested that

there is precedent for this approach in that separate sections dealing

with recordkeeping responsibilities appear in the Part 111 regulations

governing customs brokers.

2. In order to avoid rendering meaningless the benefits provided

under current Part 128 and also to reflect what records are in fact

kept in the ordinary course of business, express consignment carriers

should only be required to keep and produce, as (a)(1)(A) records,

those records presently prescribed for entry purposes in Part 128: for

letter and document shipments (express consignment carrier acts as

carrier), the summary manifest or manifest; for shipments that may be

entered free of duty under 19 U.S.C. 1321 and 19 CFR 10.151 (express

consignment carrier acts as carrier/broker), the manifest; for

shipments covered by an informal entry (express consignment carrier

acts as broker), the manifest or Customs Form 3461 and the invoice and

Customs Form 7501 or, if a consolidated informal entry, the manifest

and consolidated Customs Form 7501; and for shipments covered by a

formal entry (express consignment carrier acts as broker), the manifest

or Customs Form 3461 and the invoice and Customs Form 7501, together

with a power of attorney if entry is made in the name of the express

consignment carrier's customer and certain records required for the

entry of specific categories of merchandise. All other records

pertaining to a particular import (for example, air waybills,

commercial invoices) should be kept and produced by the recipient of

the shipment, that is, the actual importer.

3. Requiring the retention of more than the records mentioned at

point 2 above in the case of express consignment carriers neither makes

economic sense nor provides an enforcement benefit to Customs because

(1) while the value of an express consignment shipment is not typically

very high, the retention of additional records would be extremely

costly to the express consignment carrier given the volume of shipments

involved and (2) compliance assessment (including document review) for

express consignment shipments is performed either at the time of entry

by on-site Customs inspectors at express carrier facilities or,

particularly in the case of informal entries where enforcement risks

are minimal, not at all.

4. While express consignment carriers generally maintain the

consolidated Customs Form 7501 for informal entries, Customs might

consider eliminating this requirement since the document contains very

little information other than totals on duties and number of entries.

5. It should be clarified up front that the monetary penalties

provided for in 19 U.S.C. 1509(g) and in proposed Sec. 163.6(b) are

inapplicable to express consignment carriers because the documentation

or information that the express consignment industry should be required

to maintain will be presented at the time of entry. In support of this

position, it was pointed out that, in House Report No. 361, 103d

Congress, 1st Session (1993), it was noted that those penalties should

not be imposed where the ``information demanded has been presented to

and retained by the Customs Service at the time of entry.''

[[Page 32918]]

Moreover, with reference to the role that express consignment carriers

often play as customs brokers, it was pointed out that the same House

Report recognized that while customs brokers may be recordkeepers under

section 1509 and may act as importers of record in certain cases,

``their status as 'brokers'' does not change because of this and

failure to maintain the records as specified in section 615 should not

automatically subject them to penalties set forth in subsection (g)'';

rather, the House Report indicated that Customs should proceed against

customs brokers for recordkeeping violations under 19 U.S.C. 1641 and

only under section 1509(g) in exceptional circumstances such as where

there is ``an egregious, flagrant or willful violation of the

requirements of section 1509, or when there is a pattern or practice of

abuse occurring over a sustained period of time, also in willful

disregard of those recordkeeping requirements.''

Customs response: Customs disagrees with the implication of the

above general comments, that is, that express couriers should be

excepted from these recordkeeping regulatory requirements. While it is

true that express couriers not only act as carriers but also at times

as brokers and consignees, the fact remains that these separate

functions constitute activities that trigger recordkeeping

responsibilities under section 508(a). Customs does not believe that,

merely because express couriers act in these varied roles, they are so

unique that special recordkeeping requirements should apply to them.

Moreover, Customs notes that express couriers do not always exercise

unique control because some express companies have multiple brokers.

1. For the reasons stated above in response to the general

comments, Customs disagrees that separate recordkeeping requirements

should be created for express couriers.

2. Customs disagrees with the suggestion that the Part 163 texts

would have the effect of rendering meaningless the benefits provided by

Part 128. The scope and benefits of Part 128 go far beyond

recordkeeping requirements. Moreover, the Part 163 texts of necessity

reflect recordkeeping requirements that apply to express couriers for

all roles that couriers play in international transactions. The parties

listed in proposed Sec. 163.2(a) as being required to maintain records

are specifically required by Sec. 163.3 to maintain ``(a)(1)(A)''

records, that is, those records required for entry. Since each import

transaction/entry is unique and may require different (a)(1)(A)

documents depending upon a number of factors, it would be impossible to

limit the (a)(1)(A) records for each party listed in Sec. 163.2(a).

This is especially true for express couriers whose role may change from

transaction to transaction.

However, in the light of the points made by these commenters,

Customs has reconsidered this matter and now believes that, for

purposes of prescribing a minimum period during which records must be

retained, there is a valid basis for making an exception to the normal

rule in the following cases: (1) Where an informal entry is filed by a

customs broker appointed by a consignee who is not the owner or

purchaser of the imported merchandise; and (2) where the records either

relate to bona fide gifts and other articles admitted free of duty and

tax under 19 U.S.C. 1321(a)(2) and Secs. 10.151-10.153 of the Customs

Regulations or consist of carriers' records pertaining to manifested

cargo that is exempt from entry under the Customs Regulations (for

example, records, diagrams and data covered by General Note 16(c) of

the Harmonized Tariff Schedule of the United States (HTSUS), and

undeliverable articles described in General Note 16(e), HTSUS, which

are exempt from entry under Sec. 141.4(b)(1) of the Customs

Regulations). In such cases, Customs believes that a 2-year record

retention period (rather than the normal 5-year period) is appropriate

because compliance measurement most often takes place at the time of

importation or entry (and rarely, if ever, more than two years

thereafter) and because, in the case of informal entries filed by

customs brokers at the behest of consignees, the most important records

(that is, the entry records) would still have to be maintained and made

available to Customs by the broker for the normal 5-year period.

Accordingly, Sec. 163.4(b), which lists exceptions to the 5-year record

retention rule, has been modified as set forth below by the addition of

two new subparagraphs (3) and (4) to reflect these considerations.

3. Customs disagrees with this statement. Given the concerns of

Customs regarding misdeliveries within the express courier industry,

Customs deems the information on even informal entries crucial for

post-audit and compliance measurement purposes at least during the 2-

year period that might apply to an express courier under the modified

Sec. 163.4(b) text as discussed above in the point 2 comment response.

The modified Sec. 163.4(b) text, together with the provision for

alternative storage of records in Sec. 163.5, serve in part to address

the issue of the burden of maintaining a large volume of documents.

4. Customs disagrees for the reasons stated in the point 3 response

above.

5. Customs agrees, and proposed Sec. 163.6(b)(4)(iii) made clear,

that where (a)(1)(A) documents are presented to and retained by

Customs, no recordkeeping penalties will be issued. The position of

Customs is that recordkeeping violations by customs brokers will be

handled either under 19 U.S.C. 1641 and Part 111 of the Customs

Regulations or under 19 U.S.C. 1509(g) and Part 163 of the Customs

Regulations, depending on the nature and circumstances of the

violation.

Section 111.21(b)--Applicability of Part 163 to Customs Brokers

Comment: One commenter took issue with proposed new paragraph (b)

of Sec. 111.21 which provides that a customs broker shall comply with

the provisions of Part 163 when maintaining records that reflect on his

transactions as a broker. This commenter stated that the regulatory

text is too broad, and could give rise to uncertainty on the part of

Customs and a broker when an audit is being performed, because it does

not differentiate between the different functions and responsibilities

of brokers. While conceding that a broker acting as importer of record

would assume the recordkeeping responsibilities of Part 163, this

commenter argued that Sec. 111.21(b) should be limited to brokers

acting in that capacity and should not apply to other broker functions

authorized under 19 U.S.C. 1641.

Customs response: Customs disagrees. The requirements and

procedures governing the retention and subsequent production of records

under sections 508 and 509 are contained in Part 163, and proposed new

Sec. 111.21(b) was included to reflect this fact. Thus, the

``provisions'' referred to in Sec. 111.21(b) clearly would apply to

customs brokers whether they act solely as an agent on behalf of the

importer of record or list themselves as the importer of record or file

a drawback claim on behalf of the importer or transport goods on behalf

of the importer or carry on any activity of a broker authorized under

19 U.S.C. 1641 and which is also described in section 508(a) and in

Sec. 163.1(a).

Customs notes that present Sec. 111.21 (the text of which was

redesignated as paragraph (a) in the proposed regulatory amendments)

requires a broker to keep ``records of account reflecting all his

financial transactions as a broker''; this provision has always been

intended to include, among other things, financial records pertaining

to client accounts (billing records, payment of Customs duty refunds to

clients where the broker

[[Page 32919]]

was importer of record, etc.) which, even if they are not records

required to be maintained under section 508, are nevertheless records

that pertain to the conduct of ``customs business'' as that term is

defined in section 1641. For purposes of consistency and in order to

clarify the broad scope of amended Sec. 111.21 as regards the

maintenance of records, the following changes have been included in the

final regulatory amendments set forth below: (1) The proposed amendment

to the definition of ``records'' in Sec. 111.1 (which involved a simple

cross-reference change) has been replaced by an amendment setting forth

a new definition text which refers to ``documents, data and information

referred to in, and required to be made or maintained under, this part

and any other records, as defined in Sec. 163.1(a) of this chapter,

that are required to be maintained by a broker under part 163 of this

chapter''; and (2) the text of new Sec. 111.21(b) has been modified to

refer to the provisions of ``this part and part 163 of this chapter''.

Again with reference to newly designated Sec. 111.21(a), Customs

further notes that the second sentence thereof requires a broker to

maintain, among other things, ``a copy of each entry made by him with

all supporting records, except those documents he is required to file

with Customs''; this simply reflects a requirement imposed on a broker

by sections 508 and 509, whether the broker is acting as importer of

record or as an agent for the importer of record. In view of the

addition of paragraph (b) of Sec. 111.21 which refers to Part 163, and

consistent with the specific coverage of sections 508 and 509 with

regard to records pertaining to the entry process, Customs believes

that the regulatory provisions of Part 163 should control in this

context. Accordingly, the amendments to Sec. 111.21 have been modified

as set forth below to include the removal of these words from the

second sentence of newly designated paragraph (a).

Section 111.21(c)--Designation of Recordkeeping Officer and Backup

Comment: Six comments were received on proposed new paragraph (c)

of Sec. 111.21 which requires a customs broker to designate a

knowledgeable company employee to be the broker's recordkeeping officer

as well as a back-up recordkeeping officer. The points made by these

commenters were as follows:

1. One commenter supported the proposed regulatory provision as

being in accord with the Customs principle of ``People, Processes and

Partnership'' by creating a primary point of contact. This commenter,

however, suggested that the word ``manager'' be used in place of

``officer'' in the regulatory text so that a broker could designate a

non-corporate officer to handle these responsibilities.

2. Four commenters argued that the provision should be eliminated

entirely on the grounds that it is unnecessary and overly intrusive.

These commenters pointed out that, contrary to the case of a regular

importer, a customs broker is already required under Part 111 of the

regulations to have on record with Customs an individually licensed

broker who is responsible for the supervision and control of the

broker's customs business (including recordkeeping requirements). In

addition, brokers are different from importers in that a broker can be

penalized (by monetary fines or by suspension or revocation of its

license) under the broker statute and regulations for a failure to meet

its recordkeeping responsibilities, whereas after certification an

importer would merely have its privilege suspended or terminated.

Moreover, brokers are licensed and thus should be aware of their

obligations regarding recordkeeping, and the appointment of

recordkeeping officers would not in itself ensure greater compliance.

It should be sufficient for a broker, if necessary, to simply provide a

contact name to Customs when needed, without prescribing in the

regulations how a broker should organize its business.

3. One commenter suggested that, rather than requiring an express

designation of a recordkeeping officer, the licensed qualifying officer

of the broker should automatically serve as the recordkeeping officer

unless the broker makes an alternative designation. This commenter also

recommended that the requirement of a back-up recordkeeping officer be

eliminated for small brokers having less than 25 employees.

Customs response: While Customs does not agree that the regulatory

provision at issue should be eliminated entirely, Customs is in

substantial agreement with the above comments regarding the sufficiency

of a mere recordkeeping contact (and without a required back-up) within

the brokerage, because Customs requires only the existence of a

designated individual responsible for recordkeeping compliance in the

case of the Recordkeeping Compliance Program. Section 111.21(c) as set

forth below has been modified accordingly. In addition, in the revised

text the word ``entry'', which was used in the proposed text, has been

replaced by ``customs business'' to reflect the broad scope of

Sec. 111.21 as discussed above in the comment response regarding

Sec. 111.21(b).

Section 111.22--Additional Record of Transactions

Comment: A commenter supported the proposed amendment to

Sec. 111.22 which would transfer, from the port director to the Field

Director of Regulatory Audit responsible for the geographical area in

which the broker's designated recordkeeping officer is located, the

authority to exempt a broker from the recordkeeping requirement set

forth in that section. This commenter opined that this proposed change

recognizes changing industry trends and should shorten approval times

and improve lines of communication between brokers and Customs.

Customs response: While the changes to Sec. 111.21(c) discussed in

the comment response immediately above would appear to affect the

wording of the proposed changes to Sec. 111.22, Customs has

reconsidered the need for Sec. 111.22 as a whole. In light of the fact

that numerous requests for exemptions from the requirements of this

section are granted yearly by Customs, and since approval authority has

been granted to Regulatory Audit which utilizes a new audit approach,

Customs believes that Sec. 111.22, and the recordkeeping burden imposed

thereby, are no longer necessary. Accordingly, the final regulatory

amendments set forth below include the removal of Sec. 111.22 in its

entirety.

Section 111.23(a)(1)--Consolidation of Records

Comment: Four comments were received on the proposed revision of

Sec. 111.23(a)(1) which would permit the consolidation of records with

the approval of the Field Director of Regulatory Audit responsible for

the geographical area in which the broker's designated recordkeeping

officer is located. Two of the commenters stated their agreement with

the general principle of allowing the consolidation of records.

However, all four commenters made the following complaints or

suggestions with regard to the proposed regulatory text:

1. There should be no provision for review and approval by the

local Field Director of Regulatory Audit; all that should be required

is that the Field Director of Regulatory Audit be notified of the

storage location. Moreover, the proposed regulatory text could lead to

inconsistent treatment of requests since the text allows for the

rejection of a request without requiring a reason or justification.

