PREPARED STATEMENT OF ROBERT E. HERZSTEIN, CHAIRMAN, STANDING Mr. Chairman, I am Robert E. Herzstein, a member of the District of Columbia Bar and currently Chairman of the American Bar Association's Standing Committee on Customs Law. I appreciate the opportunity to appear before you as the representative of the American Bar Association to express our support for legislation such as H.R. 8149, with some modifications which I will discuss, to reform Section 592, the provision of the Tariff Act of 1930 which imposes penalties for erroneous statements to the Customs Service in connection with the importation of merchandise. The Association's House of Delegates has adopted two resolutions calling for reform of Section 592. The House of Delegates is the Association's highest "legislative" or policy-making body, and consists of a total of 352 members coming from every state in the Union. Thus, I do not speak to you on behalf of a particular group of businesses whose self-interest would be advanced by new legislation, nor do I speak merely on behalf of a special group of practicing lawyers who represent parties affected by this statute-though indeed some of us have done so and have thereby discovered how unfair this statute is. Instead, I speak on behalf of the entire American Bar Association in calling on the Congress to remedy a most unsatisfactory situation in which government action, having vast adverse effects on private persons and businesses, is excessively harsh, inconsistent with our legal tradition, and inadequately regulated by the rule of law. The Committee is considering the proposed "Customs Procedural Reform Act of 1977," which would revise many of the antiquated provisions in the United States customs laws, and in particular would amend the antiquated provisions of section 592 of the Tariff Act of 1930. Reform of Section 592 is needed not merely for efficiency and economy, but to eliminate the following defects from the statute: It is disruptive of the business of legitimate importers, far beyond what is necessary to achieve its purposes. It is unfair in that the penalty imposed under Section 592 may be excessive in amount and bears no reasonable relation to the offense which has been committed. It empowers and requires government officials to make decisions with vast impact but which are not subject to the rule of law. Rudimentary due process. protections are missing, and there are no adequate opportunities for meaningful judicial review. It is inconsistent with the standard for customs penalties set forth in the General Agreement on Tariffs and Trade, which is the basic international charter for cooperation in conduct of trade among nations. I. THE PROVISIONS OF SECTION 592 AND RELATED STATUTES Section 592 makes it unlawful for any person to import or attempt to import merchandise into the United States "by means of any fraudulent or false invoice, declaration, affidavit, letter, paper, or by means of any false statement, written or verbal, or by means of any false or fraudulent practice or appliance," unless that person has "reasonable cause to believe the truth of such statement." The statutory penalty is forfeiture of the merchandise itself or a fine equal to its domestic value. By its terms the statute applies even where the false statement would not result in an underpayment of duty, and the term "false statement" is considered by the Customs Service to embrace negligent as well as international statements. The penalty imposed by Section 592 is generally administratively assessed' by the Customs Service. Then Customs officials may, in their discretion, reduce the penalty. Under 19 U.S.C. § 1618, they may mitigate penalties under Section 592 "upon such terms and conditions as [they] deem just and reasonable." If the importer refuses to pay a penalty (whether or not mitigated), Section 592 may be enforced in an action commenced by the United States in a United States district court. Once the United States has established "probable cause" to believe that a violation of the statute has occurred-a task which can be accomplished simply by demonstrating an error in the entry documents-the. burden of proof is placed on the respondent to show that in fact a violation has: not occurred. 19 U.S.C. § 1615. II. THE LEGAL DEFECTS IN SECTION 592 AND ITS ADMINISTRATION A. The Penalty Imposed Under Section 592 May Bear No Relationship to the Nature or Consequences of the Offense The amount of the potential penalty under Section 592 is excessive. The only statutory limitation on the penalty is the United States value of the merchandise covered by the false statement, which may of course run to many thousands or millions of dollars. Thus the sanctions available under this civil penalty statute can far exceed the penalties normally found in criminal statutes, even for felonies. It is particularly anomalous that the civil penalty which may be imposed under Section 592 may easily exceed the maximum $5,000 fine that can be imposed for a criminal conviction under 18 U.S.C. § 542, a criminal statute which is the counterpart of Section 592. This is so even though the standards of proof that prevail in establishing a violation of the criminal statute are, of course, much stricter than in the civil penalty forfeiture action under Section 592. Further, the sanctions imposed by Section 592 are in most cases out of all proportion to the seriousness of the offense. When penalties are established for most legal infractions-by the legislature or the courts-careful consideration is customarily given to the degree of culpability of the offender and to the consequences of his offense. However, in Section 592 cases there is no predictable correlation between the value of