FTZB Proposes Major Revisions to FTZ Regs (Part II – Production, Penalties, Prior Disclosure)

Comments on the proposed rule are due by April 8, 2011.

This is Part II of a multipart series of summaries of the proposed rule, and highlights information in the proposed rule on the definition of "production," production activity requiring approval, penalties, and prior disclosure. (See ITT’s Online Archives or 12/30/10 ITT, 10123022, for BP’s Part I-Overview. See future issues for additional BP summaries of the proposed rule.)

"Production" Concept Would Replace Manufacturing & Processing Categories

The current regulations divide activity where an imported component is combined with one or more other components to create a different finished product into two categories -- “manufacturing¹” or “processing.²” Manufacturing involves a substantial transformation of the component, while processing involves a change in customs classification or in its eligibility for entry (that does not amount to a substantial transformation).

The proposed rule would make a universal change to the regulations under 15 CFR Part 400 by eliminating these two categories and instead applying a unified concept of “production” and provide a single set of procedures pertaining to that type of activity.

The Board proposes to define “production” activity under 15 CFR 400.2(l) as: "Any activity which results in a change in the customs classification of an article or in its eligibility for entry for consumption, regardless of whether U.S. customs entry actually is ultimately made on the article resulting from the production activity."

General Advance Approval Would be Eliminated

The proposed rule would limit the general advance approval process to specific types of FTZ benefits that could potentially impact other domestic manufacturers, involving (1) tariff inversion; (2) antidumping and countervailing duties, quantitative quotas, or Section 337³ orders; (3) scrap or waste; etc.

This change would have the effect of eliminating the general advance approval requirement for most export manufacturing.

Activity Involving AD/CV, Inverted Tariffs, Would Need Advance Approval

Proposed 15 CFR 400.14(a) would state that advance approval by the Board (or notification to the Board pursuant to 15 CFR 400.37) would be needed for production activity in zones or subzones which involves:

New production activity. (1) A foreign article for which the actual or effective duty rate for U.S. entries would be reduced through incorporation into a different product or article (inverted tariff);

(2) A foreign article that would be subject (if it were to enter U.S. customs territory) to an antidumping duty (AD) or countervailing duty (CVD) order or which would be otherwise subject to suspension of liquidation under AD/CVD procedures, to an order of the International Trade Commission pursuant to 19 USC 1337 (Section 337), or to a quantitative import control (quota);

(3) Duty avoidance on scrap or waste resulting from the production activity (except for production activity that is for export only); or,

Previously approved production operation. (4) For a production operation that had been the subject of prior Board consideration and approval (including delegated authority), a foreign article:

New or increased tariff inversion. For which there is a new (or increased) inverted tariff due to a new (or increased rate of) general or special duty relative to the circumstances in effect at the time of the Board’s prior consideration of the foreign article’s use in the production operation;

New AD/CV. Which is subject (were it to enter U.S. customs territory) to an AD/CVD duty or suspension of liquidation under AD/CVD orders that were not in effect at the time of the Board’s prior consideration of the foreign article’s use in the production operation; or;

New Section 337 order. Which is subject (were it to enter U.S. customs territory) to a Section 337 order that was not in effect at the time of the Board’s prior consideration of the foreign article’s use in the production operation."

Annual Reporting of Production Activity Would be Specified in Regs

Proposed 15 CFR 400.14(b) would be new and makes explicit in regulation that all production activity in zones or subzones must be reported to the Board annually in accordance with any Board instructions, guidelines, and forms.

Limits on Approved Production Authority

Proposed 15 CFR 400.14(c) would state that the Board's approval of production authority for a particular operation would be limited to the inputs, finished products, and production capacity presented in the approved application (or for which notification has been made to the Board pursuant to 15 CFR 400.14(e)).

IA Could Give Interim Approval to Expedite Process, Could Also Handle Scrap

Proposed 15 CFR 400.14(d) would delegate to Import Administration (IA)⁴ certain determinations in cases requiring production authority. This delegation already exists if the activity could otherwise be conducted under CBP bonded procedures; however, the delegation of authority would be new for scrap or waste, and new for interim determinations (which would replace the less flexible temporary/interim manufacturing (T/M) authority⁵ adopted by the Board in 2004, and which has not yet been the subject of regulations).

Under 400.14(d), delegation to IA -- based on a review by the Board staff and the recommendation of the Executive Secretary -- would be available in situations where:

CBP bonded procedures. The Port Director determines that the proposed production activity could otherwise be conducted under U.S. Customs and Border Protection bonded procedures;

Scrap or waste is only benefit. The sole zone benefit requiring advance approval from the Board is for scrap or waste resulting from the production activity; or

Interim approval requested. IA’s determination would only be on an interim basis, in response to a request from the applicant, to enable some or all of the activity in question to commence until the Board is able to complete its case review.