Accordingly, the proposed text should be modified (1) to set forth

[[Page 32920]]

the reasonable requirements for consolidation that the broker must

meet, (2) to provide for a certification from the broker that it meets

those requirements, and (3) to provide for issuance of an

acknowledgment from the Field Director of Regulatory Audit to the

broker showing receipt of the consolidation plan.

2. A broker should only be required to notify Customs of

consolidation of records, and such notification should be provided to

Customs Headquarters rather than to a field office. The approach taken

in the Federal Maritime Commission regulations in 15 CFR 762.5 should

be followed.

3. While one commenter read the proposed text as permitting

consolidation of records in multiple locations, another commenter

recommended that the text specifically provide that brokers can

consolidate records in one or more (regional) locations.

4. The regulatory text should provide that, where electronic data

storage or imaging is being used, the term ``consolidate'' covers a

computer system that may have a distributed database.

5. Brokerage firms having multiple district permits could possibly

have, if required, a recordkeeping officer located in a different

geographic area than its home district where its licensed qualifying

officer is located, thus creating confusion over authorities and

responsibilities.

6. The regulatory text should specifically provide that for brokers

for which multiple district permits have been issued, only one

application and approval to consolidate records would be required for

use in all permitted districts.

Customs response: 1 and 2. While Customs has reconsidered the

proposed provision and agrees with the commenters both that brokers

need only notify Customs in advance of the decision to consolidate

their records and that such notification should go to a single,

centralized location, Customs does not agree that such notification

should go to Customs Headquarters. Rather, Customs believes that the

Miami regulatory audit field office is the appropriate location for

submission of the written notice of consolidation because the Miami

office houses the field audit specialist on recordkeeping requirements

and also houses the staff that will be responsible for creating

Customs-wide recordkeeping information data bases and entering the data

therein. The proposed regulatory text in question (redesignated in this

document as paragraph (b)(2) of Sec. 111.23 as discussed below) has

been modified accordingly.

Based on the agreement of Customs to dispense with the proposed

requirement for Customs approval of consolidation of records, and in

view of the changes to the Part 111 proposed amendments already

discussed above, the Sec. 111.23 amendments as set forth below

incorporate some other changes not reflected in the amendments as

originally proposed. The following points are noted in this regard: (1)

In paragraph (a)(1), reference is simply made to ``records'' (the

meaning of which should be clear from the new definition thereof in

Sec. 111.1), the reference to Customs approval and the last sentence

regarding appeal of a denial of approval have been removed, reference

is made to consolidation at ``one or more'' locations (to clarify that

the intent was not to restrict consolidation to one location, so that a

broker could, for example, opt to keep all entry records at one

location and all client financial account records at another location),

and the reference to the geographical location of the broker's

recordkeeping officer has been removed in favor of a simple reference

at the end of the text to the subparagraph which sets forth the

notification procedures (formerly paragraph (e)); (2) proposed new

paragraph (b) has been omitted (because it adds nothing that is not

already stated in new Sec. 111.21(b) and because the reference in the

proposed text to only Part 163 failed to reflect that some records

required to be maintained under the Part 111 texts are not records

covered by Part 163) and, consequently, former paragraph (e) has been

redesignated as (b) (rather than as (c)); (3) within newly designated

paragraph (b), the word ``financial'' has been removed from

subparagraphs (1) and (2)(ii) and the word ``accounting'' has been

removed from the first sentence of subparagraph (2)(i) in order to

reflect that consolidation applies to all records (that is, those

required under Part 111 and those required to be maintained under Part

163), and new language regarding where notice of consolidation is to be

given, as discussed above, has been included in the introductory text

of subparagraph (2); (4) former paragraph (b) has been removed (because

it will not be replaced by a new paragraph (b) text as originally

proposed and, as with the other paragraphs removed from this section,

is superseded by the Part 163 texts); and (5) paragraph (f) (which was

inadvertently not redesignated or otherwise mentioned in the proposed

Sec. 111.23 amendments) has been removed because its substance is

adequately covered by other provisions within Sec. 111.23 and Part 163.

3. Customs agrees, and the modified Sec. 111.23(a)(1) text, as

discussed above and set forth below, now makes this clear.

4. Customs disagrees. The issue raised by this comment in effect

concerns alternate methods for storage of records and is adequately and

more properly addressed in Sec. 163.6.

5. While Customs agrees with this commenter's observation, it is

essentially rendered moot by the changes to Secs. 111.21 and 111.23 as

discussed above and set forth below.

6. The substance of this comment has been addressed by the

regulatory text changes discussed above and set forth below.

Section 143.35--Procedure for Electronic Entry Summary

Comment: With regard to the proposed revision of Sec. 143.35 which

provides that documentation submitted before being requested by Customs

will not be accepted or retained by Customs, a commenter requested that

the regulatory text be modified to provide that any such documents will

be promptly returned to the filer.

Customs response: Customs disagrees with the requested change.

Documents submitted before being requested by Customs will not be

accepted by Customs, thus obviating the need to return them.

Section 143.36(c)--Retention and Submission of Invoice

Comment: Two comments were received on the proposed changes to

Sec. 143.36(c) which would provide (1) that the invoice is to be

retained by the filer unless requested by Customs and (2) that Customs

will not accept or retain an invoice submitted by a filer before a

request is made by Customs.

One commenter claimed that the refusal of Customs to accept and

retain the invoice will impose an unreasonable burden on broker-filers

in cases where the broker knows that the entry summary may later be

used in connection with a drawback entry. This commenter stated that it

already has been overwhelmed in some cases when Customs requested

copies of entry summaries and related documents for paperless entries

because a drawback claim was later filed by the importer or exporter,

pointing out that the request from Customs usually is not for a single

entry summary but rather for dozens at a time. This commenter therefore

suggested that a broker should be allowed the option of filing such

[[Page 32921]]

documents at the time of entry summary while its files are at hand,

rather than be forced to assume the time and expense of retrieving

documents from a storage location.

The second commenter argued that, where Customs refuses to accept

and retain an invoice filed without a request for it having been made,

the regulatory text should provide for a prompt return of the document

to the filer.

Customs response: Customs disagrees. As regards the first comment,

section 615 of the Mod Act and the subsequent proposed recordkeeping

regulations were written in order to reduce the burden of filing other

documents with the entry or entry summary because Customs frequently

did not need the documents to process the entry or entry summary. The

decision of whether Customs needs the documentation either at or after

the time of entry is a decision best left to Customs. If the broker

knows that certain entry summaries and supporting documentation will be

used for a subsequent claim for drawback, the broker could maintain

those records separately and thus forego any time or expense for future

retrieval. The substance of the second comment has been addressed above

in the comment response regarding Sec. 143.35.

Section 143.37(a)--Retention of Records

Comment: With regard to the reference to records that must be

retained by a broker, a commenter requested clarification on whether or

not a Customs electronic response to a broker transmission must be

maintained.

Customs response: Since a Customs electronic response to a broker

transmission is not one of the documents or data elements covered by

sections 508 and 509 and by the definition of ``records'' in

Sec. 163.1(a), there is no regulatory requirement that such electronic

responses be maintained; however, a prudent broker might want to retain

them for other purposes.

Also with regard to Sec. 143.37, as a result of a further internal

review of the proposed regulatory amendments to paragraphs (c) and (d),

Customs has concluded that these two paragraphs should be removed

rather than merely amended as proposed. As regards paragraph (c), which

concerns consolidation of electronic entry records, the issue of

consolidated records is specifically covered for brokers in amended

Sec. 111.23(a) because that provision also sets forth a basic standard

for where records are to be maintained in the absence of consolidation;

however, in the case of other entry filers, consolidation of records

lacks a regulatory context because the regulations have never

prescribed (and the proposed new Part 163 texts did not mention) a

basic records location standard to which consolidation would have

reference. Thus, the removal of paragraph (c) would allow Parts 111 and

163 to control and would have the added benefit of avoiding an

unnecessary distinction between electronic entry records (for which

consolidation was specifically mentioned under the proposed texts) and

other records (for which no consolidation standards were proposed). As

regards paragraph (d), which concerns the condition in which supporting

documentation must be retained, Customs notes that the substance of

this provision is also the subject of proposed Sec. 163.5; thus, in

view of the cross-reference to Part 163 in amended Sec. 143.37(a),

paragraph (d) no longer serves any necessary or useful purpose.

Accordingly, the regulatory amendments set forth below include the

removal of paragraphs (c) and (d) of Sec. 143.37.

In addition, also based on a further internal review, Customs has

determined that present Sec. 143.38, which concerns the retrievability

of supporting documentation regarding electronic transactions (and

which was not affected by the proposed regulatory amendments),

duplicates, or is inconsistent with, the new Part 163 provisions. Since

Customs believes that the Part 163 provisions should control, the

regulatory amendments set forth below also include the removal of this

section.

Section 143.39--Penalties

Comment: Four comments were received on the proposed revision of

Sec. 143.39 which refers to brokers and importers unable to produce

documents requested by Customs within a reasonable time and provides

that such brokers will be subject to penalties pursuant to Parts 111

and/or 163 and that such importers will be subject to penalties

pursuant to Part 163. The points made by these commenters were as

follows:

1. One commenter argued that the maximum period for production of

records is much too short for large companies with centralized payment

offices and that, thus, it is unreasonable to penalize an importer for

a failure to produce documents within a ``reasonable time''. Noting

that there are currently no administrative penalties for failure to

keep and produce required records for examination, this commenter

complained that, under the proposed rule, recordkeepers that fail to

comply could find themselves held in contempt by a district court,

subject to monetary penalties fixed by the court, and could be

prohibited from importing until they comply.

2. One commenter argued that brokers should not be liable for

penalties under both Part 111 and Part 163 because this could represent

double liability for one error. This commenter suggested limiting

liability for brokers to Part 111 which subjects a broker to the

greatest potential liability, that is, loss of its license.

3. One commenter stated that since broker records are retained by a

broker only because of the requirements of Part 111, brokers should be

subject to penalties only under Part 111 (and not under Part 163)

unless the broker is also the importer of record or unless the broker

is a certified recordkeeping agent for one or more of its clients.

Similarly, another commenter requested clarification on its assumption

that penalties under Part 163 would apply to a broker only when the

broker acts as importer of record and that penalties under Part 111

would apply in all other cases.

Customs response: 1. Customs has extensively modified proposed

Sec. 163.6(a), as discussed below in connection with the comments

received on that provision, and the regulatory text, as so modified,

addresses the substance of this comment.

2 and 3. Customs agrees with these comments only in regard to the

issue of double liability: Whether a broker on a Customs transaction

was acting as the importer of record or only as an agent for the

importer of record, if disciplinary action (including the assessment of

monetary penalties) under 19 U.S.C. 1641 and Part 111 of the Customs

Regulations is taken against the broker for a recordkeeping violation,

no additional penalties under 19 U.S.C. 1509(g) and Part 163 of the

Customs Regulations can be assessed; this is made clear by the text of

proposed Sec. 163.6(b)(5)(ii) (redesignated as Sec. 163.6(b)(4)(ii)) as

set forth below. On the other hand, whenever a broker engages in an

activity (such as filing an entry as importer of record or as an agent

for the importer of record) that triggers the record maintenance and

production requirements of 19 U.S.C. 1508 and 1509 and Part 163 of the

Customs Regulations, Customs may, in response to a recordkeeping

violation by that broker and depending on the nature and circumstances

of the violation, opt for imposition of a section 509/Part 163

[[Page 32922]]

penalty in lieu of taking disciplinary action under section 641/Part

111.

Based on a further internal Customs review of the proposed

regulatory amendments, the following clarifying changes have been

included in the text of revised Sec. 143.39 as set forth below: (1) in

paragraph (a) and paragraph (b), the word ``documents'' has been

replaced by ``records'' for purposes of terminology consistency vis-a-

vis Parts 111 and 163, and the words ``within a reasonable time'' have

been removed in light of the changes made to the record production

requirements of Sec. 163.6(a) as discussed below; and (2) in paragraph

(a), reference is made to ``disciplinary action or'' penalties, and

reference is made to part 111 ``or'' part 163 (rather than ``and/or'',

for the reason stated in the points 2 and 3 comment response

immediately above).

Section 163.1(a)--Definition of ``Records''

Comment: In the definitions of ``records'' and ``activities'' it

should be specified that records either are, or need not be, kept for

imports where no entry or record of importation needs to be filed by a

customs broker. This should be clarified for informal entries,

importations of merchandise under $250 where no entry is required, all

forms of in-bond entries and the like. Without such clarification the

importing community will not know whether those documents fit under the

definition.

Customs response: Customs disagrees. The meanings of the terms

``records'' and ``activities'' are quite specific and, in the case of

the latter, are provided by statute. Whether or not a particular

importation is subject to formal entry or informal entry, or is exempt

from entry, the transaction would still fall within the scope of either

an ``importation'' or the requiring of a ``declaration'' and therefore

there must be records, documents or data associated with that

importation or declaration and they must be maintained. In all cases,

the activities described in the comment (informal entry, exemption from

entry, and movement under bond) are all subject to the recordkeeping

requirements. The sole exception would be for declarations made by

arriving travelers as provided for in proposed Sec. 163.2(g)

(redesignated as Sec. 163.2(e) as set forth below).

Comment: In the introductory text of proposed Sec. 163.1(a),

Customs has included the words ``directly or indirectly'' although the

concept of ``indirectly'' pertaining to an activity is nowhere

specified in the statute itself. Thus, this is a ``stretch'' not

sanctioned by law.

Customs response: Customs agrees that these words should be removed

from the text. Section 163.1(a) as set forth below has been modified

accordingly.

Comment: With regard to subparagraph (1)(ii) of the proposed

definition, which refers to shipments carried under bond, a commenter

noted that, under the anticipated remote location filing program, goods

will move to designated examination sites under the importer's bond and

it is likely that carriers will not be aware that such movements are

under bond and thereby potentially be in violation. This commenter

stated that clarity is needed regarding what constitutes ``under bond''

and suggested doing this either by simply referring to 19 CFR Part 18

or by exemption in the case of movements covered by the bond provisions

set forth in 19 CFR 113.62, because a carrier should not be required to

be aware of or be required to keep records related to goods moving to a

designated examination site under the remote location filing program.

