Penalties for False Drawback Claims

DEPARTMENT OF THE TREASURY

Customs Service

19 CFR Parts 162, 171 and 191

RIN 1515-AC21

Penalties for False Drawback Claims

AGENCY: Customs Service, Department of the Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document proposes to amend the Customs Regulations to set

forth the procedures to be followed when false drawback claims are

filed and penalties are thereby incurred. The proposed regulatory

changes would implement section 622 of the Customs modernization

provisions of the North American Free Trade Agreement Implementation

Act. These new provisions track, to the greatest extent possible, the

procedures that have been set forth for section 592 of the Tariff Act

of 1930, as amended (19 U.S.C. 1592). This document also sets forth

proposed mitigation guidelines that Customs would follow in arriving at

a just and reasonable assessment and disposition of liabilities when

false drawback claims are filed and penalties are incurred. Finally,

the document proposes to amend the Customs Regulations in order to

provide more specificity regarding the grounds and procedures for

removal of a participant from the drawback compliance program.

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

ADDRESSES: Written comments (preferably in triplicate) may be addressed

to the Regulations Branch, Office of Regulations and Rulings, U.S.

Customs Service, 1300 Pennsylvania Avenue, NW, Washington, DC 20229.

Comments submitted may be inspected at the Regulations Branch, Office

of Regulations and Rulings, U.S. Customs Service, 1300 Pennsylvania

Avenue, NW, 3rd Floor, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Charles Ressin, Penalties Branch,

Office of Regulations and Rulings, 202-927-2264.

SUPPLEMENTARY INFORMATION:

Background

This document proposes to amend the Customs Regulations to

implement section 622 of Title VI of the North American Free Trade

Agreement Implementation Act (Pub. L. 103-182). Title VI of the North

American Free Trade Agreement Implementation Act is popularly known as

the Customs Modernization Act. Paragraph (a) of section 622 amended the

Tariff Act of 1930, as amended, by adding section 593A, which prohibits

the filing of false (fraudulent or negligent) drawback claims and

prescribes the actions that Customs may take, including the assessment

of monetary penalties, if such claims are filed (gross negligence is

not separately set forth as a level of culpability in the new statutory

provision). New section 593A was codified as section 1593a of Title 19

of the United States Code (19 U.S.C. 1593a, hereinafter ``the

statute'').

As in the case of penalties under section 592 of the Tariff Act of

1930, as amended (19 U.S.C. 1592), specific procedures and other

requirements are set forth in the statute for prepenalty notices and

penalty claims, the former not being required by the statute if the

penalty is $1,000 or less. The statute provides that approval of

Customs Headquarters is required if a prepenalty notice alleging fraud

is contemplated. The statute also further provides for the

applicability of section 618 of the Tariff Act of 1930, as amended (19

U.S.C. 1618), which authorizes the administrative remission or

mitigation of penalties. Written decisions, setting forth a final

determination and findings of fact and conclusions of law upon which

that determination was based, are also mandated by the statute.

Rather than setting forth specific penalty amounts, the statute

provides for the assessment of monetary penalties in amounts not to

exceed a specific percentage of the actual or potential loss of

revenue, with the applicable percentage depending on the level of

culpability, whether there have been prior violations involving the

same issue, and whether the violator is a participant in the Customs

drawback compliance program (the statute provides for the establishment

of a drawback compliance program, and regulatory provisions relating to

the operation of that program were adopted as part of the amendments to

the Customs Regulations regarding drawback published in the Federal

Register as T.D. 98-16 on March 5, 1998, 63 FR 10970). For purposes of

applying the monetary penalties prescribed in the statute, Customs

proposes in this document to define loss of revenue with reference to

the amount of drawback that is claimed and to which the claimant is not

entitled.

The statute further provides for limited penalty assessment for

filing a false drawback claim if there is a prior disclosure of the

violation. As in cases brought under section 592, the limited penalty

assessment would be applicable only in those instances in which the

circumstances of the violation are disclosed before, or without

knowledge of the commencement of, a formal investigation. In this

context, this document should be read in conjunction with the notice of

proposed rulemaking regarding prior disclosure that was published in

the Federal Register on September 26, 1996 (61 FR 50459).

The statute provides for penalties, or notices of violation in lieu

of penalties, as set forth below in cases involving negligent

violations (under the statute, a repetitive violation is one which

involves the same issue as a prior violation): 1. If the violator is

not a participant in the drawback compliance program, Customs shall

assess monetary penalties in amounts not to exceed the following:

a. 20 percent of the loss of revenue for the first violation;

b. 50 percent of the loss of revenue for the first repetitive

violation; and

c. The loss of revenue in the case of a second and each subsequent

repetitive violation.

