Since September 11, U.S. Customs and Border Protection has been stepping up its scrutiny of foreign travelers and their identification documents. Unfortunately for business, the agency also has been coming down hard on American importers, especially those taking advantage of NAFTA's preferential duties by importing goods from Mexico and Canada.

Making matters worse, U.S. courts have been siding with Customs so far. In the most recent case, the federal court for the Western District of Texas on Sept. 26 denied Ford Motor Co.'s motion to dismiss a Customs lawsuit seeking $42 million in NAFTA record-keeping damages against the automaker. If upheld the decision may force importers to provide Customs with thousands of documents they didn't create and have no control over. Most of the documents Customs wants were created and maintained by the suppliers.

“U.S. v. Ford is an earth-shattering ruling for U.S. importers and related parties who will be subject to draconian record-keeping penalties if they are unable to supply thousands of supporting documents that are under exporters' control,” says Lars Hjelm, a partner at Akin Gump Strauss Hauer & Feld. “And what makes the decision even more significant is the fact that Customs has taken an increasingly aggressive approach to record-keeping requirements and enforcement.”

The difficulty originates, appropriately enough, with a document known as a “NAFTA Certificate of Origin.”

Records Responsibility
To qualify for NAFTA's preferential duty treatment, goods must “originate” in the U.S., Canada or Mexico. The certificate of origin is a verification that an exporter's shipment has met this requirement. But the one-page document has disproportionately significant consequences.

“A certificate of origin attached to an invoice pretty well guarantees duty-free access across the NAFTA zone,” says Barry Appleton, a partner at Appleton & Associates International Lawyers, whose offices are in Washington, D.C., and Toronto.

But while the exporter provides the certificate, the importer must maintain “entry records” and supply them to Customs on demand. NAFTA's list of required entry records includes “NAFTA Certificate[s] of Origin and supporting records.” U.S. law (not NAFTA) mandates the imposition of severe penalties for failing to produce entry records.

In 1996 Ford imported thousands of automotive products from a Mexican company, Coclisa, and claimed preferential treatment for the goods based on Coclisa's certificates of origin. At the time Coclisa was a wholly owned subsidiary of Ford. Acting as agents of Coclisa, Ford employees prepared and completed the certificates. In 2001 Customs officials served Ford with an administrative summons demanding production of documents relating to the imported products' origins. Coclisa had created and maintained these documents.

“Customs was telling Ford it had an obligation to produce all records supporting the certificate of origin, regardless of where they were or who created them,” Appleton says. “That's difficult in a globalized world where product components are coming from all over the place.”

In any event Ford refused to produce the records, claiming the documents sought were not “entry records” but “foreign producer records” which only the exporter had an obligation to maintain. U.S. Customs responded by seeking a $41 million fine and suing in Texas District Court to collect it.

Ford moved to dismiss pointing out that U.S. Customs' own publication, the NAFTA Focused Assessment Program Guidelines, stated importers had no responsibility to maintain supporting documents for products certified by exporters on certificates of origin.

This contradiction didn't sway District Judge David Briones.

Maintaining Documentation
As Briones saw it the Guidelines did not have the force of law and couldn't override NAFTA requirements. In his view the documents Customs demanded were “supporting records” and therefore qualified as “entry records.”

“Ford is correct that exporters are statutorily required to maintain these supporting records,” Briones wrote. “However, this requirement does not alter the classification of the records as entry records, nor does the regulation relieve the importer of its duty to maintain said records.”

The fact that the importer created the supporting records “is irrelevant to their classification,” Briones concluded.

Especially damning to Ford's case was that it had signed the certificates on behalf of Coclisa.

“Irrespective of whether Coclisa, as the exporter of the automotive goods, is responsible for issuing and maintaining the NAFTA Certificates of Origins, Ford assumed those duties here when it acted as Coclisa's agent,” Briones wrote.

The upshot was the case could proceed to trial. Unless a trial or subsequent appeals produce a different result, however, importers will be in a tough spot.

“As things stand now, companies like Ford will have to police their NAFTA suppliers,” Appleton says. “That will be costly. There's also the question of whether U.S. companies want to assume the liabilities that could arise from having access to the records of foreign companies.”

Arguably, the decision runs contrary to NAFTA's free trade tenets.

“The decision in U.S. v. Ford is mildly protectionist,” Appleton says. “People will be trying to buy from U.S. suppliers because it will be easier to prove origin.” According to Appleton, the decision also has implications for logistics companies and their customers. “Companies such as FedEx and UPS rely on basic documentation, like the bare certificates of origin,” he says. “But they're responsible for payment of the duty, so they may decide they have to enhance the quality of the documentation they request. In a just-in-time economy that straddles North America, this will cause serious obstacles.”

For his part, Hjelm says all is not lost–yet. “Remember the case isn't over and it still has to go to trial,” he says.

Still, given the well-reasoned nature of Briones' 20-page decision, the trial could be as difficult for Ford as providing the supporting documentation demanded.