Customs response: There are no regulations in place concerning

remote entry filing, and creation of special language in this provision

in anticipation of possible future regulations under the entry

procedure therefore would be inappropriate. If and when such provisions

are created which may cause a conflict or confusion with the

recordkeeping provisions, amendments can be made at that time.

Comment: With regard to subparagraph (2) of the proposed

definition, which sets forth examples of information which are

considered records, a commenter took issue with the reference to

``computer programs necessary to retrieve information in a usable

form''. This commenter asserted that under no circumstances should

Customs seek to obtain from an importer or other affected party the

source or object code or any other program information that would

permit Customs, as contrasted with the affected party, to retrieve data

independent of production by the affected party. Customs has the right

to ask for the production of records and, if the records are not

produced, Customs may take such steps as are within the scope of 19

U.S.C. 1509 to obtain production.

Customs response: The requirement in question is not new but rather

has been in the Customs Regulations since 1979 when Part 162 was first

adopted. The inclusion of language to cover computer programs was

intended to ensure that recordkeepers who store documents/information

electronically would also maintain the programming necessary to

retrieve the documents/information in a format which could be read by

Customs. The substantive interest of Customs lies not in the

programming per se but rather in the data stored with the use of that

programming. Without this requirement, it could be argued that the

submission to Customs of corrupted or encrypted data, or data produced

by obsolete programs, would satisfy the statutory and regulatory record

maintenance and production requirements.

Based on a further internal Customs review of the proposed

definition of ``records'', the text of Sec. 163.1(a) as set forth below

has been modified to incorporate some changes in addition to the change

discussed above. Aside from minor editorial-type wording changes, these

changes are as follows:

a. The proposed introductory text has been designated as

subparagraph (1), subparagraph (2) of the proposed text (examples) has

been moved into the text of new subparagraph (1), and subparagraph (1)

of the proposed text (activities) has been redesignated as subparagraph

(2). These organizational changes will improve the clarity of the text

by placing the examples next to the part of the text to which they

directly relate.

b. The word ``Further'' has been removed from the beginning of the

second sentence of the definition in order to avoid any appearance that

what is mentioned in that sentence is in addition to, rather than

within the scope of, the first sentence (in other words, what is

mentioned in the second sentence is subject to the basic first sentence

``normally kept in the ordinary course of business'' standard which

reflects a basic requirement of section 508(a)).

c. The words ``electronically stored or transmitted information or

data'' have been added to the examples in the text in order to (1)

ensure coverage of what is referred to in section 509(g)(1) and (2)

facilitate removal of all references to ``information'' elsewhere in

the Part 163 texts (e.g., in the term ``records/information'' used in

Sec. 163.5 and in referring to demanded ``information'' in Sec. 163.6)

when the regulatory text clearly is attempting to address ``records.''

With regard to the second point, Customs now recognizes that the

proposed texts had the improper effect of introducing an undefined term

(``information''), or of joining that undefined term with a defined

term (``records'') by means of a slash (thereby creating another

undefined term ``records/information''), into substantive text, thereby

creating

[[Page 32923]]

potential confusion regarding the coverage of the regulatory texts and

frustrating the purpose behind the adoption of the regulatory

definition of ``records'' (which was to bring together in one all-

inclusive definition all the different statutory terms and contexts

that are subject to the maintenance and production requirements of

sections 508 and 509). Accordingly, in addition to the above-described

addition to the definition of ``records,'' the Part 163 texts as set

forth below have been modified by removing all references to ``/

information'' and by replacing all references to ``information'' by the

term ``records'' wherever the context clearly relates to records as

defined in Sec. 163.1(a).

d. Subparagraph (iv) in the list of activities has been modified to

refer to the ``completion and signature of a NAFTA Certificate of

Origin'' (rather than only to ``any exportation to a NAFTA country'')

in order to conform to the terms of the statute (section 508(b)(2)(A)).

A similar conforming change has been made to the text of Sec. 163.2(c)

as set forth below.

e. In subparagraph (v) within the list of activities, a reference

to ``duties'' has been added to ensure consistency with the statutory

(section 509) and regulatory (Sec. 163.6) record examination authority,

and the text has been rearranged for purposes of clarity.

Section 163.1(d)--Definition of ``Certified Recordkeeper''

Comment: Three comments were received on the proposed Sec. 163.1(d)

definition as it relates to customs brokers. The points made by these

commenters were as follows:

1. One commenter requested confirmation of its understanding that

the ``agent'' referred to as a certified recordkeeper would be a broker

acting as importer of record and would not apply when entry is made in

the name of the actual importer.

2. Another commenter proposed, as in the case of Sec. 111.21(c)

discussed above, that the certified recordkeeper automatically be the

licensed qualifying officer of a broker unless the broker makes an

alternate designation.

3. The third commenter took issue with that portion of the

Sec. 163.1(d) definition that provides that a customs broker ``may be a

certified recordkeeper's agent in its own name and on its own account

for records required by Sec. 111.21 without client participation.''

This commenter asserted that: (1) The purpose of Sec. 111.21 is to

ensure that the broker will maintain records which support the entry

and that such records are available to Customs officials; (2) until the

passage of the ``Mod Act'' provisions allowing electronic entries and

entry summaries, relevant importer documents were routinely submitted

to Customs and the broker did not have to retain copies; (3) with

paperless entries, the importer is required to maintain those documents

required for release of a shipment (the ``(a)(1)(A) list'') and, to the

extent that these documents are not submitted with the entry, they must

also be retained by the broker; and (4) the failure of a broker to

submit the paper entry documents is solely a violation of 19 U.S.C.

1641, punishable either by monetary fine or by license suspension or

termination. This commenter further stated that, in contrast, the

purpose of participation in the ``certified recordkeeper'' program

under proposed Sec. 163.14 is the avoidance or reduction of penalties

under 19 U.S.C. 1509 for failure to produce (a)(1)(A) documents when

requested by Customs. Since Sec. 111.21 is unrelated to the provisions

for maintaining the (a)(1)(A) records, for which brokers may be liable

for penalties under section 1641, there is no reason for a broker to

seek certification, as an ``agent'' or otherwise, for Sec. 111.21

records unless it is the intention of Customs to grant the same relief

to brokers in connection with a section 1641 violation (i.e., avoidance

of a section 1641 penalty). Accordingly, this commenter requested that

the provision at issue be deleted from the Sec. 163.1(d) text.

Customs response:

1. This commenter is generally correct regarding its understanding

of the intent of the proposed regulatory text.

2. Since it is the brokerage firm that is a recordkeeper and that

would be certified, Customs sees no point in referring to a certified

recordkeeper as an individual holding a license or someone designated

by the broker. Notwithstanding the designation of a recordkeeping

contact under amended Sec. 111.21(c) as discussed above and set forth

below, Customs would still hold the firm responsible.

3. Customs does not agree with all of the statements in this

comment, in particular as regards the relationship between the broker

statute/regulations and sections 508/509/Part 163. Section 111.21, as

discussed above and as set forth in part below, clearly has reference,

inter alia, to records required to be maintained and produced under

sections 508 and 509 and Part 163; therefore, a failure to comply with

Sec. 111.21 as it relates to Part 163 record maintenance requirements

could result in penalties under section 509/Part 163 (in which case, as

stated above, disciplinary action under section 641/Part 111 could not

be taken). A broker can be a certified recordkeeper in his own name and

on his own account and as such might be able to obtain relief from

section 509/Part 163 penalties; however a broker's status as a

certified recordkeeper would afford no basis for relief if Customs

opted for disciplinary action under section 641/Part 111 in lieu of

penalty action under section 509/Part 163.

In view of the uncertainty reflected in the above comments

regarding the role of agents/brokers as certified recordkeepers, and

based on a further internal review of the proposed text, Customs

believes that the proposed text should be changed to simply parallel

the statute (section 509(f)) as regards participation in the

Recordkeeping Compliance Program. Accordingly, the proposed definition

of ``certified recordkeeper'' in Sec. 163.1(d) has been modified, as

set forth below, by removing the last two sentences and by revising the

remaining first sentence to refer simply to a person who is required to

keep records under the Customs Regulations and who is a participant in

the Recordkeeping Compliance Program (the section within Part 163

dealing with eligibility for that Program identifies the eligible

participants specifically as persons described in Sec. 163.2(a), that

is, persons required to keep records under section 508(a)). Thus, under

the statute and under the regulatory texts as set forth below, the

eligibility of brokers and other persons to apply to become certified

recordkeepers is simply a function of their obligation (based on their

activities either as a principal or as an agent) to maintain records

under section 508(a).

Comment: A commenter referred to ISO9000 which was described as an

internationally recognized system that by definition is a minimum

system requirement which helps ensure items are provided in accordance

with good management practice and which includes documentation of the

system, control of documents and both internal and external auditing.

In order to achieve the benefits of a certified, audited recordkeeping

program without asking importers to expose more information than they

feel comfortable, this commenter recommended that importers who become

registered to the ISO9000 standard be considered automatically a

``certified recordkeeper''.

Customs response: Customs disagrees. While the ISO9000 standard is

a rigorous one, it certainly applies to a number of areas other than

recordkeeping. The fact that an importer

[[Page 32924]]

meets those standards is a factor, and admittedly a significant factor,

to be considered in the certification process under the Recordkeeping

Compliance Program, but it cannot and should not be the sole criterion.

Section 163.1(e)--Definition of ``Certified Recordkeeper's Agent''

Comment: Customs should consider either expanding the proposed

definition of a certified recordkeeper's agent (that is, beyond an

importer of record or a customs broker) or creating a new class of

agent (an Independent Certified Recordkeepers Agent, or ICRA) to

include only those who utilize alternative storage methods, such as CD

ROM and optical disk, to maintain records. The ICRA would essentially

be a specialized service bureau that scans paper documents,

appropriately indexes and permanently stores the scanned images on CD

ROM or optical disk; the ICRA would be independently certified by

Customs but such certification would be limited in scope to

certification of alternative recordkeeping methods as provided for in

proposed Sec. 163.5(b) and would not relieve the primary recordkeeper

from certification requirements set forth in proposed Sec. 163.14. The

ICRA would ``team up'' with a certified recordkeeper to provide the

conversion, indexing, storage and retrieval portion of the overall

certification program. This commenter argued that adding a provision

for an ICRA would result in the following benefits for Customs and the

importing community: (1) It would expedite the certification process

for Customs and the party wishing to become a certified recordkeeper

who uses alternative storage methods because the ICRA would have

established standards regarding conversion techniques, the system of

storage to be used and the security safeguards to prevent alteration of

the stored images, and thus Customs would only have to review the ICRA

standards once; (2) it would make it easier and more convenient for a

primary recordkeeper to become a certified recordkeeper and thus would

encourage more recordkeepers to become certified; (3) by independently

certifying an ICRA, the proposed Sec. 163.5(c)(3) standard for

alternative record storage (i.e., vendor specifications/documentation

and benchmark data regarding the storage medium) would already have

been made available to Customs and would be the same for each certified

recordkeeper that the ICRA represents; (4) it would automatically

provide for segregation of duties between those responsible for

maintaining and producing the original records and those responsible

for the transfer process, as required in proposed Sec. 163.5(c)(9); and

(5) it would expedite the quarterly internal sampling-exception-

reporting/testing required by proposed Sec. 163.5(c)(10) because the

ICRA would perform the testing and file the necessary reports on behalf

of each certified recordkeeper it represents, using standardized

procedures and reporting which would facilitate the Customs review

process.

Customs response: Customs does not agree with this suggestion. As

pointed out above in the discussion of the definition of ``certified

recordkeeper'', Customs may certify under section 509(f) only persons

who are required to keep records under section 508(a); thus, Customs

has no authority to certify persons who do not have a recordkeeping

responsibility under the applicable Customs laws and regulations, and

it was never intended that such persons would be covered by the

``certified recordkeeper's agent'' definition. In this light and in

view of the modified text of the definition of ``certified

recordkeeper'' as discussed above and set forth below, Customs has

reconsidered this matter and no longer believes that it is necessary or

appropriate either to retain the definition of ``certified

recordkeeper's agent'' or to include any references to a certified

recordkeeper's agent in the operative provisions dealing with the

Recordkeeping Compliance Program. The Part 163 texts as set forth below

have been modified accordingly.

Section 163.1(f)--Definition of ``Compliance Assessment''

Comment: A commenter suggested that the last sentence of this

proposed definition be made a part of proposed Sec. 163.1(c)

(definition of ``audit''), because the Sec. 163.1(f) definition both

states what a compliance assessment is and then goes on to note that a

compliance assessment can be expanded into a ``detailed audit''.

Customs response: This suggestion should not be adopted. The last

sentence of the proposed ``compliance assessment'' definition was

considered necessary in that specific context in order to indicate that

there is a distinction between compliance assessment procedures and

more detailed ``audit'' (as defined in paragraph (c)) procedures.

However, based on this comment and as a result of a further

internal review of the proposed regulatory texts, Customs no longer

believes that a compliance assessment should be specifically defined as

the first phase of an audit. Customs notes in this regard that (1) in

many cases compliance assessments are concluded without the need to

expand the inquiry into a detailed audit and (2) in some cases an audit

may be initiated without having been preceded by a compliance

assessment. Accordingly, the definition of ``compliance assessment''

(redesignated below as paragraph (e) of Sec. 163.1) has been revised to

more precisely describe a compliance assessment as a type of importer

audit and to more succinctly describe the procedures and purposes of a

compliance assessment.

Comment: A commenter took issue with the statement in this proposed

definition that in the compliance phase of an audit Customs will review

``* * * internal controls, operations, and procedures to ensure

compliance. * * *'' While a review of an importer's systems (i.e.,

controls, operations and procedures) may be a reasonable way for

Customs to test for accuracy of records and may be appropriate in some

circumstances, this commenter stated that it was aware of no provision

of law requiring an importer to subject its ``systems'', as

distinguished from its required records, to Customs scrutiny, noting in

particular that 19 U.S.C. 1508 merely identifies those records which an

importer shall make, keep, and render for examination and that 19

U.S.C. 1509 merely sets forth rules for the examination of such

records. This commenter stated that the proposed definition should be

amended accordingly and suggested, as a minimum, the addition of the

words ``and may, in appropriate circumstances, review'' before the

words ``internal controls, operations, and procedures''.