[[Page 51869]]

2. If the violator is a participant in the drawback compliance

program and is generally in compliance with the provisions thereof, the

following actions shall be taken by Customs:

a. For a first violation and for any other violation that is not

repetitive or that involves the same issue as a prior violation but

does not occur within three years from the date of that prior

violation, a notice of violation (warning letter) shall be issued;

b. For the first violation that is repetitive and that occurs

within three years from the date of the violation of which it is

repetitive, a monetary penalty of up to 20 percent of the loss of

revenue shall be assessed;

c. For the second violation that is repetitive and that occurs

within three years from the date of the first of two violations of

which it is repetitive, a monetary penalty of up to 50 percent of the

loss of revenue shall be assessed; and

d. For a third and each subsequent violation that is repetitive and

that occurs within three years from the date of the first of three or

more violations of which it is repetitive, a monetary penalty not to

exceed the loss of revenue shall be assessed.

In the case of a fraudulent violation, the statute makes no

distinction between drawback compliance program participants and those

who do not participate in the program: a fraudulent violation gives

rise to a monetary penalty in an amount not exceeding three times the

loss of revenue or, if there has been a prior disclosure regarding the

fraudulent violation, in an amount not exceeding the loss of revenue.

If there has been a valid prior disclosure regarding a negligent

violation, drawback compliance program participants and those who do

not participate in that program are also treated the same: the violator

is subject to a monetary penalty that may not exceed an amount equal to

the interest computed on the basis of the prevailing rate of interest

applied under 26 U.S.C. 6621 on the amount of actual revenue of which

the United States is or may be deprived during the period from the date

of overpayment of the claim to the date of tender of the overpaid

amount.

In order to obtain the benefits of prior disclosure in both fraud

and negligence cases, tender of the amount of the overpayment is

required either at the time of disclosure or within 30 days (or such

longer period as Customs may provide) after Customs gives notice of its

calculation of the amount of the overpayment.

Paragraph (b) of section 622 of the Customs Modernization Act

provides that the provisions of the statute shall apply only to

drawback claims filed on and after Customs implements nationwide an

automated drawback selectivity program, and mandates the publication in

the Customs Bulletin of the effective date of the selectivity program.

The proposed amendments set forth in this document to implement the

statute involve changes to the penalty procedure provisions within

parts 162 and 171 of the regulations and the addition of a new appendix

D to part 171 to set forth guidelines for the imposition and mitigation

of monetary penalties incurred under the statute. To the greatest

extent possible, and except where the statute expressly mandates a

different approach, the regulatory amendments set forth in this

document are modeled on the section 592 regulatory provisions and thus,

among other things, reflect the definitions of ``fraud'' and

``negligence'' (which includes gross negligence) that are intended to

be applied in cases brought under section 592 (see Senate Report 103-

189 at pages 73-74). As noted above, these proposed regulations, if

adopted as a final rule, will not be effective until Customs implements

an automated drawback selectivity program.

Finally, with regard to the final amendments to the Customs

Regulations regarding drawback published as T.D. 98-16 as mentioned

above, Customs notes that the provisions regarding the operation of the

drawback compliance program (set forth as subpart S within part 191)

include, in Sec. 191.194 (e) and (f), procedures regarding the

revocation of certification for participation in the program. However,

contrary to the approach taken elsewhere in the Customs Regulations in

the context of a revocation or removal of a privilege, those drawback

compliance program provisions do not include specific grounds for such

action. Moreover, those paragraph (e) and (f) texts only refer to

proposed revocation actions (with a delayed effective date following

notice of the proposed revocation). Thus, no provision exists in those

regulatory texts for a revocation with immediate effect when the basis

for the revocation involves willfulness on the part of the program

participant or when public health, interest, or safety requires

immediate revocation, notwithstanding the fact that such immediate

action may be necessary and would be consistent with the license

revocation principles enshrined in the Administrative Procedure Act

(see 5 U.S.C. 558(c)). This document proposes to revise Sec. 191.194

(e) and (f) in order to address the above points and in order to

otherwise improve the organization of, and procedures reflected in,

those texts. In addition, the proposed text revisions refer to

``removal'' (rather than ``revocation'') of certification in order to

reflect statutory terminology (see 19 U.S.C. 1593a(f)(1)).

Comments

Before adopting these proposed amendments, consideration will be

given to any written comments timely submitted to Customs. Comments

submitted will be available for public inspection in accordance with

the Freedom of Information Act (5 U.S.C. 552), Sec. 1.4, Treasury

Regulations (31 CFR 1.4), and Sec. 103.11(b), Customs Regulations (19

CFR 103.11(b)), on regular business days between the hours of 9 a.m.

and 4:30 p.m. at the Regulations Branch, Office of Regulations and

Rulings, U.S. Customs Service, 1300 Pennsylvania Avenue, NW., 3rd

Floor, Washington, DC.

