Time is Money: CBP Proposes New Mitigation Guidelines for Liquidated Damages Response Petitions

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For importers and brokers, there may be several aspects of US Customs & Border Protections (“CBP” or “Customs”) policies that are obscure. One of those areas is liquidated damages provisions and their proposed consequences. Under CBPs most recent proposal, importers who fail to respond to liquidated damages claims in a timely manner will face possible fines and consequences far beyond what is currently in place. As any shrewd business person will note, it is important to keep operating costs low and to avoid any extra bills whenever possible. This holds the same for importers and brokers whose job is to quickly and efficiently get merchandise from point A to point B. Brokers and importers must be attentive to deadlines and time requirements just as much as any other business, but even more so because of the nature of their profession.

If the newly proposed changes to the Liquidated Damages Mitigation Guidelines (as will be discussed below) are put into place, filing timely may be the difference between a few hundred and a few thousand dollars in extra bills. But lets not get too far ahead of ourselves, lets first get a clear understanding of what exactly a Liquidated Damage is, where it comes from, and why it is so crucial for importers to “timely” respond to Liquidated Damages claims made by Customs.

Background & Current Mitigation Guidelines for Untimely Liquidated Damage Response Petitions

Before we address the consequences of untimely responding to a liquidated damages claim, we need to first understand how they occur. Liquidated damages arise out of customs bonds. A customs bond is typically filed by the importer of record, warehouseman, or other custodian of merchandise. It is effectively an agreement between an importer and surety that ensures compliance with all of Customs obligations with respect to entry, storage, and transport of goods.   In the event that an importer breaches one of these obligations, this bond functions as security for liquidated damages claims issued by the CBPs Office of Fines, Penalties, and Forfeitures.

In the event that a liquidated damages claim is issued, CBP affords importers the opportunity to challenge the claim by submitting a petition pursuant to 19 C.F.R. § 172.3(b). Under this regulation, a petition must be filed within 60 days from the date of mailing to the bond principal the notice of claim for liquidated damages or penalty secured by a bond. Historically, CBP has been lenient with respect to accepting late petitions.

CBPs most current Mitigation Guidelines: Fines, Penalties, Forfeitures, and Liquidated Damages provide instruction on how CBP determines settlement amounts for late petitions. CBP begins by calculating the mitigation amount as if a timely petition was submitted. This is called the “base amount.” CBP then takes 1% of the base amount and multiplies that by the amount of days the petition was late. This amount is then be added to the original base amount with a minimum additional value to be no less than $400.

Now that we have established what Liquidated Damages are, how they arise, and the current calculation for untimely filing, let us now turn our attention to the newly proposed changes to Customs Mitigation Guidelines.

CBPs Proposed Changes to Mitigation Guidelines for Late Petitions

In an informal document made available to members of the trade industry, CBP has claimed that the current mitigation guidelines have not effectively reduced or deterred the number of late petition filings by importers. Furthermore, in recent discussions between CBP the International Trade Surety Association (“ITSA”) and Customs Surety Executive Committee (“CSEC”), CBP explained its intent to significantly alter the calculation scheme for mitigation on untimely liquidated damage responses by importers.

Under the proposed calculation, CBP will take 1% of the full original assessment amount and multiply that by the amount of days the petition was late. This amount will then be added to the base amount. It is also reported that petitions later than 180 days late will not be accepted at all and the full original assessment amounts will be paid.

This proposed change in CBPs Mitigation Guidelines is significant and can result in final mitigation amounts being tens of thousands of dollars more than they would otherwise be under the current scheme. Importers are advised to be aware of the proposed changes and to make sure to submit liquidated damages response petitions timely.

If you need assistance filing a response petition to Customs or want more information on the developments in CBPs Mitigation Guidelines contact the Customs, Import and Trade Law practice group at Fuerst Ittleman David & Joseph, PL at 305-350-5690 or contact@fidjlaw.com.

