By Susan Kohn Ross; Mitchell Silberberg & Knupp LLP (Los Angeles, California, USA)
On Thursday, July 26th, Immigration and Customs Enforcement (ICE) issued a press release touting its arrest of the president of the San Diego Customs Brokers Association, along with other alleged co-conspirators, in a case claimed to involve at least 90 commercial shipments, goods worth
over $100 million, and the failure to pay some $10 million in duties. Never mind that we in the trade recognize the $100 million figure is greatly inflated. The basic claim of fraud was escalated to a 56-count criminal complaint in an apparent attempt to sensationalize the incident at the expense of the reputation of customs brokers everywhere. ICE certainly should have been able to make its point differently, but then perhaps sensationalism is what the agency was after.
If the complaint is to be believed, the in-bond system was again corrupted. Supposedly, goods arrived in the U.S. which were destined to be exported in-bond to Mexico, i.e., transit the U.S. without payment of duty. The goods were shipped in-bond to San Diego and held in bonded warehouses. Thereafter, the complaint alleges, the goods were never exported to Mexico, but instead were taken out of the bonded warehouses and delivered domestically within the U.S. and without duty being paid. Moreover, when Customs and Border Protection (CBP) asked for the T+E (transportation and exportation) entries to establish that each of the shipments was validly exported to Mexico, the parties are accused of having fraudulently created the documents and submitting them to CBP perforated, i.e., seemingly processed by CBP. The probable cause statement explains that CBP identified the supposedly criminal behavior by focusing on two things: 1) CBP had no prior record of the export documents; and 2) the perforation consisted of a C with two dots above and below it, rather than the one dot CBP was actually using in both locations.
When you carefully read the underlying complaint and supporting probable cause statement, you can reasonably conclude people on the staff of the brokerage operation were involved in what appears to be a not so sophisticated illegal scheme. Whether the company owner and association president, Gerardo Chavez, was also involved remains to be seen. Although Chavez was arrested and his association connection heralded in the ICE release, there is little directly implicating him. While law enforcement agents don’t include everything they know in these probable cause statements, they do typically put forth their strongest evidence of complicity.
Wiretaps were used to make the case against the defendants and so, as is typical, the probable cause statement includes snippets of what those recordings contain. In one instance, Chavez is asked by CBP to provide a copy of a T+E to support the export of a specific shipment. He responded the shipment should have gone south and named the employee who would provide the document to the requesting CBP officer. The second reported conversation is between Chavez and an employee (one of the defendants). In it, Chavez tells the employee he was just asked for a T+E and CBP must be looking for something. He does mention the phrase “punch holes” and also the possibility of an investigation. Chavez then supposedly mentions filing a formal entry. Finally, there is a reference to making the entry and “then do a low value on it.” Since the probable cause statement does not provide a full transcript of what was said, it is difficult to reach any clear conclusions about the meaning of any of these excerpts. The suggestion of guilty knowledge may be there, but you have to wonder what was really said and the context of the comments.
Remember, if you get caught in a similar situation, only those parts of the wiretap transcripts the agents think are most helpful to their case will get reported in the initial pleadings, and in the press. Thereafter, you have to defend yourself, but only after the adverse information may have been widely disseminated by the media.
Until this case is decided in court and all the evidence can be independently reviewed and evaluated, we will not know all the facts or be able to determine for ourselves just how involved this one individual was in the actions which gave rise to the pending case. There are extensive allegations about the roles of other defendants, one of whom was an employee of Chavez’s company who, from the way the statement is framed, seems to be directly involved in the allegedly criminal behavior. If that turns out to be true, CBP can be expected to seek revocation of the company’s brokerage license as well as that of any involved individuals. In the meantime, the ICE press release, criminal complaint and probable cause statement will frame public opinion with respect to the defendants and, with little doubt, by inference extend to the brokerage industry as a whole.
This case is another reminder that companies would be wise to have a plan in place to deal with an unexpected event that has the potential to seriously impact the company or its industry. Think recall, contamination, embezzlement, and any number of other “ripped from the headlines” situations that cast aspersions far beyond the allegedly culpable parties.
Here, there is little question CBP (and maybe ICE) wanted to send a message to the brokerage community. CBP San Diego has a history of antagonizing the brokerage community, although generally when they do, they lose. The recent case against Lizarraga Customs Broker is one such example. CBP had no tangible evidence but pursued the case anyway. In the end, they lost at every stage, paying the plaintiff’s attorney’s fee and costs, and sending the wrong message to the brokerage community. Now, we have a sensational phrase about Chavez’s position as the association president featured in a press release which again sends the wrong message. Such a statement may pander to the law enforcement community, long suspicious of the industry’s professionalism. It may also help attract publicity for ICE/CBP. However, if the real goal is to work with the industry to raise its standards, this was precisely the wrong approach and may well undermine the positive steps CBP is taking in rewriting the brokerage regulations.
How do you deal with such an industry-threatening situation? The National Customs Brokers and Forwarders Association of America put out a press release on Friday which was clearly written by lawyers and not crisis management experts. Is that going to be enough? With the instant dissemination of information now possible via Twitter, Facebook and other forms of social media, does your company have a plan of how to deal with events of this significance? If not, these circumstances provide a stark reminder to get one! If you already have a plan, when was the last time it was reviewed and updated?