goods in a given shipment and the culpability of the importer responsible for an error in the entry papers or the amount of duty underpaid. Thus, under Section 592 a ten million dollar aircraft could be forfeited for false statement that resulted from mere negligence and produced a duty underpayment of a few hundred dollars. The value of shipments entered over a period of months or years and amounting to tens of millions of dollars could be forfeited upon discovery of errors resulting from negligence of an importer's clerical personnel, even though they produced relatively small duty underpayments. In a recent proceeding which attracted wide attention, a penalty notice was issued to Standard-Kollsman, Inc., an electronics manufacturer, claiming a penalty of some $42.5 million. The duty underpayment which give rise to the penalty proceeding was reported to be around $115,000, i.e., about 0.3 percent of the penalty asserted. The Treasury Department has stated that it felt the total duty underpayment was about $1 million, which is about 2.35 percent of the penalty asserted. It is interesting to note that if Standard-Kollsman had underpaid its taxes by $1 million the highest civil penalty that could have been assessed against it would have been $500,000, if the underpayment had been deliberate, or $100,000, if it had been negligent. Although statutory penalties are frequently mitigated by the Customs Service, the mere issuance of a penalty notice of such magnitude creates an extraordinarily serious problem for the firm receiving it. Publicly held companies must disclose contingent liabilities of this kind, and even a privately held company attempting to obtain financing would have to reveal the contingent liability in its financial statements. It is almost certainly no coincidence that the publicly quoted price of Standard-Kollsman's stock dropped by 20 percent in the four weeks following the issuance of the penalty notice, but recovered most of this on the day after the penalty had been mitigated to $1.65 million. Since mitigation of the penalty is a matter of discretion with customs officials, and may vary within a vast range from zero to the full value of the goods, it is very difficult for lawyers and accountants to give a company guidance on the amount and seriousness of the contingent liability it should disclose to its shareholders. The unreasonableness and excessiveness of the sanctions under Section 592 are particularly clear when they are imposed upon a person who is innocent of any wrongdoing or has been merely negligent. As stated above, the Customs Service has taken the position that a penalty may be imposed on a person who made a false statement because of negligence. Indeed, some lawyers believe that the statute authorizes forfeiture of goods in the possession of a wholly innocent importer, when import documents made out by the foreign shipper contain false statements. The excessive size of the penalty and its lack of any reasonable relationship to the state of mind of the violator or to the amount of harm caused by the violation raise substantial issues under the Due Process Clause of the Fifth Amendment-the violator may arguably be arbitrarily and capriciously deprived of his property. Further, it might be argued that Section 592 permits unreasonable seizures of property in violation of the Fourth Amendment's prohibition against unreasonable searches and seizures or involves the imposition of an excessive fine in violation of the provisions of the Eighth Amendment. In addition, the penalties imposed under Section 592 would seem to contravene the policy expressed in a provision of the General Agreement on Tariffs and Trade: "No contracting party shall impose substantial penalties for minor breaches of customs regulations or procedural requirements. In particular, no penalty in respect of any omission or mistake in customs documentation which is easily rectifiable and obviously made without fraudulent intent or gross negligence shall be greater than necessary to serve merely as a warning." Art. VIII (3). The GATT does not commit the United States to action inconsistent with prior legislation. Since Section 592 was a United States law prior to the United States undertaking to apply the provisions of GATT, it has not been legally superseded by this GATT provision. However, since United States policy has long sought the elimination of unnecessary import barriers-particularly those of a capricious and discretionary nature-it would make good sense to bring United States laws into line with this eminently reasonable GATT provision. B. The Customs Service Procedures for Assessing a Penalty Pursuant to Section 592 Do Not Provide Due Process Protection to the Alleged Violators Penalties have been assessed and seizures have been made by Customs under Section 592 without procedural protections normally associated with due process. There has generally been no adequate notice given of the facts upon which Customs bases its conclusions that a penalty or forfeiture has been incurred, no hearing before an impartial hearing examiner, no right of crossexamination of adverse witnesses, and no final determination with findings of fact and statements of the reasons for the decision. The penalty notices are usually prepared by junior officials in the Customs Service, who may have little appreciation of the serious financial consequences that may follow the mere issuance of a notice, and often have received no more than a cursory review by the District Director before being issued. Moreover, it seems that in some cases penalty notices may have been issued even where the Customs officials do not have reason to believe that Section 592 was violated, simply as a convenient