CBP Changes Regulations for Suspected Counterfeit Merchandise

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In an effort to combat the importation of counterfeit goods into the United States, US Customs & Border Protection (“CBP” or “Customs”) has significantly increased the number of seizures of suspected counterfeit merchandise. Between 2010 and 2011, Customs seized nearly 25,000 shipments with a domestic value of approximately 200$ Million and retail values exceeding 1.1$ Trillion. These seizures accounted for just under a 25% increase for the fiscal year 2011. Customs is making a statement, and is taking significant steps to ensure that counterfeits are not getting into the United States market place. The downside of these efforts is that with the increased volume of seizures, it is becoming more difficult for Customs to differentiate between good faith importers and those who knowingly import counterfeits.

Products such as electronics, pharmaceuticals, and footwear are at the top of CBPs watch list and good faith importers of these goods are getting caught in the crossfire. Counterfeit or not, the chances of import cargo being detained or seized is much higher, and importers are forced to wait out what could be months of administrative proceedings to have their cargo released. Worst of all, until recently, there has been virtually no recourse for importers who want to dispute these claims expeditiously. Fortunately, Customs has recognized this problem and implemented new seizure and detention policies in response.

On April 24, 2012, Customs issued an interim rule entitled Disclosure of Information for Certain Intellectual Property rights Enforced at the Border. This regulation amends 19 C.F.R. § 133.21 which outlines CBPs regulations regarding the seizure and detention of suspected counterfeit imports.

In its interim rule, Customs established an entirely new notification and response procedure between itself and importers suspected of importing counterfeits. This new procedure is designed to benefit importers because the previous version of the regulation was silent as to how importers could respond to allegations of suspected forfeiture and provided little immediate recourse for upstanding importers who have been wrongfully accused of counterfeit importation.

Under the new regulations, CBP is given a maximum of thirty days to detain suspected counterfeit goods after which the goods will be excluded from entry or delivery pursuant to 19 U.S.C. § 1514(a)(4). This period can be extended up to an additional thirty days if the importer can display good cause. Under the old regulatory framework, CBP effectively had the power to detain importers items indefinitely and offered no remedy for importers to dispute the seizure of their goods.

Pursuant to the amended regulation in 19 C.F.R. § 133.21(b), CBP is also now required to notify an importer, in writing, that his goods are being detained within 5 days of the detention. The importer will then be afforded seven days to respond to CBP and offer evidence of the merchandises authenticity. Prior to the amendment, Customs had no formal requirement to notify importers of its intentions to seize their merchandise. In fact, CBP was only required to notify the trademark owner.

Section (b) creates a twofold benefit. First, it affords honest importers an opportunity to quickly dispute claims and have merchandise released without waiting (for what could have previously taken up to 60 days) to have the authenticity of there merchandise verified. Under the new regulation good faith importers could potentially have their shipments released in a fraction of the time if they can sufficiently and quickly gather evidence of the seized goods authenticity.

Secondly, this section requires CBP to become more efficient in its verification and disposition of alleged counterfeit goods. Under the auspices of the previous regulation, CBP had full discretion to take as much time as it felt necessary to complete the forfeiture proceeding. This is no longer the case. Customs must now be much more efficient with its procedure and have matters resolved within 30 days, barring any good cause extensions.

Aside from the previously mentioned changes, 19 C.F.R. § 133.21 is effectively the same with respect to Customs dealings with the actual trademark owner. CBP is still required to notify the trademark owner about information regarding the seized shipment (i.e. port of entry, quantity, description of merchandise, product samples, etc) within thirty days. The regulation also continues to afford trademark owners the discretion to provide written consent to have the goods disposed or entered into the US (after obliteration of counterfeit trademarks).

The effect of this updated regulation seems to be positive on all fronts: It puts all involved parties on notice, affords importers the opportunity to dispute and resolve claims quickly, and continues to enforce and protect the trademarks of companies who may be damaged from counterfeit goods in the domestic marketplace.

If you are an importer and have been notified that your cargo has been detained, do not hesitate to contact an attorney in our Customs practice to assist you in responding to CBP.