Customs response: Notwithstanding the revision of the proposed

definition of ``compliance assessment'' as discussed above, Customs

disagrees with the basic premise of this comment. A compliance

assessment is designed to test exactly those areas referred to by this

commenter. It should be noted that records and recordkeeping systems

are a part of compliance, not its sole purpose. In this regard, see the

second sentence of Sec. 163.0 which spells out the various purposes of

compliance assessments, audits and other inquiries.

While considering the above issues regarding the definitions of

``audit'' and ``compliance assessment'', Customs noted that whereas the

statute (section 509) makes the basic distinction between an

``investigation'' and an ``inquiry'', the proposed Sec. 163.1

definitions did not address this distinction. It is clear that, in the

[[Page 32925]]

context of section 509, the broad term ``inquiry'' is intended to cover

any request for information by a Customs officer that does not

constitute an investigation (and thus would encompass, for example,

compliance assessment and other audit procedures and more informal

procedures such as requests for information made by telephone or on

Customs Form 28). In order to address this point, Sec. 163.1 has been

modified as set forth below by the addition of a new paragraph (g)

definition of ``inquiry'', and additional editorial changes have been

made elsewhere in the Part 163 texts as set forth below to conform

those texts to the principle reflected in this new definition.

Section 163.1(h)--Definition of ``Original Records'' and ``Original

Information''

Comment: Ten comments were received on the concept of ``original''

records and information, in some cases not only with reference to the

definition in proposed Sec. 163.1(h) but also with reference to the

basic requirement in proposed Sec. 163.5(a) that records be retained in

their original formats. The points made by these commenters were as

follows:

1. One commenter referred specifically to the first sentence of the

Sec. 163.1(h) definition which mentions ``paper documents or electronic

data retained in the condition they were received by the party

responsible for maintaining records pursuant to 19 U.S.C. 1508.'' This

commenter complained that this requirement as it reads is open-ended

and suggests that all original records and original information

received by an importer are covered, whether or not the record or

information is one normally kept in the ordinary course of business or

is one required to be maintained by statute or is identified as one

listed on the (a)(1)(A) list. This commenter argued that the

recordkeeping statute does not require maintenance of every piece of

paper or electronic data received by an importer and that, therefore,

original records and electronic data should be limited in the

regulatory text to such records and electronic data received and

normally kept in the ordinary course of the importer's business and

such records and electronic data that are required to be maintained by

statutory fiat or that are included on the (a)(1)(A) list.

2. Three commenters complained that the proposed definition does

not adequately distinguish between documents and data and thus does not

accurately reflect the way that companies do business, particularly

with regard to how they receive and process electronic information. One

of these commenters pointed out that some importers receive shipment

data from the foreign seller in a proprietary electronic data interface

(EDI) format as enormous strings of raw data in a preliminary record

layout form which, as such, is not used for commercial purposes and is

not transmitted as such to a customs broker for filing with Customs;

this raw EDI data must undergo system edits to test its reliability,

and only after the data has been processed through the importer's

system (and thus is no longer raw data) can it be used for commercial

and entry purposes. Thus, although the entry information transmitted to

Customs would not match the original record layout data as transmitted

by the foreign seller, the information transmitted to Customs is the

most accurate information and, from a practical and legal standpoint,

it is ``original'' data for purposes of conducting business and making

the proper declarations to Customs. Another commenter stated that when

paper documents are involved, often they are a result of data acquired

through a chain of computer activities (purchase order, pick lists,

invoice, shipping data, etc.); the regulatory texts, by not including a

reference to ``electronic documentation'', place too much emphasis on

the original paper and the retention thereof, where, in fact, the

information should be the focus. Moreover, imaging is increasingly

becoming a standard for preservation of data because it facilitates

workflow and storage management (particularly for large customs brokers

and importers who handle large volumes of paper), and thus paper

documents are routinely scanned into a computer upon receipt and

facsimile transmissions are received directly into the image system

without making ``hard copies'' unless requested by Customs. The third

commenter noted that an importer or other required recordkeeper

probably will not receive records only in a single format but rather

will receive them in more than one format, such as an EDIFACT

electronic invoice, a facsimile transmission of the same invoice, a

carbon copy air waybill, and an original hard copy truck bill of lading

for delivery; while under the proposed rule the importer would be

maintaining these records in at least two formats, it would be more

realistic for the importer to be able to keep them all in hard copy or

all electronically, instead of in a combination of methods based on how

they were received, without having to obtain specific approval from

Customs so long as certain basic requirements are met. In addition to

these observations, the commenters made the following specific

suggestions:

a. The recordkeeping requirements and definition at issue should be

revised to allow importers' systems data, as described above, to be

considered as ``original''. This could be done by adopting the standard

in Rule 1001 of the Federal Rules of Evidence which states that ``[i]f

data are stored in a computer or similar device, any printout or other

output readable by sight, shown to reflect the data accurately, is an

`original'.''

b. The regulations should recognize that, in addition to

photocopies and facsimile, a printout of an image from a computer may

be considered an original in satisfying all Customs requirements.

c. The first sentence of Sec. 163.1(h) should be amended to read

``[t]he terms `original records' or `original information' mean paper

documents or electronic documentation or data retained in the condition

they were received * * *''.

d. In the first sentence of Sec. 163.1(h), ``and/or'' should be

used in place of ``or'' between the terms ``paper documents'' and

``electronic data''.

3. Four commenters stated that the fifth sentence in the

Sec. 163.1(h) definition may create some confusion with regard to

maintaining multi-part or carbon copy (multiple impression) forms (for

example, delivery orders or bills of lading), photocopies and facsimile

copies. One of these commenters noted that, in the case of multi-part

or carbon copy forms, the originals are often separated and information

or notations are placed on one copy only or only on the top copy, thus

raising the question of which copy is the true original copy; this

commenter stated that the regulations should be more specific as to

what constitutes an original record. Another commenter noted that

whereas an original hard copy record may, for example, be submitted to

a bank and the importer, broker or other person may only have a copy,

the importer, broker or other person would be considered to have an

``original'' record within the definition so long as the copy is

``retained in the condition received * * *''; this commenter questioned

whether the definition was necessary, suggesting that it would be as

easy to revise proposed Sec. 163.5(a) to require the party responsible

for maintaining records pursuant to 19 U.S.C. 1508 to retain the record

in the condition received unless an alternative method was approved

[[Page 32926]]

under Sec. 163.5(b). The third and fourth commenters suggested that the

reference in the definition to copies and multi-part forms should be

clarified since the record/information received as a copy is acceptable

under the definition; one of these commenters also questioned whether

the fifth sentence was necessary if the importer is obligated to retain

the record in the condition received, and both commenters believed that

the reference to ``a certified copy'' in the sixth sentence of the

definition should be clarified as to who would be the certifier, one

commenter suggesting that it would have to be the importer because of

what is stated in the next sentence.

4. With reference to the overall effect of proposed Sec. 163.1(h)

and 163.5 and in particular the requirement of obtaining Customs

approval before converting records to another format for storage and

retrieval, a commenter requested clarification as to whether the

regulatory texts mean that every system that an importer may use to

maintain records (microfiche, CD-ROM, etc.) must be approved in advance

by Customs when such systems are part of a company's normal course of

business. This commenter further questioned whether Customs has the

staffing necessary to certify these systems for importers.

5. A commenter referred to the provision in proposed Sec. 163.1(h)

that electronically received data will be considered the original

record even though it is converted to paper upon request by Customs.

This commenter stated that it expects to obtain authority to convert

paper documents into an electronic storage medium, and reasonably soon

thereafter, to be allowed to destroy the original paper documents. This

commenter suggested that Sec. 163.1(h) should include provision for

exemption which may be granted under Sec. 163.5; under the exemption,

such a converted document may, upon the request of Customs, be

certified to be a true copy of the original record or document.

Customs response:

1. Customs disagrees. Proposed Sec. 163.1(h) was merely intended to

define what is meant by the term ``original records/information''.

Which records or information are to be maintained is properly the

subject of other provisions of Part 163.

2. The raw EDIFACT feed is original information from which other

forms of the data are created; putting it in a readable form is

acceptable. Customs agrees that it is the information that is the focus

of the Part 163 retention and production provisions, provided that the

information in question falls within the Sec. 163.1(a) definition of

``records'' (see the above discussion of the changes made to that

definition and the below discussion of the changes to the definition at

issue here). Although alternate storage is the subject of Sec. 163.5

and is discussed below in that context, Customs notes that where

originals are in different formats and importers wish to use a single

format for storage, the alternative storage provisions of Sec. 163.5

are intended to accommodate that. The following are the Customs

responses to the specific suggestions of these commenters:

a. Customs disagrees. The standard cited from Federal Rules of

Evidence provides a very limited guideline which would not qualify as a

proper definition encompassing a wide variety of situations. Customs

believes that the approach in the proposed definition is sufficient to

cover advances in technology.

b. Customs agrees in part. Photocopies and facsimiles, if

originally received in that format, would be considered to be original

documents. A computer printout, however, is a secondary source or copy

because the electronic data stored in the computer is the original

data. While not considered as an original, the printout may in fact

satisfy Customs requirements for production of the record since it

would qualify as a ``facsimile paper format'' or possibly as a

``hardcopy spreadsheet''.

c. The substance of this comment has already been addressed above.

d. This comment is obviated by the changes made to the proposed

definition as discussed below.

3. Customs disagrees generally with the comments. In the case of a

multi-part form or document, the first copy where the initial

impression occurs could be considered the ``original'' and the

subsequent carbon copies could be considered ``copies''. Recognizing

that other entities such as carriers or banks may remove and keep the

``original'' (top) copy, the proposed regulatory text provided for the

acceptability of a carbon copy form, a facsimile copy and a photocopy

in lieu of the original (top copy) page, thus rendering moot the

question of which copy is the ``original''. The provisions regarding

alternative storage methods (Sec. 163.5) are not the proper context for

dealing with this issue. Moreover, the phrase in the first sentence

``retained in the condition they were received'' does not answer the

question and obviate the need for the sentence regarding multi-part

forms because the importer could be the person who created the form to

begin with or who received the form from a third party and removed a

copy and then forwarded the form; in those cases, the ``original'' form

issue is not addressed by the words ``condition . . . received''. With

regard to the last two sentences of the proposed definition, Customs

believes that, in view of the overall subject matter of Part 163 which

is the maintenance and production of records, it should be sufficiently

clear that the person who would certify the copy can only be the person

who has the statutory and regulatory responsibility for maintaining and

producing the record (and who thus knows what happened to the

``original'').

4. The concerns of this commenter are addressed in the changes

which have been made to proposed Sec. 163.5 as discussed below in

connection with the comments received on that section.

5. Customs disagrees with this suggestion. Substantive requirements

regarding storage methods are set forth in Sec. 163.5 and thus are

inappropriate for this definitional provision.

In consideration of the comments received and based on a further

review of the regulatory text, Customs has determined that some changes

should be made to the definition as proposed. In addition to some

minor, editorial changes, the text of the Sec. 161.1(h) definition as

set forth below incorporates the following changes:

a. The defined term has been changed to read simply ``original'',

for four reasons. First, the term defined in the proposed text was not

used as such in the text of the proposed provision to which it had the

most direct relevance (that is, Sec. 163.5(a) which used the words

``original formats''). Second, inclusion of the word ``records'' in the

defined term is unnecessary and inappropriate because ``records'' has

already been defined (and thus cannot have a new meaning here). Third,

use of the word ``information'', thereby implying something different

from ``records'', is inappropriate for the reasons stated above at the

end of the comment discussion concerning Sec. 163.1(a). Finally, based

on the proposed definition and the proposed Part 163 texts as a whole,

it seems clear that the proposed definition was in essence merely

trying to establish the concept of ``original''.

b. As a companion to the change in the term that is defined, the

proposed first sentence of the definition has been modified to refer to

the specific context in which the defined term is used within Part 163

(that is, in the context of maintenance of records). In addition, this

text, as modified, refers to records that are in the condition in which

they were ``made or'' received, because

[[Page 32927]]

section 508 refers to the making and keeping of records and some

records that are required to be kept by section 508 and Part 163 are

made (rather than merely received) by the person required to keep them

(compare this textual change to the change to the introductory text of

Sec. 163.2(a) discussed below at the end of the Customs responses to

the comments on that section). Finally, the first sentence of the

proposed definition has been changed into an introductory text and,

except as otherwise stated in point c immediately below, the remaining

text of the proposed definition has been set forth as a list of four

subparagraph exemplars of original records covered by the general

definition in the introductory text.

c. The third sentence in the proposed text (regarding when original

electronic information or paper documents must be provided to Customs)

and a portion of the language in the sixth sentence of the proposed

text (that is, regarding the assessment of penalties) have been omitted

from the modified definition because they are not appropriate for a

definitional text and merely repeat what is more appropriately covered

in Sec. 163.6.

d. In the first exemplar of the modified definition text (which

corresponds to the second sentence of the proposed text), a reference

to ``other electronic records'' has been included to clarify that

electronic information may be used to develop not only paper documents

but also other records set forth and maintained in an electronic

format.

e. Finally, in the fourth exemplar of the modified definition text

(which corresponds to the last two sentences of the proposed text),

provision is made for submission of a signed certifying statement only

if required by Customs (rather than in all cases covered by that

exemplar).

Section 163.1(k)--Definition of ``Third-Party Recordkeeper''

Comment: With regard to accountants as third-party recordkeepers, a

commenter contended that the definition should state that accountants

are not empowered to conduct ``customs business'' as statutorily

defined.

Customs response: Customs disagrees. The regulatory text in

question (redesignated below as Sec. 163.1(l)) merely provides a

definition of a third party recordkeeper in the context of Part 163

which concerns recordkeeping. The concept of ``customs business,'' and

the rules regarding who may engage in customs business, are established

under the customs broker statute and regulations (19 U.S.C. 1641 and 19

CFR Part 111) and are not relevant to these recordkeeping regulations.