means of correcting nonculpapable errors. The notice is usually extremely brief and conclusive in nature, and requests for additional information in the past have rarely produced useful results. Once a penalty notice has been issued, customs officials at the local level may be reluctant to revoke it, even though the subsequently developed facts indicate that the statute has not been violated. Having put the respondent to the time and expense of investigating facts and preparing a petition for mitigation they may be reluctant to admit that the notice may have been issued in error, and the temptation to pass the matter on to Customs Headquarters in Washington for final decision is very strong. Of course, Customs Headquarters relies heavily on the factual findings and recommendations of the local officials in reaching its decision. Determinations of liability apparently are made by Customs principally on the basis of information developed by Customs agents during their field investigation. The results of that investigation have not customarily been made available to the person receiving the penalty notice. Because of the absence of due process procedures, efforts to contest penalty assessment under Section 592 generally have taken the form of negotiation between the alleged violator and the Service, rather than an adjudicatory fact-finding process. A recent action by the Customs Service may provide some procedural rights to the importer. On January 16, 1975, the Service published new regulations which provide that, prior to issuing a penalty notice, the District Director must in most circumstances notify the importer of his intention to issue such notice and must describe the merchandise involved, the provisions of law violated and the acts or omissions constituting the violation. The importer may reply to such notice in writing within 30 days "either refuting the allegations or establishing that reasonable cause existed for believing that the acts or omissions described in the allegations were proper.” 40 Fed. Reg. 2797-98 (Jan. 16, 1975). In addition, the District Director may permit oral argument. The Dis trict Director must consider the reply of the importer, determine whether it disproves the claim and either notify the importer that a penalty notice will not issue or issue the penalty notice. The degree of relief to be obtained by the importers from this prepenaltynotice procedure depends in great part on how it is implemented: the specificity of the notice provided, the frequency with which hearings are held, etc. In any event, the procedure will not provide a hearing as a matter of right before an impartial decisionmaker nor will it require a determination based on findings of fact and conclusions of law. Where a seizure is involved, the alleged violator is at the mercy of the Customs Service. Seizure can be made upon suspicion of a Section 592 violation, even before the penalty notice is issued, and unless the claimant is willing to prepay the penalty (or a substantial portion thereof set by the Customs officials in their discretion), the goods remain under seizure until the service makes its final determination on the amount of penalty it will impose. C. Procedures Followed by the Customs Service in Determining Whether To Mitigate a Penalty Also Lack Adequate Safeguards for the Petitioner A person receiving a penalty notice may petition the Customs Service for mitigation or remission of the penalty. The proceedings relating to such petition are informal and discretionary with the Service. No provision is made for a hearing, nor is it clear that the petitioner can obtain full information relating to the reasons for the imposition of the penalty. The Customs Service does not give reasons for its decision whether to mitigate, nor does it make factual findings on which it bases its decision. The Service has recently taken a step in the right direction by publishing standards relating to mitigation. 39 Fed. Reg. 39061 (Nov. 5, 1974); 40 Fed. Reg. 2797 (Jan. 16, 1975). Previously, a petitioner had little means of determining what information would be relevant to the mitigation determination. Now the published guidelines indicate that the usual mitigated penalty consists of a multiple of the duty underpayment and that the multiple varies according to the state of mind of the violator. But the Customs Service has still refused to disclose the multiples actually used by it. D. Judicial Review of the Customs Service's Decision Is Inadequate The sole method for obtaining judicial review of a penalty to date has been for the person who has been penalized to refuse to pay the penalty. In such a situation the United States then brings an enforcement action in a district court. In an enforcement action the person penalized loses the benefit of any mitigation which may have been administratively granted. The court will only determine whether Section 592 has been violated. It has no discretion under the statute to o mitigate the amount of the penalty (the full United States value of the goods), and the government refuses to mitigate if a case goes to trial. In the case of Standard-Kollsman, described above, the Customs Service agreed to mitigate a $42.5 million penalty to $1.65 million. If Standard-Kollsman had wished to challenge the Customs Service's determination that Section 592 had been violated, it would have had to take into consideration the fact that the consequence of losing in court would have been, not a $1.65 million penalty, but the full original assessment of $42.5 million. Given the breadth of the statute and the fact that the burden of proof in a Section 592 proceeding is on the respondent, it is clear that the respondent cannot afford to