FDA’s Import Trade Auxiliary Communication System (“ITACS”) Now Available

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With an increased number of imports entering the United States, new enforcement initiatives under such programs as the Food Safety Modernization Act, decreasing budgets and a limited number of employees, complaints about the U.S. Food and Drug Administration (“FDA”) from the trade community have been on the rise.  One particular sore spot for the Agency is communications.  In an era of text messages, tweeting, and instant posting of documents on the internet, the FDA was still sending and receiving its messages to and from importers and brokers through fax machines and paper copies.

All of that is starting to change now.

On March 14, 2012, the FDA’s Division of Import Operations and Policy (“DIOP”) unveiled its Import Trade Auxiliary Communication System (“ITACS”) to members of the National Customs Brokers and Forwarders Association of America (“NCBFAA”).  According to FDA, the new ITACS system is being implemented in order to improve communication between FDA and the import trade community.

ITACS is an internet portal with three critical functions for importers:

  1. The ability to check on the status of an entry/lines;
  2. The ability to submit entry documentation electronically; and
  3. The ability to submit goods availability information for targeted shipments electronically.

The importance of ITACS to the trade community cannot be understated.  Using ITACS, importers and their brokers will no longer need to send or fax paper-versions of entry and goods availability documents to the FDA for their entries.  This will reduce lost documents and help eliminate the uncertainty of importers as to whether their documents were ever received by the FDA.  The automatic creation of an audit trail in ITACS means that the question of when a documents was sent and received by the FDA will no longer be in question.

ITACS is also beneficial to the trade community in that importers and brokers will be able to receive more detailed entry statuses than what are currently transmitted to filers via the U.S. Customs and Border Protection (“CBP”) Automated Broker Interface (“ABI”) system.  This will reduce the need for phone calls to the FDA district offices to check on the status of entries.  (Also, no more waiting for the FDA to return your call either.)

Finally, ITACS should reduce the confusion between importers/brokers and FDA about the date and location of shipment availability information.

The trade community is not alone in welcoming ITACS on the scene.  The new system also benefits the FDA in that it:

  • Enables FDA to focus its resources on expediting review of entries and focusing on completion of designated shipment examinations;
  • Provides all FDA staff with easy access to entry documents via FDA’s Import system;
  • Reduces the numbers of faxes, phone calls, and paper for FDA; and
  • Eliminates the need to log information in FDA’s Import system;

In its presentation to the NBCFAA entitled “ITACS:  Overview and Walkthrough of Functionality,” the FDA highlighted several important points about ITACS for the trade community to remember.  First, the availability of goods for examination should not be submitted through ITACS until the shipment has been uploaded and is physically present for FDA staff to examine.  Also, importers and filers with a current web browser and a valid CBP entry number may use ITACS.  Finally, the FDA warned that there are currently some issues with file size capacity and that documents must be in PDF format to be uploaded.  Also, ITACS will only display statuses for “open” entries.  Therefore, if a final FDA admissibility decision has been made for all lines of an entry (e.g., a release), the entry will be considered “closed” in FDA’s import system and the importer or filer will need to check the ABI Messaging or Notices of FDA Action for the status. 

We applaud the FDA’s move to improve communications between the Agency and the trade community.  We are also looking forward to the future improvements to ITACS promised by the FDA, most notably, the direct, electronic transmission of Notices of Action to both the importer and its broker (versus the paper mailings and faxes that happen today) and the ability to perform online queries for FDA Firm Identifiers and Product Codes.

The link to ITACS can be found at https://itacs.fda.gov.

For more information about the ITACS system or for assistance with the importation or regulation of your food, drug, medical device or cosmetic product, please contact the Food & Drug Law practice group at Fuerst Ittleman at 305-350-5690 or contact@fidjlaw.com.

Bureau of Industry & Security Publishes Best Practices in Effort to Curb Illegal Export Transshipments

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On August 31, 2011, the U.S. Department of Commerces Bureau of Industry and Security (BIS) announced its publication of a new set of best practices, aimed at curbing the practice of transshipment of dual-use items. Transshipment is a shipping practice whereby items are sent to an intermediate destination before being shipped again for arrival at the goods ultimate destination. While transshipment undoubtedly has legitimate and beneficial uses in our globalized economy, some argue that the practice is being used in a way that creates heightened security risk to the United States, particularly when dual-use items are involved.