With regard to the Sec. 163.1 definitions, an internal Customs

review of the proposed regulatory texts disclosed that the terms

``party'' and ``person'' were used throughout the proposed Part 163

texts without the appearance of any clear rationale for using one term

or the other in a given context (except as regards references to a

``third party recordkeeper'' which is a statutory expression), and it

is noted that sections 508 and 509 are similarly inconsistent in the

use of these terms. In order to avoid the impression that a different

meaning is intended when one term is used and not the other, and

because Customs does not believe that any such difference in meaning

was intended in the applicable statutory provisions, Customs has

modified the Part 163 texts as set forth below (1) by adding a new

definition of ``party/person'' as Sec. 163.1(i) and (2) by using the

term ``person'' throughout the Part 163 texts except where the

expression ``third party recordkeeper'' appears. The new definition is

similar to what is found in other parts of the Customs Regulations

(see, for example, 19 CFR 177.1(c)) except that ``natural person'' is

used in place of ``individual'' because that term is used in the Part

163 service of summons provisions.

Section 163.2--Parties Required To Maintain Records

Comment: Two commenters complained about the absence from this

proposed section of any specific mention of recordkeeping requirements

for express consignment operators and couriers who operate under Part

128 of the regulations. One of these commenters stated that there are

unique situations under Part 128 that should be addressed, especially

regarding manifest entries and consolidated informal entries. The other

commenter, noting the large number of shipments carried by express

consignment courier companies and the fact that they or their agents

act as importer of record, suggested the addition of a new paragraph

(f) to Sec. 163.2 to read as follows: ``(f) Recordkeeping required for

express consignment operators and carriers. Each courier, express

consignment operator or carrier shall maintain records of all

documents, entries and clearances associated with international import

shipments in accordance with 163 of this chapter.''

Customs response: Customs does not agree that the suggested new

text is necessary. As in the case of the underlying statute, the

proposed text of Sec. 163.2 adequately covers the activities of express

consignment operators and couriers.

Section 163.2(a)--General Recordkeeping Obligation

Comment: Five comments were received on proposed Sec. 163.2(a)

which sets forth the basic categories of persons required to make and

keep records and render them for examination and inspection. The points

made by these commenters were as follows:

1. The proposed regulatory text expands the recordkeeping

requirement to include those who cause an importation, anyone who files

an entry or declaration, drawback claimants, customs bonded carriers

and cartmen, bonded warehouse proprietors, and foreign trade zone

operators. Importers must also keep all information and documents

required by law for the entry of merchandise. The proposed rule would

require many importers that do not receive and retain all entry

documents in their business process to set up recordkeeping systems to

capture and retain those documents. This places an undue hardship on

many importers.

2. A commenter complained that Customs proposes that persons who

``knowingly cause merchandise to be imported'' will be subject to

recordkeeping requirements and that Customs includes within this group

persons who ``control the terms and conditions of the importation'' and

persons who supplied the importer with ``technical data, molds,

equipment, other production assistance, material, components, or parts

* * * with knowledge that they will be used in the manufacture or

production of the imported merchandise.'' This commenter stated that

this proposal will result in some companies being required to maintain

documents which normally would be discarded in the ordinary course of

business. The commenter referred specifically to companies that have

established so-called L/C ``direct import'' programs under which a U.S.

company's foreign vendor sells merchandise directly to the company's

domestic customer (for example, a retailer or mass merchandiser) which

acts as importer of record and as such assumes responsibility for

customs duty payments and entry requirements, and under which the U.S.

company may be responsible for designing imported merchandise,

providing equipment used in the production process, or supplying the

foreign vendors with materials, components or parts; these L/C programs

benefit all concerned by reducing costs to the U.S. customers and the

ultimate consumers, and they allow the mass merchandiser, which is more

[[Page 32928]]

knowledgeable regarding Customs rules and regulations (including the

need to maintain records and thus obtain any relevant documents from

the U.S. company that may be necessary), to assume responsibility for

Customs requirements by acting as importer of record. This commenter

argued that ``legal'' responsibility to maintain records should rest

with the importer of record and that a non-importing party should not

be required to maintain a second set of such records which constitutes

an unnecessary burden on the public without enhancing the ability of

Customs to effectively administer the laws it is charged with

enforcing. Accordingly this commenter urged Customs to modify the

proposed regulations to provide that persons who do not themselves act

as importers of record will not be subjected to recordkeeping

requirements merely because they may knowingly cause merchandise to be

imported. Alternatively, this commenter requested that the regulations

be clarified to provide that: (1) persons who do not act as importers

of record are not required to make, keep and render for examination and

inspection any records which they do not otherwise maintain in the

ordinary course of business; and (2) Part 163 does not impose on a

party which does not itself act as importer of record any requirements

to maintain any records which the party does not otherwise maintain in

the ordinary course of business for reasons not relating to customs

laws and regulations.

3. By mentioning an ``entry filer'' (subparagraph (1)) and an

``agent'' (subparagraph (2)), proposed Sec. 163.2(a) requires that,

where a customs broker acts as importer of record, both the actual

importer and the broker are required to maintain all records, including

those specified in the (a)(1)(A) list. If this reading is correct, the

proposed regulation will have a chilling effect on when a broker will

choose to act as the importer of record (currently, that decision is

made based on convenience to the importer and because of the need to

expedite the release of the goods).

4. In subparagraph (1), the term ``entry filer'' should be replaced

by ``customs broker'' because the only filers are customs brokers and

importers handling their own transactions and importers are already

specifically mentioned. In this context ``entry filer'' is confusing.

5. A customs broker serving as importer of record will almost never

be in possession of all of the records defined in proposed

Sec. 163.1(a), because the broker will not have caused the importation

or subsequent uses of imported goods. A broker when also serving as

importer of record should only be required to maintain records which

support the entry/entry summary declarations.

Customs response:

1. Customs disagrees. The proposed regulatory text merely reflects

the relevant statutory provisions as amended by the Mod Act. Moreover,

Customs notes that the provision for recordkeeping by importers,

including maintenance of entry records, is not new but rather was in

existence prior to the Mod Act changes (19 U.S.C. 1508 and 19 CFR Part

162, Subpart A).

2. Customs disagrees with the basic complaint of this commenter.

Customs did not create the language ``knowingly causes the

importation.'' That language comes directly from the statute (section

508(a)(1)(B)) as modified by the Mod Act, and Customs does not have

authority to promulgate regulations that are inconsistent with the

statutory requirements. Customs is not able to respond to the example

of the ``L/C direct import program'' because the paucity of information

regarding the role of the U.S. firm makes it impossible to determine

whether or not it ``knowingly caused the importation.'' Customs also

disagrees with the two specific suggested clarifications because the

first one is already provided for in the Part 163 texts and the second

one would be in direct opposition to the statute.

3. Customs agrees with the commenter's reading of these provisions.

As regards the alleged effect on a broker's decision whether to act as

importer of record, Customs notes that such a decision is merely one of

the business decisions that each broker must make when conducting

customs business.

4. Customs disagrees. The term ``entry filer'' reflects the

statutory language. The fact that a party could be mentioned twice (for

example, an owner/purchaser is usually the importer) is not the issue

here. Customs does not have authority to promulgate regulations that

are inconsistent with the statutory requirements.

5. Customs disagrees. When a customs broker is listed as the

importer of record, the broker is responsible for all the records

listed in Sec. 163.1(a) along with any additional duties or taxes

determined to be due and any other requirements placed on the party

shown as the importer of record.

Based on a further internal review of the proposed texts, Customs

has determined that the introductory text of Sec. 163.2(a) should only

reflect the requirement to maintain (rather than also ``make'') records

for the following reasons: (1) Maintenance of records is the thrust of

Sec. 163.2 as a whole; and (2) while it is true that section 508

reflects an obligation to ``make'' records, that obligation is

reflected throughout the Customs Regulations according to the specific

substantive context to which the records relate (for example, basic

entry record requirements are prescribed in Parts 141-143, and drawback

record requirements are prescribed in Part 191) and thus does not have

to be, nor should be, reflected in the more general Part 163 texts.

Section 163.2(b)--Exclusion of Domestic Transactions

Comment: The words ``who does not knowingly cause merchandise to be

imported'' should be eliminated from the introductory text of this

proposed section, because often a person in a domestic transaction is

aware that the goods ordered from an importer have been, or will be,

imported but the buyer's purchase and sale is domestic and is not

connected directly or indirectly with the import transaction; such a

domestic buyer should not be required to maintain records on the import

transaction just because he knows that the goods are imported. With

this suggested change, a person ordering merchandise from an importer

in a domestic transaction, whether or not that person knows that the

goods are to be imported, will not be required to maintain records

unless the person controls the import transaction or is involved with

the production of the goods by furnishing assists.

Customs response: Customs disagrees. The regulatory language in

question reflects the statute, and Customs does not have authority to

promulgate regulations that are inconsistent with the statutory

requirements. Further, the regulatory text gives two examples which

clearly demonstrate that the domestic buyer who simply knows that the

goods are imported is not, by that fact alone, encompassed within the

concept of knowingly causing merchandise to be imported.

Based on a further internal review of the proposed Sec. 163.2(b)

text, Customs has discovered that the text (which was based on present

Sec. 162.1b(b)), included in the introductory text the addition of the

word ``who'' before the words ``does not knowingly * * * ''; the

addition of this word, from a grammatical standpoint and with reference

to the rest of the text, had the unintended effect of creating a new

class of persons required to maintain records that was not listed in

the general provisions of Sec. 163.2(a).

[[Page 32929]]

The wording of introductory text of Sec. 163.2(b) as set forth below

has been appropriately modified to correct this and clarify that the

provision specifically relates to the class of persons listed in

Sec. 163.2(a)(1)(ii).

Section 163.2(d)--Recordkeeping Required for Customs Brokers

Comment: Irrespective of whether the broker acts as the importer of

record, the (a)(1)(A) recordkeeper under section 1509 is always the

actual importer, and that statutory provision is worded so that Customs

may always require the importer to produce the (a)(1)(A) records.

Accordingly, Sec. 163.2(d) should reflect that, when the broker acts as

the importer of record, the broker is only subject to the provisions of

section 1509(g) relating to assessment of additional duties, but is

never liable for ``penalties'' for failure to produce the (a)(1)(A)

records.

Customs response: Customs disagrees and notes that the substance of

this comment has been addressed above in the Customs response to the

comments on Sec. 143.39.

Based on a further internal review of proposed Sec. 163.2, Customs

now believes that paragraph (e) (which concerned recordkeeping required

for parties filing drawback claims) and paragraph (f) (which concerned

recordkeeping required for other activities) are not needed. Customs

notes in this regard that these two paragraphs merely repeat what has

already been provided for in the Sec. 163.1(a) definition of

``records'' and in paragraph (a) of Sec. 163.2. Accordingly, these two

paragraphs have been removed from the text of Sec. 163.2 as set forth

below and proposed paragraph (g) has been redesignated below as

paragraph (e).

Section 163.2(g)--Recordkeeping Required for Travelers

Comment: A commenter claimed that this proposed section sets up a

bifurcated recordkeeping requirement that almost no returning traveler

will know exists and that flies in the face of the mandate to make

regulations truly meaningful: a traveler does not have to maintain

records either before entering or while physically within a Customs

facility, but the traveler would have to keep records for merchandise

acquired abroad that exceeds the personal exemption or the flat rate of

duty. This commenter asked whether a traveler could not make a

declaration that all merchandise acquired abroad was within the

personal exemption and flat rate, pay no duty, and then take the

position that no recordkeeping obligation existed. The commenter noted

that while it is probably best that returning travelers be required to

produce records of all purchases abroad, once they clear the Customs

facility (even after having made a misdeclaration of value while having

on their persons records showing the true value of the purchases) there

is little likelihood that Customs will catch up with them.

Customs response: Customs disagrees. This provision is not

radically different from existing provisions or practices. Customs may

or may not ask for supporting documentation (purchase receipts or

invoices) at the time the declaration is made. After clearance, Customs

in the vast majority of cases would have no further interest in the

declaration and, consequently, in the supporting documentation. In

other words, any questions are usually resolved at the time of

presentation or declaration as Customs normally does not go back and

review declarations. The net effect of proposed Sec. 163.2(g)

(redesignated below as Sec. 163.2(e)) was to provide that for most

travelers bringing in non-commercial merchandise valued at no more than

$1,400 (that is, the $400 personal exemption amount for returning

residents plus $1,000 to which the flat rate of duty applies) per

traveler, no supporting documents will be required to be maintained;

for commercial importations or declarations over $1,400, supporting

documents must be maintained. It should be noted that application of

the personal exemption and flat rate of duty dollar limits (and thus

application of the recordkeeping exemption) is a function of the actual

value of the imported merchandise and thus does not, as a matter of

law, depend solely on what value the traveler chooses to declare to

Customs.

Section 163.3--Entry Records

Comment: Four commenters made observations on proposed Sec. 163.3

which sets forth general requirements regarding the production of

records required by law or regulation for the entry of merchandise (the

``(a)(1)(A)'' list). The points made by these commenters were as

follows:

1. One commenter approved of the language giving general time

standards for the production of documents but expressed concern that

local Customs offices would focus on the table under Sec. 163.6, to the

exclusion of the Sec. 163.3 legal guidelines. This commenter therefore

stated that the Sec. 163.3 language should be moved to Sec. 163.6 where

it is more appropriate.

2. One commenter noted that, because under Sec. 163.2(a)

recordkeepers include companies that do not act as importers of record

but that knowingly caused merchandise to be imported, Sec. 163.3 could

be interpreted to mean that persons other than importers of record are

required to maintain (a)(1)(A) records. Given the substantial penalties

which may be imposed for a failure to produce those records on demand,

and given the fact that those penalties were only intended to apply to

importers of record who no longer will be required to submit certain

specified information to Customs at the time of entry, this commenter

requested that Customs modify the regulations to expressly provide that

responsibility for producing (a)(1)(A) list records is limited to the

importer of record who is responsible for filing (or expressly

authorizing the filing of) a Customs Form 7501 (entry summary) and

commercial invoice with Customs at the time of entry.

3. Two commenters objected to the requirement to retain copies of

records when the records have been given to Customs. One of these

commenters referred specifically to cases in which the records are

returned by Customs, stating that this places an unreasonable burden of

proof on the party to whom the records are allegedly returned because

there would otherwise be no proof of such return and/or receipt. The

other commenter stated that customs brokers should not be required to

maintain any record that has already been tendered to Customs, and this

commenter further asserted that this requirement is contradicted by

Sec. 163.6(b)(4)(iii).

