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Customs brokers lobby change to US bankruptcy law

The NCBFAA proposes amending the U.S Bankruptcy Code to allow “subrogation” rights for customs brokers who have paid duties to the U.S. government on behalf of a bankrupt importer.

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The National Customs Brokers and Forwarders Association of America (NCBFAA) is stepping up its lobbying effort on Capitol Hill this month to change the way U.S. bankruptcy law is applied to customs brokers when importers become insolvent. 

Under the current law, a customs broker may be ordered by the bankruptcy trustee to give back money paid to it by the insolvent importer during the past 90 days. It does not matter to the bankruptcy trustee whether that money has already been paid to Customs and Border Protection (CBP) to cover import duties. 

“Depending on the importer, their imported volumes and products, this could amount to millions of dollars,” said Geoff Powell, head of Boston-based C.H. Powell Co. and NCBFAA chairman. “This could force customs brokers to file for bankruptcy protection themselves.” 

This so-called “claw back” is allowed under Section 547 of the Bankruptcy Code, which prohibits preferential payments to any one creditor. By contrast, under the Bankruptcy Code, duty payments to CBP are considered preferential payments because they have a “priority” position in the code. 

Under current trade law, there is generally a 10 business day period between the release of imported merchandise by CBP and payment of estimated duties to the government. Customs brokers pay duties to CBP on behalf of their importer-clients through the agency’s ACH (automated clearinghouse). It’s estimated that customs brokers remit to CBP about $10 billion annually in import duties and other fees.

The NCBFAA specifically proposes a technical amendment to Section 507(d) of the Bankruptcy Code to allow “subrogation” rights for customs brokers who have received money or paid duties to the U.S. government on behalf of a bankrupt importer. 

“If a customs broker could be subrogated to the priority rights of CBP, any payments from the importer to CBP via the customs broker during the 90-day period would likewise no longer be subject to a preference payment recovery action,” the NCBFAA said.

This language was included in the Customs Business Fairness Act (H.R.2261) which Rep. Pete King, R-N.Y., introduced on April 10. About a dozen House representatives have since signed onto the bill as co-sponsors, including Gregory Meeks, D-N.Y.; Bill Foster, D-Ill.; Peter Welch, D-Vt.; Filemon Vela, D-Texas; Vincente Gonzalez, D-Texas; Bradley Byrne, R-Ala.; Henry Johnson, D-Ga.; Don Bacon, R-Neb.; Sanford Bishop, D-Ga.; Dutch Ruppersberger, D-Md.; and Elaine Luria, D-Va. 

NCBFAA’s longtime Washington lobbyist Jon Kent has sought to amend the Bankruptcy Code in favor of customs brokers for the past 20 years. On several occasions during the early 2000s, the legislation came close to passing, but fell short due to other circumstances. 

“You have to keep coming at it,” Kent said. “It’s tough to lobby on a very complex issue like this.” 

However, he’s confident the NCBFAA is off to a good start with H.R. 2261 due to the number of lawmakers who have signed onto the bill as co-sponsors. “It’s teed up pretty well,” Kent said. 

The NCBFAA is expected to make the Customs Business Fairness Act a top legislative issue at its annual Government Affairs Conference in Washington, D.C., Sept. 22-24, during which members will spend a day on Capitol Hill meeting with their respective lawmakers.

Since the start of 2019, Laurie Arnold, regulatory compliance officer at Atlanta-based JAS Forwarding USA and the NCBFAA’s Legislative Committee chair, has led the association’s effort to rally members to contact their congressmen on Capitol Hill and make them aware of the importance of the Customs Business Fairness Act. 

“Some brokers are attuned to this because they have been affected by importer bankruptcy,” she said, adding that it will require many industry voices to give the legislation traction.

About 50 licensed customs brokers in JAS offices across 12 states have written letters to their congressmen explaining the importance of H.R. 2261 to the industry. “If you don’t let the lawmakers know, how are they expected to know that this is important to you,” Arnold said.

She contacted the heads of the regional customs broker and forwarder associations throughout the country to also urge their individual company members to contact their respective lawmakers about the significance of the Customs Business Fairness Act. 

Meanwhile, duty and fee outlays made by customs brokers on behalf of their importer clients have been propounded the past two years by tariff increases on U.S. imports. It’s estimated that CBP has collected more than $46 billion in additional duties under sections 201, 232 and 301 of the Trade Act so far.

“The current administration’s approach to tackling certain trade imbalances and trade disagreements is to increase duties to many of our trading partners,” Powell said. “If the duties continue to increase, which adds financial pressures on importers, the claw back of duties by a bankruptcy court could be devastating to many customs brokers.” 

Many customs brokers carry insurance to protect themselves from financial losses. However, if an insurance underwriter sees signs that an importer has become a major risk, it may be inclined to raise the customs broker’s insurance premiums or drop it altogether, Powell said. 

Albert Saphir, a longtime customs brokerage and forwarder industry consultant, who operates ABS Consulting in Weston, Fla., recommends that customs brokers encourage their importer clients as much as possible to obtain their own ACH accounts with CBP to pay duties and taxes.

“I see some customs brokers still advancing funds, but I think there are fewer today that continue to do this than years ago,” Saphir said. “They have learned valuable lessons.”

Chris Gillis

Located in the Washington, D.C. area, Chris Gillis primarily reports on regulatory and legislative topics that impact cross-border trade. He joined American Shipper in 1994, shortly after graduating from Mount St. Mary’s College in Emmitsburg, Md., with a degree in international business and economics.