BIS-regulated “dual-use” items are those goods that have both commercial and military applications. When dual-use items are exported, transshipment may be used to disguise the ultimate destination of the goods from the U.S. government and the U.S. exporter. Or on the other hand, transshipment can serve as a means for a U.S. exporter who has knowledge that it is violating an embargo to have a way to deny knowledge of the exports ultimate destination. So, for example, transshipment can be used to hide the fact that a dual-use item is being exported to an embargoed country like Iran by first having the item shipped to a non-embargoed country like Singapore. The shipping documents would show that the U.S. exporter sent the dual-use item to a friendly, non-embargoed country, but then the intermediate consignee in Singapore, perhaps a front for the Iranian government, would then turn around and ship the item to the Iranian military, thus violating the U.S. embargo against Iran. Thus, BIS issued its Best Practices in order to gain cooperation from the U.S. export industry in an effort to thwart these dangers.

Found here, the BIS-issued 2011 Best Practices details seven practices that U.S. exporters are urged to follow. In particular, the practices direct companies to notify BIS when a buyers order for export is denied, in addition to using due-diligence when gathering information about potential customers. While many of these practices emphasize cooperation between industry and government, there may be consequences for willful disregard of these practices in the future. Because companies may no longer be able to turn a blind eye to the potential transshipment of their dual-use items, these Best Practices could be the first step to imposing liability on companies whose goods wind up in the wrong hands.

Fuerst Ittleman lawyers are experienced in representing companies and individuals under investigation for engaging in illegal exporting activity, including transshipment of dual-use items to embargoed countries. Fuerst Ittleman can also assist exporters with their compliance efforts to avoid export violations. For more information concerning BIS regulations or other trade-related issues, please contact us at contact@fidjlaw.com

Seizures of Counterfeit Goods a Priority for CBP

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Reaffirming its commitment to keeping counterfeit merchandise from reaching consumers, U.S. Customs and Border Protection (CBP) has been busy in recent months. Recently, CBP announced that its officers at the Detroit Metropolitan Airport seized 192 separate shipments of fake merchandise between November 1, 2010 and January 17, 2011. During this period, the seizures included counterfeit designer purses, sunglasses, cell phones, and sports jerseys. According to CBP estimates, the seized items totaled an estimated worth of $2 million.

Additionally, CBP announced that its inspectors at the Los Angeles/Long Beach seaport complex were able to seize a shipment of counterfeit Marlboro cigarettes. The shipment from China contained over 22,000 cartons of fake Marlboro cigarettes. In an effort to get the shipment through customs, the shippers of the merchandise provided false invoicing information, identifying the contents as “hang tags and hang plugs.” However, an examination of the shipment by CBP import specialists and inspectors revealed its true contents.

With countless seizures of illegal goods being made, CBP has signaled that stopping counterfeit goods is a main priority. According to CBP, the sale of counterfeit goods is problematic for a few key reasons. First, fraudulent goods may be dangerous to consumers, as the imposters often appear to be of the same quality but have the potential to be inferior and present added safety risks to unsuspecting consumers. Additionally, CBP notes that counterfeit products negatively affect trademark owners who have invested time and money developing their products. Lastly, criminal organizations are often involved in the sale of counterfeit merchandise to launder the organizations illegal profits.

With the amount of counterfeit goods being attempting make entry into the U.S. is unlikely to slow, CBP is expected to have a busy year ahead.

Lawyers at Fuerst Ittleman PL are experienced in handling issues and litigation regarding products that are either counterfeit or otherwise infringe on legal trademarks.

Freight Forwarder and Oil Service Companies Pay Huge Fines For Violating The Foreign Corrupt Practices Act

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In another example of the recent enhancement in enforcement of the Foreign Corrupt Practices Act, (FCPA) a global freight forwarder and five oil and gas service companies resolved FCPA investigations conducted by the Department of Justice and the Securities and Exchange Commission by agreeing to pay $156,565,000 in criminal penalties and civil disgorgement, interest and penalties in the sum of $80,000,000.