Regulatory Flexibility Act and Executive Order 12866

Insofar as the proposed regulations closely follow legislative

direction, pursuant to the provisions of the Regulatory Flexibility Act

(5 U.S.C. 601, et seq.), it is certified that the proposed amendments,

if adopted, will not have a significant economic impact on a

substantial number of small entities. Accordingly, the amendments are

not subject to the regulatory analysis requirements of 5 U.S.C. 603 and

604. This document does not meet the criteria for a ``significant

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

List of Subjects

19 CFR Part 162

Customs duties and inspection; Law enforcement; Penalties; Seizures

and forfeitures.

19 CFR Part 171

Administrative practice and procedure; Customs duties and

inspection; Law enforcement; Penalties; Seizures and forfeitures.

19 CFR Part 191

Administrative practice and procedure; Customs duties and

inspection; Drawback.

Proposed Amendments to The Regulations

For the reasons set forth above, it is proposed to amend parts 162,

171 and 191 of the Customs Regulations (19 CFR parts 162, 171 and 191)

as follows:

[[Page 51870]]

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

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

as follows:

Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1592, 1593a, 1624.

* * * * *

2. In Sec. 162.71, paragraphs (b) through (e) are redesignated as

paragraphs (d) through (g) and the heading for paragraph (a) is

revised, and new paragraphs (b) and (c) are added, to read as follows:

Sec. 162.71 Definitions.

* * * * *

(a) Loss of duties under section 592. * * *

(b) Loss of revenue under section 593A. When used in Sec. 162.73a,

the term loss of revenue means the amount of drawback that is claimed

and to which the claimant is not entitled and includes both actual and

potential loss of revenue.

(1) Actual loss of revenue. When used in Secs. 162.73a, 162.74(h),

162.77a and 162.79b, the term actual loss of revenue means the amount

of drawback that is claimed and has been paid to the claimant and to

which the claimant is not entitled.

(2) Potential loss of revenue. When used in Sec. 162.77a, the term

potential loss of revenue means the amount of drawback that is claimed

and has not been paid to the claimant and to which the claimant is not

entitled.

(c) Repetitive violation. When used in Sec. 162.73a to describe a

violation, repetitive has reference to a violation by a person that

involves the same issue as a prior violation by that person.

* * * * *

3. A new Sec. 162.73a is added to read as follows:

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

amended.

(a) Maximum penalty without prior disclosure for a drawback

compliance program nonparticipant. If the person concerned has not made

a prior disclosure as provided in Sec. 162.74 and has not been

certified as a participant in the drawback compliance program under

part 191 of this chapter, the monetary penalty under section 593A,

Tariff Act of 1930, as amended (19 U.S.C. 1593a), shall not exceed:

(1) For fraudulent violations, three times the loss of revenue; and

(2) For negligent violations, (i) 20 percent of the loss of revenue

for the first violation,

(ii) 50 percent of the loss of revenue for the first repetitive

violation, or

(iii) One times the loss of revenue for the second and each

subsequent repetitive violation.

(b) Maximum penalty without prior disclosure for a drawback

compliance program participant--(1) General. If the person concerned

has not made a prior disclosure as provided in Sec. 162.74 and has been

certified as a participant in, and is generally in compliance with the

procedures and requirements of, the drawback compliance program

provided for in part 191 of this chapter, the monetary penalty or other

sanction under section 593A, Tariff Act of 1930, as amended (19 U.S.C.

1593a), shall not exceed:

(i) For fraudulent violations, three times the loss of revenue; and

(ii) For negligent violations,

(A) Issuance of a written notice of a violation (warning letter)

for the first violation and for any other violation that is not

repetitive or that is repetitive but does not occur within three years

from the date of the violation of which it is repetitive,

(B) 20 percent of the loss of revenue for the first repetitive

violation that occurs within three years from the date of the violation

of which it is repetitive,

(C) 50 percent of the loss of revenue for the second repetitive

violation that occurs within three years from the date of the first of

two violations of which it is repetitive, or

(D) One times the loss of revenue for the third and each subsequent

repetitive violation that occurs within three years from the date of

the first of three or more violations of which it is repetitive.

(2) Notice of violation and response thereto. (i) The notice issued

by Customs under paragraph (b)(1)(ii)(A) of this section shall:

(A) State that the person concerned has violated section 593A;

(B) Explain the nature of the violation; and

(C) Warn the person concerned that future violations of section

593A may result in the imposition of monetary penalties. The notice

shall also warn the person concerned that repetitive violations may

result in removal of certification under the drawback compliance

program provided for in part 191 of this chapter until the person takes

corrective action that is satisfactory to Customs.

(ii) Within 30 days from the date of mailing of the notice issued

under paragraph (b)(1)(ii)(A) of this section, the person concerned

shall notify Customs in writing of the steps that have been taken to

prevent a recurrence of the violation.

(c) Maximum penalty with prior disclosure. If the person concerned

has made a prior disclosure as provided in Sec. 162.74, whether or not

such person has been certified as a participant in the drawback

compliance program under part 191 of this chapter, the monetary penalty

under section 593A, Tariff Act of 1930, as amended (19 U.S.C. 1593a),

shall not exceed:

(1) For fraudulent violations, one times the loss of revenue; and

(2) For negligent violations, an amount equal to the interest

accruing on the actual loss of revenue during the period from the date

of overpayment of the claim to the date on which the person concerned

tenders the amount of the overpayment based on the prevailing rate of

interest under 26 U.S.C. 6621.