Customs response: 1. Customs does not agree that Customs personnel

would overlook, and thus fail to apply, a clear regulatory standard,

and it is noted that the Sec. 163.3 guidelines referred to by this

commenter were also reflected in the proposed Sec. 163.6(a) text.

However, on further reflection, Customs believes that it is not

necessary to state in Sec. 163.3 the general standard by which entry

records must be produced because Sec. 163.6 is more appropriate for

that purpose. Accordingly, Sec. 163.3 as set forth below has been

modified by removing all statements regarding the manner in which entry

records should be produced and by adding a simple reference to the

production of entry records ``in accordance with Sec. 163.6(a)''.

2. Customs disagrees. Each party specified in section 1508(a) is

individually required to ``* * * make, keep, and render for examination

and inspection records * * * '' that pertain to an activity described

in section 508(a) and that are normally kept in the ordinary course of

business; thus, under

[[Page 32930]]

the terms of the statute, the fact that one party mentioned in the

statute is subject to a particular recordkeeping requirement cannot

have the effect of precluding application of that recordkeeping

requirement to another party covered by the statute. Since the

(a)(1)(A) records referred to by this commenter are entry records and

thus are covered by the statute, adoption of this commenter's suggested

change to Sec. 163.3 would represent an improper limitation of the

statutory terms.

3. Customs disagrees with the first comment. The purpose of the

statutory and regulatory changes is to reduce the number of documents/

information filed at time of entry so that Customs would request and

retain only those documents that are needed. All other documents should

therefore be retained by the responsible party. Customs may simply

review a document and return it to the responsible party. That party

must maintain the document/information in the event Customs returns to

the entry or issue. Customs also disagrees that proposed

Sec. 163.6(b)(4)(iii) contradicts Sec. 163.3 because the former section

involves a different regulatory context (that is, the liability for

penalties).

Section 163.4--Record Retention Period

Comment: A commenter stated that the general 5-year record

retention period requirement set forth in proposed paragraph (a), on

its face, would require that any importer, person involved in the

import transaction, or person supplying technical assistance to the

manufacturer maintain every piece of paper, every fax and every E-mail

or voice-mail communication for a period of 5 years from entry,

notwithstanding that in the ordinary course of business the particular

record would normally be destroyed immediately upon receipt. On the

assumption that Customs did not intend to impose such an onerous

requirement on the importing community in contravention of its

obligation to impose a minimum burden on the public it is serving, this

commenter requested that Customs confirm that: (1) the only records

which must be maintained are those records which the company usually

maintains in the ordinary course of business; and (2) the Customs

recordkeeping requirements do not impose upon a person an obligation to

maintain faxes, E-mail or voice-mail communications which are normally

discarded after receipt or upon completion of a transaction and which

do not constitute normal business records otherwise required to be

maintained for commercial purposes.

Customs response: While Customs agrees that the only records that

are required to be maintained under section 508(a) are those that are

normally kept in the ordinary course of business, Customs disagrees

with the other statements of this commenter. Section 163.4 does not set

forth a new requirement: While the parties listed in Sec. 163.2

represent an expansion over those listed in the present regulation (19

CFR 162.1(b)) as a result of changes made to section 508 by the Mod

Act, the parties mentioned by the commenter have since 1978 been

required to maintain records for five years. As regards the second

point on which confirmation was requested, Customs notes that the

proposed definition of ``records'' in Sec. 163.1(a) included a

reference to ``information pertaining directly or indirectly to any

information element set forth in a collection of information required

by the Tariff Act of 1930, as amended, in connection with any activity

listed in paragraph (a)(1) of this section.'' Clearly, this could

include faxes, E-Mail and similar records, depending on prevailing

business requirements and practices, because the nexus between a

particular record and the requirement to maintain it is the activity to

which the record relates: If the record pertains to an activity

specified in section 508(a) and is normally kept in the ordinary course

of business, it must be maintained for the applicable period specified

in the statute and regulations.

The observations made by this commenter demonstrate the need for a

clear statement of the position of Customs regarding the relationship

between sections 508(a) and 509 and the meaning of the statutory

expression ``normally kept in the ordinary course of business'', in

particular as concerns ``(a)(1)(A)'' records. Section 508(a) requires

making and keeping and rendering for examination and inspection those

records that pertain to specified activities and that are normally kept

in the ordinary course of business. Section 509 on the other hand sets

forth specific standards for the examination of records by Customs,

including special rules under paragraph (a)(1)(A) for records that are

required by law or regulation for the entry of merchandise (the so-

called ``(a)(1)(A)'' records, also referred to in the Part 163 texts as

``entry'' records). Central to the operation of section 509 is the

assumption that the records to be produced under that section have been

made and maintained in accordance with section 508(a) (in other words,

if a record, including an (a)(1)(A) record, is not required to be made

and maintained, there can be no requirement to produce it under section

509). Thus, whereas not all section 508(a) records are (a)(1)(A)

records, all (a)(1)(A) records are covered by section 508(a).

As regards (a)(1)(A) records, it is the position of Customs that

they meet the two essential tests that define the coverage of section

508(a), that is, they pertain to an activity specified in the statute

and they are normally kept in the ordinary course of business. As

regards the first test, the fact that they relate to the entry process

clearly means that they pertain to the actions of an owner, importer,

consignee, importer of record, entry filer, or other party who imports,

or knowingly causes the importation of, merchandise into the customs

territory of the United States, as provided in section 508(a)(1)(A) and

(B). With regard to the second test, the fact that a record is required

by law or regulation for the entry of merchandise means that it is, by

definition, normally kept in the ordinary course of business (in other

words, the legal requirement for the existence of the record is

sufficient to meet the statutory test); if this were not the case, no

record that is prescribed by a provision of the Customs Regulations

would have to be maintained under section 508(a) or produced under

section 509 unless the person identified in section 508(a) chose of his

own volition to maintain it for business purposes, and this would

render any such regulatory requirement essentially unenforceable and

thus useless. Thus, contrary to the position implicit in this

commenter's assertions, what constitutes a record ``normally kept in

the ordinary course of business'' is not exclusively a function of what

a businessman may choose to create and maintain.

Comment: A commenter suggested that Customs should consider

different (i.e., shorter) record retention periods for express

consignment carrier shipments (for example, letter and document

shipments, shipments that may be entered free of duty under 19 U.S.C.

1321, and shipments covered by an informal entry). This commenter

argued that in such cases, where the cost of record retention is high

due to the large number of shipments and enforcement or compliance

measurement normally is performed at the time of entry, there is little

justification for lengthy record retention periods.

Customs response: The substance of this comment has been addressed

in significant part by the addition of new subparagraphs (3) and (4) to

the Sec. 163.4(b) text as discussed above in the

[[Page 32931]]

Customs responses to the comments regarding the treatment of express

consignment carriers.

Comment: With regard to the proposed paragraph (b)(1) exception to

the 5-year rule in the case of drawback claims, a commenter referred to

the May 5, 1997, correction document which clarified the Background

section of the April 23, 1997, notice of proposed rulemaking with

regard to the (maximum) length of time that drawback records could have

to be maintained under the proposed regulatory text, that is, ``a

period of about eleven years from the date of importation''. Noting

that the correction document assumed a payment under the accelerated

payment program, this commenter asserted that the retention period in

fact could be considerably longer when the accelerated payment program

is not used because payment in such cases is made at the time of

liquidation of the drawback claim and there is no deadline imposed on

Customs for the liquidation of drawback claims (the commenter alleged

that there have been many instances in which Customs liquidated a

drawback claim more than five years after the claim date). Assuming

that manufactured goods are exported five years after importation of

the drawback merchandise and a drawback claim is filed three years

after export, liquidation may take place ten to twelve years after

importation, thus creating a record retention period of from thirteen

to fifteen years. This commenter further asserted that the recently

published proposed revision of the drawback regulations would impose

new, stringent requirements for the accelerated payment ``privilege'',

thus leading to increased record retention periods because a larger

percentage of drawback claimants will receive payment at the time of

liquidation.

Customs response: The published statement was correct under the

stated facts. However, the commenter is also correct that if a claimant

is not paid under the accelerated payment program and liquidation is

delayed, the recordkeeping period is necessarily extended.

Comment: With regard to the proposed paragraph (b)(2) exception to

the 5-year rule in the case of packing lists, two commenters stated

that there should be no requirement to retain a packing list for any

period of time. These commenters argued that a packing list is a

temporary, transition document that has no use, and thus is discarded,

once the shipment is unloaded or released.

Customs response: Customs disagrees. Customs finds packing lists to

be very useful in performing examinations of cargo, in verifying

invoice data, and in verifying inventory receipts.

Based on a further internal review of the proposed regulatory

texts, the words ``whichever is later'' have been added at the end of

the first part of the Sec. 163.4(b)(2) text as set forth below in order

to remove a possible ambiguity in determining the applicable 60-day

period for retention of packing lists following a release or

conditional release period.

Section 163.5(a)--Original Format Record Storage

Comment: Four comments were received on proposed Sec. 163.5(a)

which provides for the maintenance of all required records in the

original formats unless alternative storage methods have been approved

by Customs. The points made by these commenters were as follows:

1. It is unclear from the proposed text whether or not electronic

ABI records serve the same purpose as the hardcopy Customs forms. If

stored electronically, this commenter asked whether the trade would be

required to produce the information in the format of the current

hardcopy records (i.e., Customs Form 3461, 7501) or whether the

electronic data would suffice. This commenter stated its desire to

store the records in the electronic ABI formats and to eliminate the

requirement to store paper records, suggesting that for audit purposes

the electronic data could easily be linked to its accounts payable

records through the entry number.

2. The term ``original formats'' in this section is too limiting

and unmanageable because it does not comport with modern business

practices. If the normal course of business is to take paper documents

and scan them directly into a computer image system, then, practically,

once there are assurances that the image meets Customs standards, the

paper should be allowed to be discarded.

3. A commenter suggested that the text of the section be revised to

read simply as follows: ``All parties listed in Sec. 163.2 must

maintain all records required by law and regulation for the required

retention periods. The records must be capable of being retrieved on

request or demand by Customs.'' This commenter argued that this

shortened version states the basic requirement of the law and also

eliminates reference to prior approval of the recordkeeping program

(the latter point is addressed more fully in the Sec. 163.5(b) comment

discussion below).

4. There should be no requirement for Government approval of

alternative storage methods.

Customs response:

1. Customs agrees that the electronic data would suffice. Clearly,

the ABI data could qualify as ``original'' records. The definition of

``original'' in Sec. 163.1(g) as discussed above and as set forth below

includes ``electronic information which was used to develop paper

documents''.

2. Customs does not believe the proposed reference to ``original

formats'' would be limiting, and it is further noted that use of

alternative storage methods would allow for discarding the original

paper documents. In consideration of the decision to define

``original'' in Sec. 163.1(h) rather than ``original records/

information'' as discussed above, the first sentence of Sec. 163.5(a),

as set forth below, has been modified by replacing the words ``in the

original formats'' by ``as original records'' as regards how records

generally are to be maintained.

3. Customs agrees with the basic principle reflected in this

comment and therefore, on further reflection, has concluded that the

requirement for advance approval of alternative storage methods is

unnecessarily onerous and thus should be eliminated. Accordingly,

Sec. 163.5(a), as set forth below, has been modified by removing the

words ``approved in writing by the director of the regulatory audit

field office who has responsibility for the geographical area in which

the designated requestor's recordkeeping officer resides'' and adding

in their place the words ``adopted in accordance with paragraph (b) of

this section''. See also the related changes to the text of

Sec. 163.5(b) noted below in the Customs response to the comments on

that section.

4. Customs agrees. The substance of this comment has been addressed

in the comment response immediately above.

Section 163.5(b)--Alternative Storage Method Approval

Comment: Five comments were received on proposed Sec. 163.5(b)

which sets forth the procedures for approval by Customs of alternative

methods (formats) for storing records. One of these commenters

supported the proposed text, stating that the approval process is sound

and will allow the trade to employ consistent procedures for the entire

recordkeeping system and will eliminate port-to-port differences and

will reduce the cycle time for approval and implementation of

alternative storage methods. The other four commenters made the

following negative comments or suggestions regarding the proposed text:

[[Page 32932]]

1. The requirement for written authorization from Customs to

maintain records and information in alternative formats is contrary to

the Mod Act which in section 614 amended 19 U.S.C. 1508(a) to allow

importers to maintain records in electronically generated or machine

readable data formats, and this was a self-implementing amendment.

Thus, the Mod Act amendment gives the option to engage in electronic

recordkeeping as an unencumbered right, not as a ``privilege'' as

stated in proposed Sec. 163.5(i). While Customs may audit or review the

electronic recordkeeping systems of an importer to determine

compliance, it may not make review a prerequisite to the establishment

of an electronic recordkeeping system.

2. The last sentence should be reworded to read as follows: ``If

the applicable director of the regulatory audit field office needs

additional information on the alternative method of storage, or

disapproves of the method proposed, he or she will contact the

requesting party within 30 calendar days of receipt; if not, the

request is deemed approved.'' The reason for this suggested change is

that the regulations as proposed could cause hundreds or thousands of

parties to contact regulatory audit seeking approval of their proposed

methods and, given the standards in proposed Sec. 163.5(c), such

requests could be voluminous. In order to ease the burden on Customs

and the importing public, Customs needs to adopt a set of standards and

guidelines and then allow parties subject to recordkeeping requirements

to establish programs that meet those standards and guidelines, and

acceptance of the proposed method would be assumed unless some

information is missing or there are serious flaws in the proposal. This

commenter argued that this approach is consistent with ``informed

compliance'' in that Customs would provide the information and set the

standards and recordkeepers would have to establish programs to comply.

In addition, Customs can periodically check to ensure that the

recordkeeper is continuing to follow the standards, with authority to

impose sanctions or hold the recordkeeper to a corrective action plan

if the standards are not being followed.

3. In the case of customs brokers, the requirement for ``approval''

is unnecessary. A more enlightened and reasonable approach can be found

in the Department of Commerce regulations at 15 C.F.R. 762.5 which

requires neither notice to, nor advance approval by, the Department of

Commerce but rather sets forth the requirements for which compliance is

expected, and the same should be true for Customs. If a broker cannot

produce the ``original'' or a ``copy'' of a document, which it is

required to maintain under Sec. 111.21, it is in violation of 19 U.S.C.