A criminal information was filed on November 4 charging Panalpina World Transport (Holdings) Ltd., the global freight forwarding company based in Switzerland , (“Panalpina”)with conspiring to violate the anti-bribery provisions of the FCPA. In a deferred prosecution agreement and a plea agreement filed in federal court in the Southern District of Texas, Panalpina, and its U.S. subsidiary Panalpina, Inc., admitted that they engaged in a scheme to pay bribes to numerous foreign government officials on behalf of their many customers in the oil and gas industry. These bribes allowed them to circumvent local rules and customs regulations governing the importation of cargo into numerous foreign countries. Panalpina admitted paying bribes totaling $27,000,000 to foreign officials in Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia and Turkmenistan.

Panalpinas customers, Shell Nigeria Exploration and Production Company Ltd., Transocean Inc. and Tidewater Marine International, Inc. admitted in deferred prosecution agreements that they knew of and condoned the bribes paid on their behalf. These companies recorded the bribes as legitimate business expenses in their corporate books and records. These companies agreed to pay criminal fines in excess of $50,000,000 . Under the terms of the deferred prosecution agreements, Panalpina and its customers are required to cooperate fully with U.S. and foreign authorities in any ongoing investigations of the companies corrupt payments. Each company is also required to implement and adhere to a set of enhanced corporate compliance and reporting obligations.

In recent years, the Department of Justice has made FCPA prosecutions a priority, allocating substantial resources to a team of FBI agents and prosecutors dedicated solely to bringing FCPA cases against companies and their executives. Compliance with the FCPA, along with expanded due diligence, anti-bribery prevention programs and regular auditing of foreign payments are now essential for businesses with international operations and sales. As shown in this case, failure to abide by the FCPA can have catastrophic consequences and is at a companys (and its executives) peril.

Pinnacle Aircraft Parts, Inc. Reaches Settlement With OFAC For Violation Of Reporting, Procedures, And Penalties Regulations

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On November 16, 2010, the Office of Foreign Assets Control (“OFAC”), of the U.S. Department of the Treasury announced that it reached a settlement with Pinnacle Aircraft Parts, Inc. (“Pinnacle”) for alleged violations of OFACs Reporting, Procedures, and Penalties Regulations (“RPPR”). The alleged violations stem from Pinnacles sale and delivery of a jet engine destined for Iran in February 2004. OFAC is a part of the U.S. Department of the Treasury and administers and enforces economic sanctions against targeted foreign countries, regimes, terrorists, international narcotics traffickers, among others.

OFAC alleged that Pinnacle violated the RPPR, found at 31 C.F.R. part 501, when it failed to provide documents in response to an administrative subpoena issued by OFAC as part of its investigation into Pinnacles jet engine sale. The administrative subpoena ordered Pinnacle to provide copies of all transactional documents and all other documents pertaining to the payment or transportation of the jet engine shipment. According to OFAC, while Pinnacle responded to the subpoena with 260 pages of documents, Pinnacles outside counsel failed to submit a copy of an e-mail that indicated that the engine was likely destined for Iran as well as other documents concerning the terms of sale.

Compounding the problem for Pinnacle was the fact that Pinnacle did not voluntarily self-disclose the error to OFAC. As a result of Pinnacles actions, Pinnacle faced a penalty of $250,000. However, this amount was reduced in the settlement agreement to $225,000. The settlement amount reflects OFACs consideration of several factors including that Pinnacle had no prior OFAC enforcement history, Pinnacle agreed to settle the matter, and that Pinnacle relied in good faith on the advice of legal counsel in not producing the e-mail and other documents. OFAC did note that while Pinnacle did rely on the advice of counsel, it remained the party that is legally responsible for compliance with OFAC regulations. As a result, the actions of Pinnacles counsel are attributable to Pinnacle for the purposes of calculating a base penalty and settlement amount.

For more information regarding OFAC and strategies on maintaining compliance with federal regulations, please contact Fuerst Ittleman at 305-350-5690 or contact@fidjlaw.com.

Internal Revenue Service Office of the Chief Counsel Carves Out Narrow Exception for Properly Applied First Sale Rule in Customs Law

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On October 29, 2010, the Office of the Chief Counsel of the Internal Revenue Service (IRS) issued Chief Counsel Advice (CCA) 2010-43-028, which discusses the effect of the First Sale Rule under customs law on Internal Revenue Code (IRC) § 1059A.

