In late 2003, when the North American Free Trade Agreement was signed into law, the second half of that bill included the Customs Modernization legislation. It was the Mod Act which contained the provision that now requires importers to exercise reasonable care, see 19 U.S.C. 1484.
… While how reasonable care applies in different contexts has been further commented upon since then, the basic principals of reasonable care have remained the same from the outset: It is up to the importer to conduct his business in such a way as to make reasonably sure that his declarations about classification, value and admissibility are correct at time of entry and if not, to correct them promptly thereafter.
Against this backdrop, it was stunning to see the indictment of the company which in 2007 imported wheat gluten contaminated with melamine used as an ingredient in pet food. The fact ChemNutra Inc. was indicted is perhaps not unexpected, but the basis for the indictment surely should give every international trader shudders. The facts of the case are relatively straightforward. It is what the U.S. Attorney claimed in the indictment that is shocking.
According to the indictment, ChemNutra is owned by Sally and Stephen Miller. ChemNutra sourced the gluten from Suzhou Textiles, Silk, Light Industrial Products, Arts and Crafts Import/Export Co., Ltd., or SSC. SSC was registered as an export broker, meaning it could export on its own account and for others. SSC, in turn, sourced the gluten from another company, Xuzou Anying Biologic Technology development Co., Ltd. (XAC), and then acted as exporter when the goods were ready to ship. Wheat gluten is used as a binding agent in the manufacture of certain types of pet food.
The gluten ordered by ChemNutra from SSC was to have a 75-percent minimum protein content. In the ordinary course of events, the General Administration of Quality Supervision, Inspection and Quarantine of the People's Republic of China, the Chinese inspection service, is in charge of entry-exit commodity inspection. Wheat gluten is subject to mandatory inspection under Chinese law.
However, because SSC misclassified the gluten at time of export, AQSIQ did not inspect the goods prior to shipment. Of course, SSC prepared the documents required for export from China and import into the United States When it came to classifying the wheat gluten, SSC selected 3504.0090, which covers peptones, other derivatives and other protein substances.
Sally Miller is a Chinese national with a food chemistry engineering degree from a Chinese university. She supposedly represented herself to be certified in China as an ISO-9000 chief auditor. Claiming that ISO-9000 is "an international consensus on good quality management practices that provide[s] a set of internationally recognized standardized requirements for [a] quality management system in any organization," the U.S. Attorney in Kansas City, who brought the indictment, sought to impose on ChemNutra and the Millers liability for steps that when read together sound very much like exactly what any importer should do to exercise reasonable care and in conducting his business.
The first claim is that based on Sally Miller's training and experience, she knew or should have known that products exported under 3504.00, HTS, would not be inspected by AQSIQ. She is also alleged to know, or should have known, that if the wheat gluten had been classified under 1109.00, HTS, it would have been subjected to a mandatory inspection by AQSIQ, the clear inference being if that had happened, the melamine would have been detected and the pet illnesses and deaths which followed avoided. …
In a nutshell, the federal government claims the wheat gluten was deliberately labeled and coded so it would not be subject to a compulsory inspection at time of export. While that may be true, the question about which all traders should be concerned is how does this set of facts translate into liability in the U.S. on the part of the importer or its owners/shareholders?
Well, let's begin with the obvious FDA violations. The law is written in such a way that an importer has strict liability if he deals in goods which are misbranded or adulterated. In other words, whether or not the importer had knowledge, he is responsible if his product is adulterated, in this case because it contained the melamine, a "deleterious" substance that rendered the wheat gluten injurious to health. The wheat gluten was also misbranded in that it was labeled as containing a protein level of 75 percent when, in fact, the actual protein level was much lower.
The indictment contains 13 counts alleging the introduction, delivery for introduction and causing the introduction and delivery for introduction into interstate commerce of misbranded food, plus another 13 counts focused on adulterated foods. (The case covers 13 imported shipments.) Those 26 counts apparently were not enough, most likely because they involve misdemeanors…. Obviously, the U.S. Attorney felt it necessary to find a way to at least assert one felony count, and got creative and this is where international traders need to start worrying.
The indictment contains a count for conspiracy to commit wire fraud. The claim is there was "a fraudulent scheme and artifice to defraud and obtain money by means of false and fraudulent representations and concealment of material facts" and that wire communications occurred which were both interstate and international in nature, i.e., wire fraud.
Given her background, the government states Miller and the other parties knew or should have known that misdeclaring the goods at time of export from China would allow those shipments to evade mandatory inspection, allowing tainted product to be imported.
So, just what did the importer do that contributed to the conspiracy? What are the "overt acts?" There are 32 paragraphs in the indictment listing a series of e-mail communications between Miller and a variety of parties, including the Chinese suppler/export agent, her husband and ChemNutra's customers, plus communications between Steven Miller and the customs broker stating the correct classification is 1109.00.10, HTSUS, (a similar message was separately sent by Sally Miller to a customs broker); also between Sally Miller and her husband describing 3504.00.90 as the tariff provision for collagen(?). There were also documents which described the product as wheat protein rather than wheat gluten; additionally, there were at least a couple of certificates of analysis. Finally, and most importantly from a reasonable care perspective, Sally Miller questioned the supplier about whether the correct classification was heading 3504 or 1109!
One argument made by the government is that ChemNutra failed to disclose its supplier was not the manufacturer, something quite common and business-proprietary in nature. Of course, the primary allegation is that ChemNutra and the Millers failed to disclose the wheat gluten had not been properly exported out of China, meaning no AQSIQ inspection took place! As to the certificates of analysis, none stated the presence of the melamine and, as is often emphasized in the indictment, ChemNutra and the Millers failed to disclose the presence of the melamine or the fact the wrong tariff number appeared on the certificates.
From the government's perspective, equally damning was the fact ChemNutra issued its own certificates of analysis (presumably relying on those from China) attesting to the 75-percent protein level, which, based on the FDA testing, was false. The remaining overt acts alleged involve quality complaints received from one buyer and the supposedly false representations made about how those problems would be resolved. Also noteworthy, the government took issue with ChemNutra representing the export trading company as "its manufacturer."…
In the meantime, international traders need to be worried about what else Washington expects them to know about their suppliers' activities in order to avoid liability. Do you know what your suppliers do to get their goods exported? Just how far should you go in your questioning of your suppliers practices? Does this case materially change how your due diligence is conducted? Most would probably say, what my supplier does is his responsibility not mine.
Are you as confident of that opinion in light of this indictment?