4. A new Sec. 162.77a is added to read as follows:

Sec. 162.77a Prepenalty notice for violation of section 593A, Tariff

Act of 1930, as amended.

(a) When required. If the appropriate Customs field officer has

reasonable cause to believe that a violation of section 593A, Tariff

Act of 1930, as amended (19 U.S.C. 1593a) has occurred, and determines

that further proceedings are warranted, the officer shall issue to the

person concerned a notice of intent to issue a claim for a monetary

penalty.

(b) Contents--(1) Facts of violation. The prepenalty notice shall:

(i) Identify the drawback claim;

(ii) Set forth the details relating to the seeking, inducing, or

affecting, or the attempted seeking, inducing, or affecting, or the

aiding or procuring of, the drawback claim;

(iii) Specify all laws and regulations allegedly violated;

(iv) Disclose all the material facts which establish the alleged

violation;

(v) State whether the alleged violation occurred as a result of

fraud or negligence; and

(vi) State the estimated actual or potential loss of revenue due to

the drawback claim and, taking into account all circumstances, the

amount of the proposed monetary penalty.

(2) Right to make presentations. The prepenalty notice also shall

inform the person of his right to make an oral and a written

presentation within 30 days of mailing of the notice (or such shorter

period as may be prescribed under Sec. 162.78) as to why a claim for a

monetary penalty should not be issued or, if issued, why it should be

in a lesser amount than proposed.

(c) Exceptions. A prepenalty notice shall not be issued for a

violation of 19 U.S.C. 1593a if the amount of the proposed monetary

penalty is $1,000 or less.

[[Page 51871]]

(d) Prior approval. If an alleged violation of 19 U.S.C. 1593a

occurred as a result of fraud, a prepenalty notice shall not be issued

without prior approval by Customs Headquarters.

Sec. 162.79a [Amended]

5. Section 162.79a is amended by removing the references

``Sec. 162.76(b)(1) or Sec. 162.77(b)(1)'' and adding, in their place,

``Sec. 162.76(b)(1), Sec. 162.77(b)(1) or Sec. 162.77a(b)(1) and

(b)(2)''.

6. Section 162.79b is revised to read as follows:

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

Whether or not a monetary penalty is assessed under this subpart,

the appropriate Customs field officer shall require the deposit of any

actual loss of duties resulting from a violation of section 592, Tariff

Act of 1930, as amended (19 U.S.C. 1592) or any actual loss of revenue

resulting from a violation of section 593A, Tariff Act of 1930, as

amended (19 U.S.C. 1593a), notwithstanding that the liquidation of the

entry to which the loss is attributable has become final. If a person

is liable for the payment of actual loss of duties or actual loss of

revenue in any case in which a monetary penalty is not assessed or a

written notification of claim of monetary penalty is not issued, the

port director shall issue a written notice to the person of the

liability for the actual loss of duties or actual loss of revenue. The

notice shall identify the merchandise and entries involved, state the

loss of duties or revenue and how it was calculated, and require the

person to deposit or arrange for payment of the duties or revenue

within 30 days from the date of the notice. Any determination of actual

loss of duties or actual loss of revenue under this section is subject

to review upon written application to the Commissioner of Customs.

PART 171--FINES, PENALTIES, AND FORFEITURES

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

as follows:

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

2. Section 171.21 is revised to read as follows:

Sec. 171.21 Written decisions.

If a petition for relief relates to a violation of section 592,

593A or 641, Tariff Act of 1930, as amended (19 U.S.C. 1592, 19 U.S.C.

1593a or 19 U.S.C. 1641), the petitioner shall be provided with a

written statement setting forth the decision on the matter and the

findings of fact and conclusions of law upon which the decision is

based.

3. Part 171 is amended by adding a new Appendix D to read as

follows:

Appendix D To Part 171--Guidelines for the Imposition and

Mitigation of Penalties for Violations of 19 U.S.C. 1593A

A monetary penalty incurred under section 593A, Tariff Act of

1930, as amended (19 U.S.C. 1593a; hereinafter referred to as

section 593A), may be remitted or mitigated under section 618,

Tariff Act of 1930, as amended (19 U.S.C. 1618; hereinafter referred

to as section 618), if it is determined that there exist such

mitigating circumstances as to justify remission or mitigation. The

guidelines below will be used by Customs in arriving at a just and

reasonable assessment and disposition of liabilities arising under

section 593A within the stated limitations. It is intended that

these guidelines shall be applied by Customs officers in prepenalty

proceedings, in determining the monetary penalty assessed in the

penalty notice, and in arriving at a final penalty disposition. The

assessed or mitigated penalty amount set forth in Customs

administrative disposition determined in accordance with these

guidelines does not limit the penalty amount which the Government

may seek in bringing a civil enforcement action pursuant to 19

U.S.C. 1593a(i).