Under the Customs Modernization Act, it is the responsibility of the importer of record to enter, classify and value goods entering the United States and provide any other information necessary to enable U.S. Customs and Border Protection (CBP) to properly assess duties, collect statistics, and determine whether all legal requirements are met. Under U.S. law, the transaction value of imported merchandise is the primary or preferred method for determining the value of imported goods. Generally, the transaction value is the price actually paid or payable for merchandise when sold for exportation to the United States, plus certain statutorily enumerated additions.

Before merchandise reaches the United States, however, it may have been subject to a series of sales. For example, it may be sold by its manufacturer to a middleman (in the same or a different country), who in turn sells the merchandise to a U.S. importer. In the case of a series of sales, the importer may, under criteria prescribed by CBP, choose a sale that occurred earlier in the chain and use the price paid at that point, as long as the importer can establish that the earlier sale was a sale for exportation to the United States. The option to choose the earlier sales price as the transaction value is known as the “First Sale Rule.” The United States International Trade Commission has provided guidance to ensure proper use of the First Sale Rule in customs law.

In CCA 2010-43-028, the IRS Office of the Chief Counsel discussed how this alternative valuation is treated for purposes of Federal Income Tax.

Given the option afforded by the first sale rule, importers often choose the first sale value because it minimizes custom duties. Use of first sale rule generally results in a disparity between the custom valuation and the income tax valuation because the income tax valuation is based on a later more valuable sale.

As discussed in the CCA, the conflict in tax law is apparent in IRC § 1059A(a), which provides:

If any property is imported into the United States in a transaction (directly or indirectly) between related persons (within the meaning of section 482), the amount of any costs (1) which are taken into account in computing the basis or inventory cost of such property by the purchaser, and (2) which are also taken into account in computing the customs value of such property, shall not, for purposes of computing such basis or inventory cost for purposes of this chapter, be greater than the amount of such costs taken into account in computing such custom value.

>> To read the complete Chief Counsel Advice Memorandum, click here.

In addressing the conflict for taxpayers who choose to take advantage of the First Sale Rule, the Office of the Chief Counsel cited to Treas. Reg. § 1.1059A-1(c)(2). The cited regulation allows taxpayers to increase the customs value of imported property by certain amounts that are properly not included in customs value, but which are incurred by the taxpayer and properly included in the transfer price of the property for income tax purposes.

Thus, the IRS Office of the Chief Counsel concluded that “an adjustment under section 1059A with respect to a value differential that results solely from an importers correct application of the first sale rule and subsequent real value added under Treas. Reg. § 1.1059A-1(c)(2) is not proper.”

Note, however, that the Office of the Chief Counsel limited its conclusion to only those situations where the taxpayer both correctly applied the first sale rule and subsequent real value was added. Thus, all other adjustments under § 1059A may nonetheless be appropriate.

Treas. Reg. § 1.159A-1(c)-7 stresses the independence of IRC § 1059A from IRC § 482. As discussed in the regulation, IRC § 1059A “in no way limits the authority of the Commissioner to adjust the taxpayers transfer price under IRC § 482 or other provision of the law. Consequently, where the basis or inventory value is determined under the arm’s-length standard of IRC § 482 as an amount less than the customs value, the taxpayer cannot adjust the basis or inventory value upward to equal such customs value by virtue of IRC § 1059A.

Not surprisingly, IRS Chief of Appeals Diane Ryan implied that the Commissioners discretion to adjust transfer price under IRC § 482 is frequently exercised. While speaking at the fall meeting of the American Institute of Certified Public Accountants Tax Division, she indicated that transfer pricing cases were “the largest deficiency cases in appeals.” Due to the increasing number of transfer pricing and other complex cases involving international issues, IRS Appeals now has a standalone unit for this area.

If you have any questions regarding correct application of the First Sale Rule, IRC § 1059A, or any other transfer pricing issues or regulations, please contact Fuerst Ittleman at contact@fidjlaw.com.