take the case to court unless he is confident of winning. Even an estimated 95 percent chance of success would hardly justify risking a penalty of $42.5 million. Thus, in order to obtain judicial review of a penalty, the person penalized must forego the mitigation of a penalty which is in all probability excessive and unrelated to the offense involved. One might well argue that this requirement places an unconstitutional burden on the right to judicial review. The situation is analagous to a procedure whereby a criminal defendant could only appeal from conviction upon pain of receiving the maximum sentence, instead of that imposed by the trial court, if he does not prevail. Such a requirement would clearly be unconstitutional. See, e.g., North Carolina v. Pearce, 395 U.S. 711, 724 (1969), in which the Supreme Court said: "A court is without right to *** put a price on an appeal. A defendant's exercise of a right of appeal must be free and unfettered. *** [I]t is unfair to use the great power given to the court to determine sentence to place the defendant in the dilemma of making an unfree choice." 94-545-77-20 The Supreme Court faced a somewhat similar situation in Ex parte Young, : 209 U.S. 123 (1908). There a railroad company challenged the constitutionality of a Minnesota statute which imposed heavy fines and possible imprisonment for failure to charge the rates established by a state commission. The Court held that the enforcement provisions of the act were "unconstitutional on their face," 209 U.S. at. 148, since they effectively prevented judicial review of the validity of the ratemaking power. The court further stated: "It may therefore be said that when the penalties for disobedience are by. fines so enormous and imprisonment so severe as to intimidate the company and its officers from resorting to the courts to test the validity of the legislation, the result is the same as if the law in its terms prohibited the company from seeking judicial construction of laws which deeply affect its rights ***. "Now, to impose upon a party interested the burden of obtaining a judicial decision of such a question (no prior hearing having ever been given) only upon the condition that if unsuccessful he must suffer imprisonment and pay fines as provided in these acts, is, in effect, to close up all approaches to the courts, and thus prevent any hearing upon the question whether the rates as provided by the acts are not too low, and therefore invalid." 209 U.S. at 147-48. As mentioned above, a further inadequacy relating to judicial review is that the burden of proof in an enforcement action is on the respondent rather than the government. Thus, even in court the government need not justify in detail its imposition of the penalty. III. CONCLUSIONS A. The Need To Restore the Rule of Law Over Customs Penalties Now that we have reviewed these four legal defects individually, let us look at the overall effect of all of them. When we do, we see that, as often happens in human affairs, unlike geometry, the whole of the evil is greater than the sum of its parts. The result of Section 592, as it is put into practice, is to place vast governmental power-including the power to cast individuals and firms into financial ruin-into the hands of government officials without guiding or restricting their actions through legal rules. The rule of law is replaced by the rule of man. A person or firm engaged in importing can find himself assessed with an enormous penalty relatively far out of proportion to either the misconduct for which he is accused or the effects of that misconduct. He has nothing approaching the usual procedural due process rights in attempting to understand the charges and defend himself. His only hope is to negotiate a reduction of the penalty-in the complete discretion of Customs, which is judge, jury, and prosecutor. And he is effectively deprived of an opportunity to have the court review the lawfulness or reasonableness of the officials' action (i) in imposing the penalty initially or (ii) in deciding on the ultimate amount to be paid. The enormous range of the discretion exercised by Customs officials in administering Section 592 can be illustrated in one way by comparing the amount of the penalties initially assessed against importers with the amount to which these assessments were ultimately mitigated. In 1975, the penalties assessed under Section 592 totaled over $500 million. Customs officials, in their discretion, agreed to reduce these to a total of $16 million. (Table A) A look at this data prompts one to ask: How did Customs officials decide on these penalty levels? Were they excessively harsh or lenient with the importers concerned? Was one importer treated the same as others similarly situated? Were the officials too generous with funds that the government might have been entitled to? To what extent did importers agree to pay these mitigated amounts because they could seek judicial review only by greatly increasingly their financial exposure? I am not aware of any process by which a member of the public can even ascertain the answer to these questions. This process of making persons bargain with government officials who are unguided by rules and insulated from court review is of course fraught with the danger of injustice and abuse. It is a process we associate, regretfully and sometimes scornfully, with totalitarianism or primitively governed countries. It is quite unlike the regularity, objectivity, and fairness we normally insist upon in relations between our government and the governed. I should add that, in deploring the excessive discretion this statute vests in Customs officials, I do not want my comments to be interpreted in any way as |