Interim authority could only be approved after the close of the period for public comment for the application in question based on a recommendation from the Executive Secretary, which will take into account certain enumerated factors, any public comments received, and any other relevant considerations.

Any request for interim authority must provide a public interest-based justification and a full explanation of the need for such interim authority, and must include both a realistic projected timeframe for commencement of the proposed activity and written concurrence from the CBP port director that specifically addresses the applicant's projected timeframe.

Interim authority, once approved, would remain at the discretion of IA until the Board has acted, and is subject to modification or rescission for cause during the interim period.

Notification of Production Changes and Capacity Increases

Proposed 15 CFR 400.14(e)(1) pertains to retrospective notification of production changes, and would not be allowed if the foreign articles are subject to AD/CV orders, quotas or Section 337 orders.

Proposed 15 CFR 400.14(e)(2) would define a new procedure for notification of increases in production capacity, while proposed 15 CFR 400.14(e)(3) would cover prohibitions or restrictions based on the public interest, regarding production-change and capacity-increase notifications.

Retrospective production change notification. Under proposed 400.14(e)(1), if advance approval is required, an applicant requesting production authority from the Board (or with existing production authority from the Board) may also request authority to notify the Board on a quarterly retrospective basis of production changes involving new finished products or foreign components/inputs resulting in inverted tariff or scrap benefits.

AD/CV, quota, 337 ineligible. Foreign articles subject (were they to enter U.S. customs territory) to AD or CVD orders or that would be otherwise subject to suspension of liquidation under AD/CVD procedures, to an order of the International Trade Commission pursuant to Section 337, to any ongoing AD/CVD or Section 337 proceeding, or to quantitative import controls (quotas) would not be eligible for this production change notification procedure.

(15 CFR 400.37 would delineate applicable criteria and procedures for requests for authority to utilize this production change notification provision and, where such authority has been approved, for subsequent notifications to the Board.

For example, a request for authority to use the notification procedure would include a list of the 4-digit tariff schedule (HTS) headings within which such notifications are projected to occur (separated into headings that relate to finished products and headings that relate to components), to which such notifications would then be limited, and would explain the relevance of each heading to current or projected activity and provide an economic justification for the request.)

Capacity increase notification. For a production operation approved by the Board, proposed 400.14(e)(2) states that the operator would notify the Board of any increases in production capacity relative to the capacity level approved by the Board (or for which notification was previously submitted to the Board pursuant to this paragraph) no later than the end of the calendar quarter during which the capacity increase becomes effective.

The notification would name the zone or subzone operation for which the notification is occurring and address the impact of the notified change(s) relative to the most recent prior Board approval (or notification pursuant to this paragraph) for the production operation in question.

Upon notification of an increase in capacity, the Executive Secretary would conduct a preliminary analysis of the increase in relation to the approved (or previously notified) capacity level for the production operation in question, taking into account specified factors as appropriate, and determine whether further review is necessary to ensure that activity involved in these situations continues to be in the public interest.

Restrictions based on public interest. Under proposed 400.14(e)(3), the IA may, based on public interest grounds, order the prohibition or restriction of the use of zone procedures in regard to a notified production change or capacity increase, including requiring that items be placed in privileged foreign status upon admission to a zone or subzone.

Scope Determinations and AD/CV Restrictions

Proposed 15 CFR 400.14(f) on "scope determinations" and proposed 15 CFR 400.14(g) on restrictions on items subject to AD/CV actions, would largely mirror current regulations.

Proposed 15 CFR 400.14(f) would state that determinations may be made by the Executive Secretary (and case or examiner reviews when warranted) as to whether changes in activity are within the scope of related activity already approved for the facility involved under this part.

Proposed 15 CFR 400.14(g) would state that zone procedures could not be used to circumvent AD and CV actions. In addition, admission of items subject to AD/CVD actions that would be otherwise subject to suspension of liquidation under AD/CVD procedures if they entered U.S. customs territory, would be placed in privileged foreign status upon admission to a zone or subzone. Upon entry for consumption, such items would be subject to duties under AD/CVD orders or to suspension of liquidation, as appropriate.

Fines, Penalties and Suspended Activity Status

Proposed 15 CFR 400.62 would authorize fines for certain violations of not more than $1,000, with each day during which a violation continues constituting a separate offense. Parties that could be fined would include the zone operator, grantee, or agent of the grantee. Proposed offenses include the following (partial list):

Production activity. Each of the following would constitute a separate offense, with the operator subject to a fine of not more than $1,000 for each such separate offense:

· Each finished product or foreign component or combination thereof for which the operator had failed to obtain the required advance approval or to submit notification;

· Production involving any finished product, foreign component, or combination thereof authorized by the FTZ Board (or properly notified) at a level exceeding the plant’s authorized or notified capacity; and

· Each day during which an offense continues.