(A) Violations of Section 593A

A violation of section 593A occurs when a person, through fraud

or negligence, seeks, induces, or affects, or attempts to seek,

induce, or affect, the payment or credit to that person or others of

any drawback claim by means of any document, written or oral

statement, or electronically transmitted data or information, or act

which is material and false, or any omission which is material, or

aids or abets any other person in the foregoing violation. There is

no violation if the falsity is due solely to clerical error or

mistake of fact unless the error or mistake is part of a pattern of

negligent conduct. Also, the mere nonintentional repetition by an

electronic system of an initial clerical error shall not constitute

a pattern of negligent conduct. Nevertheless, if Customs has drawn

the person's attention to the nonintentional repetition by an

electronic system of an initial clerical error, subsequent failure

to correct the error could constitute a violation of section 593A.

(B) Degrees of Culpability

There are two degrees of culpability under section 593A:

negligence and fraud.

(1) Negligence. A violation is determined to be negligent if it

results from an act or acts (of commission or omission) done with

actual knowledge of, or wanton disregard for, the relevant facts and

with indifference to, or disregard for, the offender's obligations

under the statute or done through the failure to exercise the degree

of reasonable care and competence expected from a person in the same

circumstances in ascertaining the facts or in drawing inferences

therefrom, in ascertaining the offender's obligations under the

statute, or in communicating information so that it may be

understood by the recipient. As a general rule, a violation is

determined to be negligent if it results from the offender's failure

to exercise reasonable care and competence to ensure that a

statement made is correct.

(2) Fraud. A violation is determined to be fraudulent if the

material false statement, omission or act in connection with the

transaction was committed (or omitted) knowingly, i.e., was done

voluntarily and intentionally, as established by clear and

convincing evidence.

(C) Assessment of Penalties

(1) Issuance of Prepenalty Notice. As provided in Sec. 162.77a

of the Customs Regulations (19 CFR 162.77a), if Customs has

reasonable cause to believe that a violation of section 593A has

occurred and determines that further proceedings are warranted, a

notice of intent to issue a claim for a monetary penalty shall be

issued to the person concerned. In issuing such prepenalty notice,

the appropriate Customs field officer shall make a tentative

determination of the degree of culpability and the amount of the

proposed claim. A prepenalty notice shall not be issued if the claim

does not exceed $1,000.

(2) Issuance of Penalty Notice. After considering

representations, if any, made by the person concerned pursuant to

the notice issued under paragraph (C)(1), the appropriate Customs

field officer shall determine whether any violation described in

section (A) has occurred. If a notice was issued under paragraph

(C)(1) and the appropriate Customs field officer determines that

there was no violation, Customs shall promptly issue a written

statement of the determination to the person to whom the notice was

sent. If the appropriate Customs field officer determines that there

was a violation, Customs shall issue a written penalty claim to the

person concerned. The written penalty claim shall specify all

changes in the information provided in the prepenalty notice issued

under paragraph (C)(1). The person to whom the penalty notice is

issued shall have a reasonable opportunity under section 618 to make

representations, both oral and written, seeking remission or

mitigation of the monetary penalty. At the conclusion of any

proceeding under section 618, Customs shall provide to the person

concerned a written statement which sets forth the final

determination and the findings of fact and conclusions of law on

which such determination is based.

(D) Maximum Penalties

(1) Fraud. In the case of a fraudulent violation of section

593A, the monetary penalty shall be in an amount not to exceed 3

times the actual or potential loss of revenue.

(2) Negligence.

(a) In General. In the case of a negligent violation of section

593A, the monetary penalty shall be in an amount not to exceed 20

percent of the actual or potential loss of revenue for the first

violation.

[[Page 51872]]

(b) Repetitive Violations. For the first negligent violation

that is repetitive (i.e., involves the same issue and the same

violator), the penalty shall be in an amount not to exceed 50

percent of the actual or potential loss of revenue. The penalty for

a second and each subsequent repetitive negligent violation shall be

in an amount not to exceed the actual or potential loss of revenue.

(3) Prior Disclosure.

(a) In General. Subject to paragraph (D)(3)(b), if the person

concerned discloses the circumstances of a violation of section 593A

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

investigation of such violation, the monetary penalty assessed under

this Appendix may not exceed:

(i) In the case of fraud, an amount equal to the actual or

potential revenue of which the United States is or may be deprived

as a result of overpayment of the claim; or

(ii) If the violation resulted from negligence, an amount equal

to the interest computed on the basis of the prevailing rate of

interest applied under 26 U.S.C. 6621 on the amount of actual

revenue of which the United States is or may be deprived during the

period that begins on the date of overpayment of the claim and ends

on the date on which the person concerned tenders the amount of the

overpayment.