Since September 11, U.S. Customs and Border Protection has been stepping up its scrutiny of foreign travelers and their identification documents. Unfortunately for business, the agency also has been coming down hard on American importers, especially those taking advantage of NAFTA's preferential duties by importing goods from Mexico and Canada.

Making matters worse, U.S. courts have been siding with Customs so far. In the most recent case, the federal court for the Western District of Texas on Sept. 26 denied Ford Motor Co.'s motion to dismiss a Customs lawsuit seeking $42 million in NAFTA record-keeping damages against the automaker. If upheld the decision may force importers to provide Customs with thousands of documents they didn't create and have no control over. Most of the documents Customs wants were created and maintained by the suppliers.

“U.S. v. Ford is an earth-shattering ruling for U.S. importers and related parties who will be subject to draconian record-keeping penalties if they are unable to supply thousands of supporting documents that are under exporters' control,” says Lars Hjelm, a partner at Akin Gump Strauss Hauer & Feld. “And what makes the decision even more significant is the fact that Customs has taken an increasingly aggressive approach to record-keeping requirements and enforcement.”

The difficulty originates, appropriately enough, with a document known as a “NAFTA Certificate of Origin.”

Records Responsibility
To qualify for NAFTA's preferential duty treatment, goods must “originate” in the U.S., Canada or Mexico. The certificate of origin is a verification that an exporter's shipment has met this requirement. But the one-page document has disproportionately significant consequences.

“A certificate of origin attached to an invoice pretty well guarantees duty-free access across the NAFTA zone,” says Barry Appleton, a partner at Appleton & Associates International Lawyers, whose offices are in Washington, D.C., and Toronto.

But while the exporter provides the certificate, the importer must maintain “entry records” and supply them to Customs on demand. NAFTA's list of required entry records includes “NAFTA Certificate[s] of Origin and supporting records.” U.S. law (not NAFTA) mandates the imposition of severe penalties for failing to produce entry records.

In 1996 Ford imported thousands of automotive products from a Mexican company, Coclisa, and claimed preferential treatment for the goods based on Coclisa's certificates of origin. At the time Coclisa was a wholly owned subsidiary of Ford. Acting as agents of Coclisa, Ford employees prepared and completed the certificates. In 2001 Customs officials served Ford with an administrative summons demanding production of documents relating to the imported products' origins. Coclisa had created and maintained these documents.

“Customs was telling Ford it had an obligation to produce all records supporting the certificate of origin, regardless of where they were or who created them,” Appleton says. “That's difficult in a globalized world where product components are coming from all over the place.”

In any event Ford refused to produce the records, claiming the documents sought were not “entry records” but “foreign producer records” which only the exporter had an obligation to maintain. U.S. Customs responded by seeking a $41 million fine and suing in Texas District Court to collect it.

Ford moved to dismiss pointing out that U.S. Customs' own publication, the NAFTA Focused Assessment Program Guidelines, stated importers had no responsibility to maintain supporting documents for products certified by exporters on certificates of origin.

This contradiction didn't sway District Judge David Briones.

Maintaining Documentation
As Briones saw it the Guidelines did not have the force of law and couldn't override NAFTA requirements. In his view the documents Customs demanded were “supporting records” and therefore qualified as “entry records.”

“Ford is correct that exporters are statutorily required to maintain these supporting records,” Briones wrote. “However, this requirement does not alter the classification of the records as entry records, nor does the regulation relieve the importer of its duty to maintain said records.”

The fact that the importer created the supporting records “is irrelevant to their classification,” Briones concluded.

Especially damning to Ford's case was that it had signed the certificates on behalf of Coclisa.

“Irrespective of whether Coclisa, as the exporter of the automotive goods, is responsible for issuing and maintaining the NAFTA Certificates of Origins, Ford assumed those duties here when it acted as Coclisa's agent,” Briones wrote.

The upshot was the case could proceed to trial. Unless a trial or subsequent appeals produce a different result, however, importers will be in a tough spot.

“As things stand now, companies like Ford will have to police their NAFTA suppliers,” Appleton says. “That will be costly. There's also the question of whether U.S. companies want to assume the liabilities that could arise from having access to the records of foreign companies.”

Arguably, the decision runs contrary to NAFTA's free trade tenets.

“The decision in U.S. v. Ford is mildly protectionist,” Appleton says. “People will be trying to buy from U.S. suppliers because it will be easier to prove origin.” According to Appleton, the decision also has implications for logistics companies and their customers. “Companies such as FedEx and UPS rely on basic documentation, like the bare certificates of origin,” he says. “But they're responsible for payment of the duty, so they may decide they have to enhance the quality of the documentation they request. In a just-in-time economy that straddles North America, this will cause serious obstacles.”

For his part, Hjelm says all is not lost–yet. “Remember the case isn't over and it still has to go to trial,” he says.

Still, given the well-reasoned nature of Briones' 20-page decision, the trial could be as difficult for Ford as providing the supporting documentation demanded.