In addition, the grantee or agent of the grantee engaged in detailed operational oversight or direction of an operator may also be subject to a fine of not more than $1,000 for each offense of the operator.

Annual report. Each day during which a grantee fails to submit a complete and accurate annual report constitutes a separate offense subject to a fine of not more than $1,000. Further, each day during which a zone operator fails to submit to the zone’s grantee the information required for the grantee’s timely submission of a complete and accurate annual report to the Board may constitute a separate offense subject to a fine of not more than $1,000.

Conflicts of interest. Each day during which an agent of the grantee performs functions that are a conflict of interest (that could lead to non-uniform treatment of zone participants) would constitute a separate offense for which the agent would be subject to a fine of not more than $1,000.

Notice of violation. The Board would give written notice of any alleged violation(s) and a period of time (normally 30 days) to respond. A hearing would be held if requested or if otherwise appropriate.

Level of fine. If the Board makes an affirmative determination of violation, it would recommend the level of fine to be imposed.

Mitigating factors. The mitigation of an imposed fine may be approved based on specific evidence presented by the affected party. Factors to be taken into account in evaluation of potential mitigation include:

• The prior good record of a violator over the preceding five years with regard to the type of violation(s) at issue;
• A violator’s inexperience in the type of foreign-trade zone activity at issue;
• Violation due to the action of another party despite violator’s adherence to the requirements of the FTZ Act and the Board’s regulations;
• Immediate remedial action by the violator to avoid future violations;
• A violator’s cooperation with the Board (beyond the degree of cooperation expected from a person under investigation for a violation) in ascertaining the facts establishing the violation;
• A violation resulting from a clerical error or similar unintentional negligence;
• Contributory Board error such as the violation resulting, at least in significant part, from the violator having relied on inaccurate written advice provided by a Board staff member; and,
• Other such factors as is deemed appropriate to consider in the specific circumstances presented.

Suspension of zone activity. When a fine has not been paid within 90 days of the specified time period, or there is a repeated and willful failure to comply with a prohibition or restriction, CBP may be instructed (after notification and a hearing if requested) to suspend the activated status of the zone operation(s) in question (or, if appropriate, the suspension may be limited to a particular activity of an operator, such as suspension of the privilege to admit merchandise).

DoJ enforcement. The Board may also request the U.S. Department of Justice to recover the amount assessed in any appropriate district court of the U.S. or may commence any other lawful action.

Prior Disclosure if Subject to a Fine

Proposed 15 CFR 400.63 would state that a party subject to a fine may provide a written disclosure of a violation prior to the commencement of a Board investigation of the violation. If the written prior disclosure is valid, the Board would normally reduce to a maximum of $1,000 the total sum of potential fines for a single violation or series of offenses stemming from a continuing violation. (A prior disclosure pursuant to this section would not involve the loss of revenue; such fines must be addressed through the procedures established by 19 USC 1592(c)(4).)

¹"Manufacturing" is currently defined under 15 CFR 400.2(g) as "activity involving the substantial transformation of a foreign article resulting in a new and different article having a different name, character, and use."

²"Processing" is currently defined under 15 CFR 400.2(k) as "activity involving a change in condition of merchandise, other than manufacturing, which results in a change in the Customs classification of an article or in its eligibility for entry for consumption."

³Section 337 investigations most often involve claims regarding intellectual property rights, including allegations of patent infringement and trademark infringement by imported goods.

⁴Commerce Department’s Assistant Secretary for Import Administration

⁵The T/IM procedure is limited to activity similar to that approved by the FTZ Board in the preceding five years. The new provision for interim approvals would contains no requirement for similarity to recently approved activity.

(See ITT's Online Archives or 11/30/10 news, 10113051, for BP summary of the Office of Management and Budget's approval of this proposed rule.

See ITT's Online Archives or 08/05/10 news, 10080510, for BP summary of the FTZB's request for comments on proposed minor adjustments to ease certain requirements in its voluntary alternative site framework.

See ITT's Online Archives or 05/19/09 news, 09051930, for BP summary of the FTZB's request for comments on a proposal to revise the format of annual reports that are submitted by zone grantees.)

FTZB contact - Andrew McGilvray (202) 482-2862

(D/N 090210156-0416-01, FR Pub 12/30/10)

FTZB's unofficial summary of key provisions of the proposed regulations as well as a side-by-side comparison of the proposed and existing regulations are available here.