(b) Condition Affecting Penalty Limitations. The limitations in

paragraph (D)(3)(a) on the amount of the monetary penalty to be

assessed apply only if the person concerned tenders the amount of

the overpayment made on the claim either at the time of the

disclosure or within 30 days (or such longer period as Customs may

provide) from the date of notice by Customs of its calculation of

the amount of overpayment.

(c) Burden of Proof. The person asserting lack of knowledge of

the commencement of a formal investigation has the burden of proof

in establishing such lack of knowledge.

(d) Commencement of Investigation. For purposes of this

Appendix, a formal investigation of a violation is considered to be

commenced with regard to the disclosing party, and with regard to

the disclosed information, on the date recorded in writing by

Customs as the date on which facts and circumstances were discovered

which caused Customs to believe that a possibility of a violation of

section 593A existed.

(e) Exclusivity. Penalty claims under section D shall be the

exclusive civil remedy for any drawback-related violation of section

593A.

(E) Deprivation of Lawful Revenue

Notwithstanding section 514, Tariff Act of 1930, as amended (19

U.S.C. 1514), if the United States has been deprived of lawful

duties and taxes resulting from a violation of section 593A, Customs

shall require that such duties and taxes be restored whether or not

a monetary penalty is assessed.

(F) Final Disposition of Penalty Cases When the Drawback Claimant

Is Not a Certified Participant in the Drawback Compliance Program

(1) In General. Customs shall consider all information in the

petition and all available evidence, taking into account any

mitigating, aggravating, and extraordinary factors, in determining

the final assessed penalty. All factors considered should be stated

in the decision.

(2) Penalty Disposition When There Has Been No Prior Disclosure.

(a) Nonrepetitive Negligent Violation. The final penalty

disposition shall be in an amount ranging from a minimum of 10

percent of the actual or potential loss of revenue to a maximum of

20 percent of the actual or potential loss of revenue.

(b) Repetitive Negligent Violation.

(i) First Repetitive Negligent Violation. The final penalty

disposition shall be in an amount ranging from a minimum of 25

percent of the actual or potential loss of revenue to a maximum of

50 percent of the actual or potential loss of revenue.

(ii) Second and Each Subsequent Repetitive Negligent Violation.

The final penalty disposition shall be in an amount ranging from a

minimum of 50 percent of the actual or potential loss of revenue to

a maximum of 100 percent of the actual or potential loss of revenue.

(c) Fraudulent Violation. The final penalty disposition shall be

in an amount ranging from a minimum of 1.5 times the actual or

potential loss of revenue to a maximum of 3 times the actual or

potential loss of revenue.

(3) Penalty Disposition When There Has Been a Prior Disclosure.

(a) Negligent Violation. The final penalty disposition shall be

in an amount equal to the interest determined in accordance with

paragraph (D)(3)(a)(ii).

(b) Fraudulent Violation. The final penalty disposition shall be

in an amount equal to 100 percent of the actual or potential loss of

revenue.

(4) Mitigating Factors. The following factors shall be

considered in mitigation of the proposed or assessed penalty claim

or final penalty amount, provided that the case record sufficiently

establishes their existence. The list is not exclusive.

(a) Contributory Customs Error. This factor includes misleading

or erroneous advice given by a Customs official in writing to the

alleged violator, but this factor may be applied in such a case only

if it appears that the alleged violator reasonably relied upon the

written information and the alleged violator fully and accurately

informed Customs of all relevant facts. The concept of comparative

negligence may be utilized in determining the weight to be assigned

to this factor. If the Customs error contributed to the violation,

but the alleged violator is also culpable, the Customs error is to

be considered as a mitigating factor. If it is determined that the

Customs error was the sole cause of the violation, the proposed or

assessed penalty is to be cancelled.

(b) Cooperation with the Investigation. To obtain the benefits

of this factor, the alleged violator must exhibit cooperation beyond

that expected from a person under investigation for a Customs

violation. An example of the cooperation contemplated includes

assisting Customs officers to an unusual degree in auditing the

books and records of the alleged violator (e.g., incurring

extraordinary expenses in providing computer runs solely for

submission to Customs to assist the agency in cases involving an

unusually large number of entries and/or complex issues). Another

example consists of assisting Customs in obtaining additional

information relating to the subject violation or other violations.

Merely providing the books and records of the alleged violator may

not be considered cooperation justifying mitigation inasmuch as

Customs has the right to examine an importer's books and records

pursuant to 19 U.S.C. 1508-1509.

(c) Immediate Remedial Action. This factor includes the payment

of the actual loss of revenue prior to the issuance of a penalty

notice and within 30 days after Customs notifies the alleged

violator of the actual loss of revenue attributable to the

violation. In appropriate cases, where the alleged violator provides

evidence that, immediately after learning of the violation,

substantial remedial action was taken to correct organizational or

procedural defects, immediate remedial action may be granted as a

mitigating factor. Customs encourages immediate remedial action to

ensure against future incidents of non-compliance.