1641 and is subject to a penalty. The fact that a broker received

permission from Customs to make copies using a particular method will

not aid the broker when it cannot produce a requested record.

4. There should be provision for grandfathering-in existing

programs for alternative record storage methods that meet the standards

of these regulations.

Customs response: Customs does not entirely agree with the comment

made at point 1 above. In order to capture or encompass all possible

records, section 508(a) had to refer to ``electronically generated or

machine readable data'' along with other possible documents and

information. This does not per se constitute an approval of those

formats, nor does it constitute express authority to alter original

paper documents, records or information into such formats; it is merely

a recognition of existing data technology rather than an expression of

an unencumbered right regarding records maintenance methodology.

However, as stated above in connection with Sec. 163.5(a), Customs does

agree that, as a general principle, advance review and approval by

Customs should not be a prerequisite of alternative storage methods. In

order to accommodate this principle and also enhance the clarity of the

proposed text, Sec. 163.5, as set forth below, reflects the following

modifications in structure and content:

a. It is noted that, with the exception of paragraph (a) which sets

forth the basic rule regarding maintenance of original records, the

text of proposed Sec. 163.5 (that is, paragraphs (b) through (j))

related entirely to alternative records storage which operates as an

exception to the paragraph (a) rule. In order to more clearly reflect

the relationship between these provisions, Sec. 163.5 has been

reorganized into two paragraphs, with paragraph (a) corresponding to

proposed paragraph (a) and with paragraph (b) entitled ``alternative

method of storage'' and covering the remainder of proposed Sec. 163.5

but with a number of additional substantive changes as noted below.

b. Paragraph (b)(1) corresponds to proposed paragraph (b) and thus

sets forth general provisions regarding alternative storage methods.

The modified text, except in the case of records required to be

maintained as original records under laws and regulations administered

by other Federal government agencies (which requirements may not be

obviated by the Customs Regulations), (1) allows use of an alternative

method for records storage so long as the recordkeeper provides written

notification thereof to the Miami regulatory audit field office

(Customs believes that a single, centralized location should be used

for this purpose and that it should be the Miami office, for the same

reasons stated above as regards notification of consolidation of broker

records under Sec. 111.23) at least 30 calendar days before

implementation of the alternative method, (2) provides that the written

notice must identify the type of alternative storage method to be used

and must state that the alternative storage method complies with the

standards of paragraph (b)(2), and (3) provides for an exception to

alternative storage under certain circumstances if Customs at any time

instructs the recordkeeper in writing that records described therein

must be maintained as original records (this exception is necessary,

for example, to ensure consistency in the form, identification and

custody of records and could be applied whenever the records are

relevant to an ongoing inquiry or investigation or administrative or

judicial proceeding). Thus, there is no longer any reference to a

formal request and approval process, and the reference to the location

of a recordkeeping officer has been eliminated (see the changes

reflected in new paragraph (b)(2) as discussed below in connection with

the comments on proposed Sec. 163.5(c)).

c. As a consequence of the removal of the request/approval process

and based on a further internal review of the proposed texts, Customs

believes that it is neither necessary nor appropriate to retain the

following paragraphs of proposed Sec. 163.5: (1) proposed paragraph

(e), which concerned retrievability of records and is adequately

covered by Sec. 163.6; (2) proposed paragraph (g), which concerned

notification of noncompliance with the agreed-upon alternative storage

method and is no longer necessary since there will be no such specific

agreement between Customs and the recordkeeper; (3) proposed paragraph

(i), which concerned revocation of the alternative storage method

privilege and thus is no longer relevant; and (4) proposed paragraph

(j), which concerned appeal procedures for denial or revocation of the

alternative storage method privilege and thus also is no longer

relevant. As a result of the removal of these four proposed paragraphs

and the

[[Page 32933]]

reorganization of Sec. 163.5 as discussed above, proposed paragraphs

(f) and (h) have been redesignated as paragraphs (b)(3) and (b)(4) and,

for purposes of consistency with the notice procedures under modified

paragraph (b)(1) as discussed above, the new paragraph (b)(3) text as

set forth below has been modified to provide that notice of changes to

alternative recordkeeping procedures must be given to the Director of

the Miami regulatory audit field office. In addition, as a consequence

of the removal of the request/approval process, newly designated

paragraph (b)(4) has been modified as set forth below by the removal of

all references to requesting, granting and revoking alternative storage

method privileges. See also the below discussion of the comments on

proposed Sec. 163.5(c) for the treatment in this document of proposed

paragraphs (c) and (d). Finally, a new paragraph (b)(5) has been added

to provide that Customs may instruct a recordkeeper in writing to

discontinue its use of an alternative storage method if the

recordkeeper fails to comply with the conditions and requirements for

alternative storage set forth in Sec. 163.5 (this new paragraph is

addressed in more detail below in the comment discussion regarding

proposed Sec. 163.5(i)).

The substance of the comments made in points 2, 3, and 4 above have

been addressed by the changes described above.

Section 163.5(c)--Standards for Alternative Storage Methods

Comment: Seven commenters made general observations regarding the

approach of proposed Sec. 163.5(c) which provides examples of commonly

used methods for storage of records, sets forth a general rule

regarding what storage methods will satisfy Customs requirements, and

prescribes minimum standards that Customs will consider in evaluating

proposals for alternative storage methods. The points made by these

commenters were as follows:

1. One commenter stated that the examples of storage methods in the

first sentence of the introductory text of the section should be

expanded to include disc access storage devices (DASD) used for the

capture and storage of electronic transmissions, image storage devices

such as CD ROM juke boxes, voice recordings and full motion video in

computerized files.

2. One commenter stated that the Sec. 163.5(c) standards are too

intrusive in that they impose on private industry new sets of

procedures regarding business records. This commenter argued that since

companies regularly undergo independent financial audits that test

business record integrity and because the Mod Act was not intended to

hinge industry efficiencies on the good graces of Customs, importers

should not need Customs approval to use alternative storage techniques

for records kept in the ordinary course of business.

3. Four commenters objected to the minimum standards that Customs

will use to evaluate alternative storage proposals, arguing that the

proposed regulatory standards are too detailed and burdensome, are not

achievable by the great majority of importers and thus will discourage

use of alternative storage methods, are difficult to understand and

follow, and will lead Customs to micro manage the recordkeeping

programs of importing parties. Three of these commenters further

questioned whether Customs would have the resources necessary to manage

such alternative recordkeeping standards, and two of these commenters

also noted that Customs has permitted alternative methods or storage in

the past without imposing ``minimum standards'' and without major

problems arising therefrom. In order to address these problems, one of

the four commenters specifically recommended removal of the last

sentence of the introductory text of the section and removal of

subparagraphs (1) through (12) and inclusion of the substance of

subparagraph (13) as a second unnumbered paragraph, arguing that the

resulting text would represent a concise summary of the recordkeeping

program requirements for which no further detail is required.

4. One commenter argued, with specific reference to customs

brokers, that some of the ``minimum standards'' (i.e., subparagraph (9)

regarding segregation of duties and subparagraph (11) regarding

continuing surveillance over the medium transfer system), while well

suited to the handling and storage of ``top secret'' documents, are

largely inapplicable to a broker's customs records.

Customs response:

1. Customs disagrees. The specific storage methods listed are

intended to be illustrative rather exhaustive; therefore, Customs sees

no reason to add to that list. However, language has been added to the

first sentence of the text (redesignated as paragraph (b)(2) as set

forth below as part of the structural changes to Sec. 163.5 discussed

above in connection with the comments regarding proposed Sec. 163.5(b))

to clarify that the listed items are not all-inclusive.

2. Customs disagrees, except as regards the issue of needing

Customs approval as already discussed above in connection with proposed

Sec. 163.5(b). It is noted that alternative storage is voluntary and

not a requirement. Furthermore, alternative storage is concerned with

only those records involving Customs matters and accordingly does not

impose any additional burden on business as regards other records.

3. Based on these comments and the comments below regarding

individual standards for alternative storage methods (proposed

paragraphs (c)(1)-(13)), and as a result of further internal review of

the proposed paragraph (c) text, Customs has determined that a number

of additional changes should be made to the text of proposed paragraph

(c) of Sec. 163.5. These changes, as reflected in the text of

redesignated paragraph (b)(2) set forth below, are as follows:

a. In the last sentence of the introductory text of the paragraph,

the reference to minimum standards that will be considered by Customs

in evaluating proposals for alternative storage methods has been

replaced by a reference to standards that must be applied by

recordkeepers when using alternative storage methods, in order to

reflect the decision discussed above to do away with the requirement

for advance review and approval by Customs.

b. In order to simplify the procedures to be followed by, and thus

reduce the burden on, recordkeepers who choose to use alternative

storage methods, and in other cases in order to reduce the complexity

of the text where the proposed text in effect added nothing of

substance to the basic obligation to maintain records and make them

available to Customs, the following provisions that were contained in

proposed paragraph (c) have been entirely eliminated from new paragraph

(b)(2) as set forth below: Subparagraph (1), which concerned

recordkeeping officer designation; subparagraph (4), which concerned

documentation of data retention and transfer procedures; subparagraph

(5), which referred to a data transfer audit trail; subparagraph (6),

which provided for the integrity and nonerasability of the storage

medium; subparagraph (7), which concerned the maintenance of papers

regarding the transfer process; subparagraph (9), which concerned

internal control systems covering persons responsible for maintaining,

producing or transferring records; subparagraph (11), which concerned

medium transfer system surveillance and availability of

[[Page 32934]]

internal review files; and subparagraph (12), which concerned

procedures for preventing the destruction of hard copy records.

c. Proposed paragraphs (c)(2) and (c)(3) have been combined and

redesignated as paragraph (b)(2)(i), and the new text no longer

contains the proposed provisions concerning documentation of the

electronic media used and life cycle and disposition procedures,

certification regarding documents required by other agencies, and

showing that the medium to which the transfer will occur is reliable.

In addition, in the provision regarding having in place operational and

written procedures ``to ensure that the imaging and/or other media

storage process preserves the integrity, readability, and security of

the original records'', the words ``the information contained in'' have

been added before ``the original records'' in order to clarify that in

an alternative storage context the standard relates to what is

alternatively stored.

d. Proposed paragraph (c)(8) has been redesignated as paragraph

(b)(2)(ii) and the text has been modified to simply provide for an

effective labeling, naming, filing, and indexing system (thus, the

references to permitting easy retrieval in a timely manner and to where

the finding aids must be located have been eliminated).

e. Proposed paragraph (c)(10) has been divided into two new

paragraphs (b)(2)(iii) and (b)(2)(iv) which incorporate the following

changes to the proposed paragraph (c)(10) text: (1) in new paragraph

(b)(2)(iii), the requirement for maintenance of all original records

for a minimum of one year after the date of transfer has been replaced

by a requirement for maintenance of entry records (except packing lists

which, under Sec. 163.4(b)(2), do not have to be retained in any format

beyond 60 calendar days) in their original formats for 120 calendar

days, with the start of the 120-day period determined in the same

manner as in the case of that 60-day packing list retention period; and

(2) new paragraph (b)(2)(iv) merely provides that an internal testing

of the system must be performed on a yearly basis (thus, the new text

eliminates the quarterly testing standard and the prohibition against

destruction of original records after one year in the absence of proof

of accurate transfer of records).

f. Proposed paragraph (c)(13) has been redesignated as paragraph

(b)(2)(v) and the text has been modified by removing the reference to

parties who requested and were granted permission to use alternative

storage methods.

g. Finally, proposed paragraph (d) has been moved into paragraph

(b) as paragraph (b)(2)(vi) and the text has been modified as follows:

(1) the reference to parties who requested and were granted permission

to use alternative storage methods has been eliminated; and (2) the

requirement for retaining and keeping available two copies of the

records on approved media at different locations has been replaced by a

requirement for retaining and keeping available one working copy and

one back-up copy stored in a secure location.

4. The changes to the proposed texts discussed under point 3 above

effectively address the substance of this comment.

Section 163.5(c)(1)--Recordkeeping Officer and Back-Up Officer

Comment: The requirement to designate a recordkeeping officer and a

back-up officer should not apply to customs brokers who are licensed

and thus should be aware of their obligations regarding recordkeeping.

Customs response: The substance of this comment has been addressed

by the changes made to proposed Sec. 163.5(c) as discussed above.

Section 163.5(c)(2)--Operational and Written Procedures

Comment: A commenter stated that the purpose and intent of the

second sentence of this proposed section is unclear, asking in this

regard whether it is intended to require that other agency documents

required for Customs purposes be stored using the same procedures, or

whether it is intended to require that every recordkeeper in every

department of a corporation keep records using exactly the same

software, hardware and procedures. This commenter argued that if the

latter is the intent, the requirement is unreasonable and will prevent

any corporation of significant size from using an alternative storage

process.

Customs response: The substance of this comment has been addressed

by the changes made to proposed Sec. 163.5(c) as discussed above.

Section 163.5(c)(6)--Integrity of the Storage Medium

Comment: A commenter noted that during the life cycle of a document

management program, documents and data hopefully will evolve as time

passes from on-line to near-line and ultimately to tape storage, and

current documents and data will be kept on-line for quick access. This

commenter stated that proposed Sec. 163.5(c)(6) seems to provide that

hard-drive disk space cannot be reused when documents or data are moved

to tape storage and that, if so, the requirement is unacceptable and

unnecessary. This commenter questioned why Customs cares what happens

to the medium if the recordkeeper has a process in place to ensure that

the documents or data are not destroyed, discarded or written over.

Customs response: The substance of this comment has been addressed

by the changes made to proposed Sec. 163.5(c) as discussed above.

Section 163.5(c)(10)--One-Year Retention of Original Records

Comment: Ten comments were submitted on proposed Sec. 163.5(c)(10)

which provides that all original records be maintained for a minimum of

one year after the date of transfer, that internal sampling-exception-

reporting/testing of accuracy and readability must be performed on a

quarterly basis, and that no original records will be destroyed after a

year unless there is acceptable proof that the records are being

accurately transferred. The comments concerned primarily the 1-year

retention requirement and all commenters were opposed to the

requirement which they felt was excessively long, commercially

unrealistic, unnecessary, burdensome, costly, redundant and

unreasonable and thus should be removed. The following additional

arguments were made by these commenters in opposition to the proposed

provision:

1. If a failure to comply with recordkeeping requirements should

arise, Customs and the courts can impose penalties for failure to

maintain or produce records, and these avenues would seem to provide

Customs with more than adequate protection.