Tea Party May Throw Kink Into GOP Trade Policies

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By Ryan Davis

Law360, New York (November 03, 2010) — In the past, a sweeping election win for Republicans reliably translated into wide support for free trade measures. That may not be the case after Tuesday’s election results, lawyers say, because the Tea Party movement that powered the GOP to victory is largely an unknown commodity when it comes to trade and may be hostile to the traditional GOP agenda on the issue.

Congress has gotten relatively little done on the international trade front since President Barack Obama took office, but the Republican gains and divided legislature brought about by the election will likely push trade even further down on the congressional agenda, attorneys say.

While the new leaders in the House, including presumptive House Speaker John Boehner, R-Ohio, and Majority Leader Eric Cantor, R-Va., have a track record of supporting free trade policies, the freshman class of Tea Party-backed Republican representatives could be far less supportive, though their positions on trade are still largely unknown, lawyers say.

The conservative rhetoric in this year’s election was fueled by populist anger about the economy and fear about the threat open trade policies pose to American jobs, lawyers say.

“It’s interesting, you would expect a high number of additional Republicans would translate into additional support for free trade,” said Behnam Dayanim, a partner at Axinn Veltrop & Harkrider LLP. “But we’re not in normal times.”

Nevertheless, few of the newly elected Republican representatives have extensive background in trade or ran on an explicitly trade-based platform, so it is difficult to guess how they will vote, said Russell L. Smith, special counsel at Willkie Farr & Gallagher LLP.

Given the economic climate and the circumstances of the election, Smith said it’s possible the freshman GOP lawmakers will be inclined to support protectionist trade policies to curry favor with constituents.

That could create tension with House leaders who are more supportive of free trade and lead to a “battle for the soul of the Republican Party,” Smith said. Whether the leadership will be able to wrangle the votes to pass legislation in support of free trade “is a big unknown,” he added.

Dayanim said he could envision a scenario in which Tea Party Republicans and liberal members of Congress who support more protectionist policies form an unusual coalition to oppose some pieces of free trade legislation.

Republicans who are skeptical of free trade “will have to do a delicate straddle on this issue because their corporate supporters like those policies just fine,” said Stanley J. Marcuss, a partner with Bryan Cave LLP.

“It’s a peculiar time,” said Mitchell S. Fuerst, managing partner at Fuerst Ittleman PL. “There are rules we thought we knew about Democrats and Republicans, but new rules are getting written.”

Any ideological schism between Republicans of different stripes will only become visible when trade legislation comes up for a vote, but many lawyers say they don’t expect trade to be a significant part of the agenda in the new Congress.

“Unfortunately, I don’t think trade will be a priority issue,” said Ashley W. Craig, a partner at Venable LLP. “The Republicans in the House have said they will focus on financial issues and repealing health care reform, so trade may get caught in the crossfire and fall victim to a further lack of consideration.”

Thompson Hine LLP partner David Christy said he doesn’t see any way for the newly elected Congress to score political points by pushing potentially unpopular free trade measures that may just get vetoed by the president anyway.

“Given the state of the economy, it won’t be a golden age for free trade,” he said.

One litmus test for how the new Congress will handle trade issues will be how it addresses the three pending free trade agreements with South Korea, Colombia and Panama. The U.S. signed the deals years ago, but they still require approval by both houses of Congress.

There has been little action so far during the Obama administration about getting the agreements approved by Congress, although the U.S. and Korea are seeking to finalize details of the plan in advance of next week’s G20 meeting in Seoul.

Jennifer Choe Groves, a partner at Hughes Hubbard & Reed LLP, said the free trade agreements “might provide an opportunity for cooperation between the White House and Congress.”

She said that even with the unknown quantity of the Tea Party’s stance on trade and the fact that Obama has voiced support for getting the deals approved, she’s optimistic the House, if not the Senate, could vote to implement the trade deals.

“Passage of the free trade agreements would be good for the country,” she said. “I don’t think the Republicans would vote against them just to spite Obama.”

Craig was less certain that the House GOP leaders would have the appetite for a vote on trade deals that conservative new members could portray as aiding foreign countries at the expense of American jobs.

