Personal Liability for Trade Compliance Violations? How the Trek Leather Case May Impact Board Members, Officers and Compliance Professionals

By Melissa Miller Proctor

Many a board member, officer and compliance professional could be losing more sleep than usual as a result of the U.S. v. Trek Leather case. Generally, owners, directors and officers of corporations and limited liability companies are not personally liable for the actions of the company where their decisions are made on an informed basis, in good faith and in the best interest of the company (unless there is criminal or fraudulent conduct, breach of a fiduciary duty, or the company is found to be an alter ego of the individual). However, the Court of Appeals for the Federal Circuit recently held in U.S. v. Trek Leather that individuals may be held personally liable violations of the U.S. customs laws and regulations—even where the corporate veil is not pierced. In September 2014, the Court of Appeals of the Federal Circuit (“Federal Circuit”) held that individuals “introducing” imported goods into the United States may be held personally liable for violations of the U.S. customs laws and regulations. This decision may have an impact going forward on importers, exporters and the individuals that serve them.

The story began in 2004, when Trek Leather, Inc. began importing men’s suits into the United States. Harish Shadadpuri was the President and sole shareholder of the company at the time. Mr. Shadadpuri, through Trek Leather and other companies that he owned, supplied fabrics to the foreign manufacturers which were used in the production of the suits. However, the cost of the fabrics and their transportation to the foreign manufacturers were not added to the dutiable value of the suits. The provision of the fabrics to the foreign manufacturers free of charge or at a reduced cost constituted an assist under the U.S. customs valuation rules. The failure to include such costs in the invoice value of the goods generally results in their undervaluation and the underpayment of duties owing to U.S. Customs and Border Protection (“CBP”). There were a total of seventy-two shipments of suits imported by Trek Leather into the United States that were undervalued in this manner. While the shipments were en route to the United States, Mr. Shadadpuri transferred ownership of the goods from one of his other companies to Trek Leather, which became the U.S. importer of record. The entry documents submitted to CBP were based on information contained in the manufacturers’ invoices, bills of lading, and other information provided by Mr. Shadadpuri or his employees. Because the invoice values failed to include the cost of the fabrics and their transportation to the Chinese manufacturer, Trek Leather underpaid the duties owing by more than $133,000. Mr. Shadadpuri apparently knew that these costs were required to be added to the dutiable value of the suits as he had been informed of this fact by CBP officials during a previous investigation of his shipments two years earlier.

CBP issued a penalty notice to Trek Leather alleging fraud, gross negligence and negligence for the undervaluation and underpayment of duties. The company, however, failed to respond to that penalty notice. As a result, CBP filed a complaint in the U.S. Court of International Trade (“CIT”). CBP alleged that both Trek Leather and Mr. Shadadpuri violated Section 1592(a) of the Customs Regulations because they had entered or introduced the suits into the United States by means of false acts, statements and/or omissions that understated the dutiable value of the merchandise and resulted in the underpayment of duties.  CBP argued that Mr. Shadadpuri could be held individually liable since he was Trek Leather’s President, directed its operations at the time that the import violations occurred, and was a “person” for purposes of the Section 1592(a) violations. The CIT found that both Trek Leather and Mr. Shadadpuri were liable for gross negligence, noting that Mr. Shadadpuri was responsible for reviewing the entry documentation, including assists in those records, and for forwarding assist information to the custom broker. The CIT entered judgment against both defendants. Mr. Shadadpuri appealed to the Federal Circuit.

In 2013, the Federal Circuit panel that heard the appeal reversed the CIT’s decision, holding that Mr. Shadadpuri was not liable for ordinary or gross negligence because he was not the importer of record or an agent authorized to make entry. The Fed Circuit noted that, in order for him to be held liable, CBP would have had to have pierced the corporate veil, shown that he was liable for fraud, or shown that he had aided or abetted Trek Leather’s fraudulent activities. CBP requested a rehearing of the panel’s decision. An en banc rehearing of the appeal was granted. On September 14, 2014, the Federal Circuit reversed the panel decision and held that Mr. Shadadpuri could indeed be held individually liable for the customs violations. First, the court found that the term “person” in Section 1592 covers owners, importers, consignees, agents and other persons. The court then looked closely at the introduction of merchandise into U.S. commerce.  The court found that the term “introduce” was broad enough to capture acts that bring goods to the point of entry, such as moving goods into CBP custody, and providing documents (such as invoices indicating value) for use in the entry process. Thus, the court found that Mr. Shadadpuri “introduced” the suits into the United States. CBP was therefore not required to pierce the corporate veil since Mr. Shadadpuri personally introduced merchandise into the United States in violation of Section 1592(a). While only importers of record or their authorized agents may be held liable for entry violations, the term “introduce” covers acts by other persons.

As reflected in the press releases and information posted on the websites of the various U.S. export agencies that enforce the export laws and regulations, individuals are often held criminally liable for export violations; however, the Trek Leather decision may lead to similar civil penalties for individuals that work for companies that export goods, software and technology from the United States. For example, the Export Administration Regulations provides that—

no person may engage in any conduct prohibited by, or contrary, or refrain from engaging in any conduct required by, the EAA, EAR, or any order, license or authorization issued thereunder.

See 15 CFR 764.2 of the EAR. Similarly, the International Traffic in Arms Regulations provides that it is unlawful to attempt or engage in exports or reexports without a required license or approval, import defense articles without a license when required, conspire to violate the ITAR or AECA, violate any terms or conditions of a license or approval, fail to register with the State Department, or broker defense articles without the required approvals. The ITAR also provides that any person who is granted a license or approval is responsible for the acts of employees, agents, brokers, and persons having possessing of the items. The ITAR further provides not that no person may knowingly or willfully—

attempt, solicit, cause, or aid, abet, counsel, demand, induce, procure, or permit the commission of any act prohibited by, or the omission of any act required by [the AECA, ITAR], license, approval, or order issued thereunder.

Thus, civil penalties for violations of the EAR and ITAR may result in civil penalties for individuals within the corporation.

The Trek Leather case offers several key take-aways for the trade community:

  • Board members, officers, and employees who are actively involved in, or have a hand in directing, the company’s day-to-day operations could be held liable for errors or omissions that occur with regard to their import and export operations; however, a solid compliance program, oversight by knowledgeable and experienced compliance personnel, and routine internal auditing mechanisms are key for reducing the likelihood of import errors.
  • A thorough understanding of both the customs and export rules, as well as the potential consequences for non-compliance, is critical for importers, exporters and their employees. Regular training and internal auditing is crucial for reducing the likelihood of errors and allowing for the timely correction of any errors that are discovered.
  • Had Trek Leather timely responded to the original penalty notice that was issued, CBP would not have resorted to filing a complaint with the CIT. The CIT and Federal Circuit cases make no mention of the reasons why Trek Leather failed to respond to the original penalty notice; however, importers and exporters should view this case as a cautionary tale and establish formal processes for handling receipts of, and submitting responses to requests from U.S. government agencies.

As the old cliché goes, the best offense is a good defense. Prudent importers and exporters should solidify their compliance programs, train their employees, establish robust auditing mechanisms, and erect swift escalation measures so that the appropriate corrective actions can be taken when and if issues arise.