2. If the internal sampling-exception-reporting/testing of accuracy

and readability are performed, the records should be eligible for

destruction immediately after capture or at most after a 30-day

retention period.

3. It is not possible to comply with this provision as written.

Almost all forms of media can be destroyed. The requirements for

alternative media should be no more restrictive than for the media

being copied (paper).

4. There will always be, at a minimum, at least three copies of the

records available to Customs: the first copy will be records stored by

the alternative storage medium; the second copy will be the back up of

the alternative storage system; and the third copy will be the copy

maintained by the broker. Thus, there is no value in requiring the

importer to maintain the

[[Page 32935]]

hard copy version of the records when alternative storage media are

employed.

5. The requirement to test accuracy and readability on a quarterly

basis will also be burdensome to the trade. If the approved system is

reliable, a year-end check will suffice.

6. The guidelines and standards presented in Sec. 163.5 provide

stringent procedures for alternate storage methods in order to meet the

expectations of Customs, and those guidelines and standards should be

sufficient so as to obviate the redundant requirement of maintaining

the original records, the cost of which would be (for this one

commenter) approximately $32,000 per year. Therefore, Sec. 163.5(c)(10)

should be revised to read as follows: ``Upon receiving written approval

for alternate storage methods by the director of the regulatory audit

field office, original documents are not required to be maintained once

the transfer process has been successfully completed. Quarterly

sampling, exception reporting and testing of accuracy and readability

must be performed and documented.''

7. There should be no requirement to maintain paper documents in

addition to electronic records because: (1) section 637 of the Mod Act

states that electronic transmission of data must be certified by the

importer of record as to its accuracy and truth and thus each certified

transmission is as binding, and has the same force and effect, as a

signed paper document; (2) the proposed section assumes that paper

documents are the basis for all business transactions, but this is not

the case; and (3) if the purpose of maintaining hard copies is to

ensure that the electronic records are backed up, there are already

sufficient back-up procedures in that under Sec. 163.5(c)(13) there

must be a capability to make hard copies and under Sec. 163.5(d) two

copies of the records must be maintained in two separate locations.

8. If an electronic image of an invoice is satisfactory for Customs

purposes 366 days after the transfer from paper, then it should be

acceptable even one day after transfer.

9. If the purpose of the 1-year document retention requirement is

to permit quarterly testing and sampling, the requirement is

inappropriate. In a professionally managed imaging process, documents

are checked for quality more frequently than once a quarter. Typically,

one out of ten documents is checked for quality during the scanning

process so that, if a quality problem exists, no more than ten

documents need to be rescanned.

10. If the regulatory provision at issue cannot be deleted in its

entirety, it should at least be modified to permit the destruction of

paper documents sooner for those importers who exceed the quarterly

quality testing standard.

Customs response: The concerns reflected in these comments have

been largely addressed by the changes made to proposed Sec. 163.5(c) as

discussed above.

Section 163.5(d)--Retention of Approved Media Records

Comment: Three commenters objected to proposed Sec. 163.5(d) which

provides that parties who were granted permission to use alternative

storage methods shall retain and keep available two copies of the

records/information on approved media at different locations. One of

these commenters stated that the requirement is too intrusive, another

commenter questioned the need to retain two copies in a paperless

environment, and the third commenter alleged that the proposed

provision is so burdensome that it will discourage customs brokers from

electing to use alternative storage methods.

Customs response: The changes to the text of proposed Sec. 163.5(d)

(redesignated as Sec. 163.5(b)(2)(vi) as set forth below) that are

discussed above in connection with Sec. 163.5(c) include removal of the

requirement to retain copies at different locations. As regards the

requirement to retain two copies, Customs believes that retention of a

working copy and a back-up thereof is essential and consistent with

prudent business practice.

Section 163.5(e)--Retrievability of Records

Comment: One comment was received in regard to that portion of

proposed Sec. 163.5(e) that provides that a ``certified hardcopy'' may

be used when information is received and stored electronically for

Customs requests for information. This commenter argued that this

requirement is unreasonable because electronically-stored data is now

printed out in hard copy from mainframe systems every day for Customs

without certification being required, noting that Customs will have the

same remedies it now has (i.e., penalties, rate advances,

investigations) if the hard copy provided to Customs is incorrect. The

commenter also complained that the regulations do not set forth the

certification process and objected that any such process will add to

the expense of producing hard copies.

Customs response: The elimination of proposed Sec. 163.5(e), as

discussed above in connection with the comments on Sec. 163.5(b),

effectively addresses this comment.

Comment: Three commenters objected to the last sentence of proposed

Sec. 163.5(e) that provides that records shall be kept of the frequency

and to whom copies of the records were given. The points made by these

commenters were as follows:

1. The provision could be interpreted to mean that a separate

tracking and measuring system must be maintained. Typically, a customs

broker receives numerous and multiple requests for records from the

importer and/or Customs, and some requests are as simple as asking for

a copy of the import invoice to enable the importer to place the

broker's bill in line for payment. To maintain a separate tracking

system outside of an entry summary notation system for this type of

request is onerous and not economically justifiable and is an

unnecessary level of detail.

2. The reason or rationale for this requirement should be

explained. There is no such requirement for paper documents and,

clearly, it would be extremely burdensome and costly to the

recordkeeper with no apparent benefit to Customs or anyone else.

3. The requirement does not seem to have any usefulness to any

parties and would be excessively burdensome, particularly on customs

brokers operating from multiple locations. Customs should only be

interested in obtaining the documents it seeks in a timely manner. A

confidentiality requirement in the case of brokers already exists in

Sec. 111.24.

Customs response: Again, the elimination of proposed Sec. 163.5(e)

effectively addresses these comments.

Section 163.5(f)--Changes to Alternate Storage Procedures

Comment: It is unreasonable to require the approval of Customs

before making any changes to the alternative recordkeeping procedures,

and Customs will end up micro managing every one of these programs

without having the requisite resources for doing this. Significant

changes should be reported to Customs but, while it might be preferable

to report the changes before implementation, realistically there will

be times when this will not occur (what will happen when an importer

must make a change to ensure continued compliance, but Customs cannot

respond in a timely manner?). In the past, Customs tried to impose the

same type of procedure in the Foreign Trade Zone Procedure Manual and

found that it could not review and approve changes in a timely or

effective manner; as a result, the requirement was changed to provide

that the zone operator keep an

[[Page 32936]]

up-to-date manual available for Customs review. This is a more

practical and realistic approach.

Customs response: Customs agrees with regard to the issue of

advance Customs approval of changes, for the same reason that Customs

has agreed that initial advance approval of the use of alternative

recordkeeping methods is not necessary. However, as in the case of an

initial decision to use alternative storage methods, Customs believes

that advance notice to Customs is necessary when a change in

alternative storage procedures is made. Accordingly, the proposed

regulatory text (redesignated in this document as Sec. 163.5(b)(3) as

discussed above) has been modified to require written notification of

the change at least 30 calendar days before implementation of the

change.

Section 163.5(g)--Notification of Noncompliance

Comment: Five comments were received on proposed Sec. 163.5(g)

which provides that written notification of noncompliance with the

agreed upon alternative storage methods must be made to Customs within

10 business days and that the notification must detail what corrective

action will take place. The points made by these commenters were as

follows:

1. This regulation makes little sense in light of the fact that

proposed Sec. 163.5(f) will prove to be unworkable (viz. the above

comment on that section). Customs will be unable to approve every

change to these programs, and the burden on even the most diligent

recordkeeper will be wholly out of proportion to the benefit to be

derived by Customs. Customs and importers only are interested in the

failure to produce documents or data requested by Customs, and the

mission of Customs is to protect the revenue and ensure compliance with

the laws enacted by Congress. The proposed regulation creates an

unnecessarily stringent requirement which will likely result in

unnecessary disputes over whether notification was required in certain

situations and which will simply result in a waste of the resources of

importers and Customs without a counterbalancing benefit to either

side.

2. The absolute requirement of notification to Customs regarding

noncompliance gives rise to the concern that Customs is conceivably

requiring self-incrimination for criminal violations.

3. The 10-day requirement for notification to Customs is

unnecessarily short because, regardless of the time period specified

for notification, none of the newly generated records will be destroyed

since original records are to be maintained for at least one year under

proposed Sec. 163.5(c)(10). Since it may take much longer than ten days

to find out the scope of the problem and to determine what corrective

action to take, thirty (30) days would be a more appropriate time

period.

4. Two commenters stated that the required notification period

should run from the ``date of discovery'' by the recordkeeper.

Customs response: The elimination of proposed Sec. 163.5(g), as

discussed above in connection with the comments on Sec. 163.5(b),

effectively addresses these comments.

Section 163.5(i)--Revocation of Privilege To Maintain Alternative

Records

Comment: Two comments were received on proposed Sec. 163.5(i) which

provides for revocation of the privilege to use alternative storage

methods for failure to meet regulatory conditions and requirements,

states that the revocation is effective on the date of issuance of the

written notice of revocation and shall remain in effect pending any

appeal, and in the last sentence provides that revocation requires the

party immediately to begin to maintain original records and subjects

the party to penalties under Sec. 163.6 for failure to do so. The

points made by these commenters were as follows:

1. Taking a recordkeeper off the alternative method of storage

pending appeal is too restrictive and gives too much authority to a

field officer (the applicable regulatory audit field office director).

Customs should decide on a case-by-case basis whether the recordkeeper

should be taken off the program pending appeal and the decision to do

so should be made at Customs Headquarters, because often these are

nationwide programs involving tremendous investment.

2. With regard to the last sentence of the proposed text, proposed

Sec. 163.5(c)(10) already requires the maintenance of (original)

records. Since the effect of revocation will be to deny a party the

right to destroy records in favor of the alternative method of storage,

the last sentence should be revised to read as follows: ``Revocation

requires the party immediately to cease to destroy original records and

will subject such person to penalties provided for in Sec. 163.6 for

failure to do so.''

Customs response: While the elimination of proposed paragraph (i)

of Sec. 163.5, as discussed above, renders moot some of the specific

points made by these commenters, Customs believes that there must be

provision for preventing a recordkeeper from continuing to use

alternative storage procedures when the recordkeeper has failed to

comply with the regulatory standards for alternative storage, because

those regulatory standards have ongoing, rather than only initial,

relevance; new paragraph (b)(5) of Sec. 163.5 as mentioned above was

added for this specific purpose. The new paragraph (b)(5) text uses the

word ``may'' in order to ensure that written instructions to

discontinue alternative storage are issued on a case-by-case basis.

However, Customs remains of the view that any appropriate Customs

office should have authority to make the determination as to whether

such an instruction is necessary, similar to the procedure reflected in

the modified paragraph (b)(1) text discussed above and set forth below.

The new text does not set forth an appeal procedure but rather refers

to the availability of a more direct and expeditious procedure (that

is, the recordkeeper may give to Customs the 30-day notification of

[re-]initiation of alternative storage under paragraph (b)(1) once the

noncompliance situation has been rectified). As regards the last

comment, Customs believes that neither the proposed text nor the

replacement text suggested by the commenter is necessary.

Section 163.6(a)(1)--Production of Entry Records

Comment: Ten commenters made observations on proposed

Sec. 163.6(a)(1) which provides for written, oral, or electronic

requests by Customs for entry records, requires a written follow-up to

an oral request, provides for timely production of such records taking

into consideration the number, type and age of the item, sets forth a

table containing guidelines as to the maximum time Customs expects to

wait for the records (maximum period in business days, with reference

to the age of the entry/entry summary), and provides for the

recordkeeper to notify Customs if the recordkeeper believes that he

will not be able to meet the applicable production time period. All of

the commenters were concerned with the effect of the time limits on a

recordkeeper's ability to properly comply with a Customs request for

records. The various specific points made by these commenters were as

follows:

1. While the time periods specified in the table for producing

records might be suitable in the case of requests for single records or

small numbers of records, a large volume of records would require

[[Page 32937]]

more time to produce; thus, the time periods set forth in the table,

which are tied to the date of the entry/entry summary, are not suitable

when large numbers of records are involved. One commenter suggested

that large requests will increase as Customs moves toward an audit

basis of review and gave, as an example, a request for all files for a

specific product over a period of several years, which could involve

generating a program to search for particular files and printing a list

of those files and identifying them with entry numbers and file numbers

and then going to several locations to pull the information, possibly

involving hundreds of files.

2. Although the timetable set forth in the table is characterized

in the regulatory text as ``general guidelines'', experience shows that

this table would be treated by Customs field officers as a mandatory

and inflexible rule.

3. In the case of an entry/entry summary not more than one month

old, the 5-day period for producing a record is not enough time because

in the case of mailed written requests the postal delivery/receipt

process will consume most or all of that time. Also, the proposed

regulatory text is unclear as to whether the requested records must be

merely sent to, or be actually received by, Customs within the 5-day

period.

4. Where a request is made orally, the text should state (1) that

the oral request ``must'' (rather than ``will'') be followed by a

written request and (2) that the time period for producing the record

runs from the date of the written request as is the current practice

with Customs Forms 28 and 29.

5. Customs brokers in many instances receive requests for records

covering a year or more without reference to particular entry numbers

(e.g., a request for copies of all entries filed by an importer during

a particular time period), and brokers may also receive requests from

several Customs sources at the same time. Thus, guidelines are needed

to grant brokers substantially more time than the periods set forth in

the proposed regulation.

In addition, the following specific recommendations were made by

some of these commenters to address the general points made above:

a. The fourth sentence of the text and the table should be removed.

b. A uniform production date of 30 days should be established for

all documents except where extenuating circumstances require a shorter

or longer period.

c. The word ``maximum'' in the second column of the table should be

changed to read ``suggested''.

d. The word ``maximum'' in the second column of the table should be

changed to read ``normal''.

e. The word ``maximum'' in the fourth sentence of the text and in

the second column of the table should be changed to read ``expected''.

f. Increase the 5-day period in the table to ten days.

g. If the 5-day period in the table is to be retained, it should

run from the date a properly addressed request is received, and a

minimum of three days should be added to effect a response to a request

delivered by mail.

Customs response: 1. Customs agrees with the substance of this

comment and therefore has modified the proposed text (redesignated in

this document as paragraph (a) of

This text is long and has been trimmed here. Open the source document for the complete record.