“The big question is whether they want to tackle something that could blow up in their face,” he said.

Still, Craig said, Republican leaders inclined to seek a less risky approach to supporting free trade and set themselves apart on trade issues could issue statements putting pressure on the administration to begin negotiating new free trade agreements with other trading partners.

As it has for the past several years, China will be the focus of most trade-related policy and discussion, and legislators on both sides of the aisle could ramp up anti-China rhetoric, Dayanim said, and even seek to strip away some favorable trade provisions the country now enjoys.

“I suspect China is going to be an even bigger bogeyman for many members of Congress than it has been in the past,” he said.

Smith said that although the new Republican leaders have pledged to tackle the very difficult task of fixing the economy first, if they become frustrated in that effort, they may find it politically expedient to capitalize on public suspicion of China and by imposing punitive trade measures.

Mario Mancuso, a partner at Fried Frank Harris Shriver & Jacobson LLP, said that ultimately U.S. policy toward China may not change much under the new Congress, but in terms of public comments about Chinese policies, “there will be more fireworks.”

While Democrats retained control of the Senate, they now have a slimmer margin that could open the door for passage of free trade measures, lawyers say. Free trade proponents are also encouraged by the election of Republican Rob Portman, a former U.S. trade representative in the George W. Bush administration, to a Senate seat in Ohio.

Some parts of Obama’s trade agenda could be significantly hampered by the Republican victory, Mancuso said.

For one, the administration has placed a high priority on reform of the country’s Cold War-era export control system, a plan that requires congressional approval for some measures, but not others.

While export control reform is not typically viewed as a partisan issue, the aspects that need a vote by the legislative branch may run up against the same skepticism about free trade that could hinder other policies, he said.

Members of Congress who oppose the plan could also slow down parts of the process that don’t need a vote by requiring members of the administration to testify more frequently and answer more questions about the project, he said.

The election may also have brought the Obama administration’s efforts to open trade with Cuba, such as relaxing regulations on family travel and some exports, to a screeching halt, Mancuso said.

That’s because Ileana Ros-Lehtinen, a Cuban-American Florida Republican who strongly supports the embargo, is expected to become new chairwoman of the House Foreign Affairs Committee, which handles most Cuba-related legislation.

“To the extent that there was a mini-trend toward easing up on the embargo, that mini-trend stopped last night,” Mancuso said.

Arizona Aviation Company Indicted for Violating Arms Export Control Act

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On October 28, 2010, a federal grand jury indicted Floyd Stilwell, president and CEO of Marsh Aviation Co., an Arizona company for violating the Arms Export Control Act. The indictment charges that Stilwell and his company were part of a conspiracy to ship arms to Venezuela from November 2005 until February 2008.

The indictment alleges that Stilwell and his company shipped military engines to the Venezuelan air force and provided training on how to maintain them in violation of federal law. The engines sold are listed on the United States Munitions List. Under federal law, the export of arms on the US Munitions List is illegal without a federal export license or written authorization issued by the Department of State. Since 2006, the U.S. government has forbidden the export of military hardware to Venezuela because Venezuela does not cooperate with United States anti-terrorism efforts. Additionally, the Office of Foreign Assets Control also issues regulations regarding the import and export of goods to countries which do not comply with U.S. counter-terrorism efforts. These regulations can be found at the OFAC Website.

According to the indictment, Stilwell and Marsh Aviation agreed to upgrade turboprop engines for use on Venezuelan air force reconnaissance planes. The indictment further alleges that Stilwell agreed to disassemble the upgraded engines, disguise them as civilian models when exporting them, and that Marsh Aviation sent employees to Venezuela to reassemble the engines once they had arrived.

U.S. Authorities also allege that Stilwell received $1.8 million in his personal bank account for his role in the arms exporting scheme. If convicted, Stilwell faces up to 15 years in federal prison for the arms violations and conspiracy charges.

For information about Fuerst Ittlemans experience litigating white collar criminal cases, as well as information regarding OFAC and strategies on maintaining compliance with federal customs regulations please contact us at contact@fidjlaw.com.