(d) Prior Good Record. Prior good record is a factor only if the

alleged violator is able to demonstrate a consistent pattern of

filing drawback claims without violation of section 593A, or any

other statute prohibiting the making or filing of a false statement

or document in connection with a drawback claim. This factor will

not be considered in alleged fraudulent violations of section 593A.

(e) Inability to Pay the Customs Penalty. The party claiming the

existence of this factor must present documentary evidence in

support thereof, including copies of income tax returns for the

previous 3 years and an audited financial statement for the most

recent fiscal quarter. In certain cases, Customs may waive the

production of an audited financial statement or may request

alternative or additional financial data in order to facilitate an

analysis of a claim of inability to pay (e.g., examination of the

financial records of a foreign entity related to the U.S. company

claiming inability to pay). In addition, the alleged violator must

present information reflecting ownership and related domestic and

foreign parties and must provide information reflecting its current

financial condition, including books and records of account, bank

statements, other tax records (for example, sales tax returns) and a

list of assets with current values; if the alleged violator is a

closely held corporation, similar current financial information must

be provided on the shareholders, wherever they are located.

(f) Customs Knowledge. This factor may be used in non-fraud

cases if it is determined that Customs had actual knowledge of a

violation and failed, without justification, to inform the violator

so that it could have taken earlier remedial action. This factor

shall not be applicable when a substantial delay in the

investigation is attributable to the alleged violator.

(5) Aggravating Factors. Certain factors may be determined to be

aggravating factors in calculating the amount of the proposed or

assessed penalty claim or the amount of the

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final administrative penalty. The presence of one or more

aggravating factors may not be used to raise the level of

culpability attributable to the alleged violations, but may be used

to offset the presence of mitigating factors. The following factors

shall be considered ``aggravating factors'', provided that the case

record sufficiently establishes their existence. The list is not

exclusive.

(a) Obstructing an investigation or audit.

(b) Withholding evidence.

(c) Providing misleading information concerning the violation.

(d) Prior substantive violations of section 593A for which a

final administrative finding of culpability has been made.

(e) Failure to comply with a Customs summons or lawful demand

for records.

(G) Drawback Compliance Program Participants

(1) In General. Special alternative procedures and penalty

assessment standards apply in the case of negligent violations of

section 593A committed by persons who are certified as participants

in the Customs drawback compliance program and who are generally in

compliance with the procedures and requirements of that program.

Provisions regarding the operation of the drawback compliance

program are set forth in part 191 of the Customs Regulations (19 CFR

part 191).

(2) Alternatives to Penalties. When a participant described in

paragraph (G)(1) commits a violation of section 593A, in the absence

of fraud or repeated violations and in lieu of a monetary penalty,

Customs shall issue a written notice of the violation (warning

letter).

(a) Contents of Notice. The notice shall:

(i) State that the person has violated section 593A;

(ii) Explain the nature of the violation; and

(iii) Warn the person that future violations of section 593A may

result in the imposition of monetary penalties and that repetitive

violations may result in removal of certification under the drawback

compliance program until the person takes corrective action that is

satisfactory to Customs.

(b) Response to Notice. Within 30 days from the date of mailing

of the written notice, the person shall notify Customs in writing of

the steps that have been taken to prevent a recurrence of the

violation. If the person fails to provide such notification in a

timely manner, any penalty assessed for a repetitive violation under

paragraph (G)(3) shall not be subject to mitigation under this

Appendix.

(3) Repetitive Violations.

(a) In General. A person who has been issued a written notice

under paragraph (G)(2) and who subsequently commits a negligent

violation that is repetitive (i.e., involves the same issue), and

any other person who is a participant described in paragraph (G)(1)

and who commits a repetitive negligent violation, is subject to one

of the following monetary penalties:

(i) An amount not to exceed 20 percent of the loss of revenue

for the first repetitive violation that occurs within three years

from the date of the violation of which it is repetitive;

(ii) An amount not to exceed 50 percent of the loss of revenue

for the second repetitive violation that occurs within three years

from the date of the first of two violations of which it is

repetitive; and

(iii) An amount not to exceed 100 percent of the loss of revenue

for the third and each subsequent repetitive violation that occurs

within three years from the date of the first of three or more

violations of which it is repetitive.

(b) Repetitive Violations Outside 3-year Period. If a

participant described in paragraph (G)(1) commits a negligent

violation that is repetitive but that did not occur within 3 years

of the violation of which it is repetitive, the new violation shall

be treated as a first violation for which a written notice shall be

issued in accordance with paragraph (G)(2), and each repetitive

violation subsequent thereto that occurs within any 3-year period

described in paragraph (G)(3)(a) shall result in the assessment of

the applicable monetary penalty prescribed in that paragraph.

(4) Final Penalty Disposition When There Has Been No Prior

Disclosure.

(a) In General. Customs shall consider all information in the

petition and all available evidence, taking into account any

mitigating factors (see paragraph (F)(4)), aggravating factors (see

paragraph (F)(5)), and extraordinary factors in determining the

final assessed penalty. All factors considered should be stated in

the decision.

(b) First Repetitive Negligent Violation Within 3 Years of

Violation Handled Under Paragraph (G)(2). The final penalty

disposition shall be in an amount ranging from a minimum of 10

percent of the loss of revenue to a maximum of 20 percent of the

loss of revenue.

(c) Second Repetitive Negligent Violation Within 3 Years of

Violation Handled Under Paragraph (G)(2) or (G)(3). The final

penalty disposition shall be in an amount ranging from a minimum of

25 percent of the loss of revenue to a maximum of 50 percent of the

loss of revenue.

(d) Third and Each Subsequent Repetitive Negligent Violation

Within 3 Years of Violation Handled Under Paragraph (G)(2) or

(G)(3). The final penalty disposition shall be in an amount ranging

from a minimum of 50 percent of the loss of revenue to a maximum of

100 percent of the loss of revenue.

(e) Fraudulent Violations. The final penalty disposition shall

be the same as in the case of fraudulent violations committed by

persons who are not participants in the drawback compliance program

(see paragraph (F)(2)(c)).

(5) Final Penalty Disposition When There Has Been A Prior

Disclosure. The final penalty disposition shall be the same as in

the case of persons who are not participants in the drawback

compliance program (see paragraph (F)(3)).

PART 191--DRAWBACK

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

follows:

Authority: 5 U.S.C. 301; 19 U.S.C. 66, 1202 (General Note 20,

Harmonized Tariff Schedule of the United States), 1313, 1624.

* * * * *

Secs. 191.191-191.195 also issued under 19 U.S.C. 1593a.

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

follows:

Sec. 191.194 Action on application to participate in compliance

program.

* * * * *

(e) Certification removal--(1) Grounds for removal. The

certification for participation in the drawback compliance program by a

party may be removed when any of the following conditions are

discovered:

(i) The certification privilege was obtained through fraud or

mistake of fact;

(ii) The program participant is no longer in compliance with the

Customs laws and regulations, including the requirements set forth in

Sec. 191.192;

(iii) The program participant repeatedly files false drawback

claims or false or misleading documentation or other information

relating to such claims; or

(iv) The program participant is convicted of any felony or has

committed acts which would constitute a misdemeanor or felony involving

theft, smuggling, or any theft-connected crime.

(2) Removal procedure. If Customs determines that the certification

of a program participant should be removed, the applicable drawback

office shall serve the program participant with written notice of the

removal. Such notice shall inform the program participant of the

grounds for the removal and shall advise the program participant of its

right to file an appeal of the removal in accordance with paragraph (f)

of this section.

(3) Effect of removal. The removal of certification shall be

effective immediately in cases of willfulness on the part of the

program participant or when required by public health, interest, or

safety. In all other cases, the removal of certification shall be

effective when the program participant has received notice under

paragraph (e)(2) of this section and either no appeal has been filed

within the time limit prescribed in paragraph (f)(2) of this section or

all appeal procedures thereunder have been concluded by a decision that

upholds the removal action. Removal of certification may subject the

affected person to penalties.

(f) Appeal of certification denial or removal--(1) Appeal of

certification denial. A party may challenge a denial of an application

for certification as a participant in the drawback compliance program

by filing a written appeal, within 30 days of issuance of the notice of

denial, with the applicable drawback

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office. A denial of an appeal may itself be appealed to Customs

Headquarters, Office of Field Operations, Office of Trade Operations,

within 30 days after issuance of the applicable drawback office's

appeal decision. Customs Headquarters will review the appeal and will

respond with a written decision within 30 days after receipt of the

appeal unless circumstances require a delay in issuance of the

decision. If the decision cannot be issued within the 30-day period,

Customs Headquarters will advise the appellant of the reasons for the

delay and of any further actions which will be carried out to complete

the appeal review and of the anticipated date for issuance of the

appeal decision.

(2) Appeal of certification removal. A party who has received a

Customs notice of removal of certification for participation in the

drawback compliance program may challenge the removal by filing a

written appeal, within 30 days after issuance of the notice of removal,

with the applicable drawback office. A denial of an appeal may itself

be appealed to Customs Headquarters, Office of Field Operations, Office

of Trade Operations, within 30 days after issuance of the applicable

drawback office's appeal decision. Customs Headquarters shall consider

the allegations upon which the removal was based and the responses made

thereto by the appellant and shall render a written decision on the

appeal within 30 days after receipt of the appeal.

Approved: August 3, 1998.

Robert S. Trotter,

Acting Commissioner of Customs.

Dennis M. O'Connell,

Acting Deputy Assistant Secretary of the Treasury.

[FR Doc. 98-25895 Filed 9-28-98; 8:45 am]

BILLING CODE 4820-02-P