BRO 2-01-RR:IT:EC 113965 GG
Gerson M. Joseph, Esq.
Sandler, Travis & Rosenberg, P.A.
The Waterford
5200 Blue Lagoon Drive
Miami, Florida 33126-2022
RE: Request for Ruling; Solicitation of Business for Broker by
Independent Agents; 19 U.S.C. 1641; 19 CFR 111.36, 111.37;
Adequate Supervision and Control; C.S.D. 79-111.
Dear Mr. Joseph:
This is in response to your ruling request, dated May 21,
1997, made on behalf of your client, Customs and Trade Services,
Inc. ("CTS").
FACTS:
CTS, a licensed broker, plans to engage retired Customs
employees and customs brokers to sell customs brokerage services
offered by CTS. Counsel for CTS advises that some, if not all,
of the customs brokers approached by CTS may have current
licenses. These individuals will operate as independent agents,
and will be compensated on a commission basis. They will sell
exclusively for CTS and will not provide or bill any services for
their own account to any importer. Although independent, the
salespeople will present CTS business cards and will disclose
their association with CTS to prospective customers.
ISSUE:
Whether a licensed customs broker may use independent agents
to market brokerage services to importers?
LAW AND ANALYSIS:
Several regulatory provisions govern the relationship
between licensed customs brokers, importers, and third parties.
These are sections 111.36 and 111.37 of the Customs Regulations
(19 CFR 111.36 and 37). A violation of these provisions may
lead to penalties or other sanctions being imposed under 19
U.S.C. 1641(b)(6) and/or 19 U.S.C. 1641(d)(1)(C).
Section 111.36(a) of the Customs Regulations precludes a
broker from entering into an agreement with an unlicensed person
to perform Customs business for a third party when fees generated
from the transaction inure to the benefit of the unlicensed
person. The question is whether the arrangement proposed by CTS
falls within this provision. To analyze this thoroughly, the
method of paying the independent agents must be examined, and a
distinction must be drawn between the independent agents of CTS
who are licensed brokers and those who are unlicensed.
Under the proposed arrangement, CTS will compensate the
independent agents by paying them a commission. As a general
rule, commissions are a percentage of the fee paid for services
rendered. Section 111.36(a), which bars the payment of fees to
unlicensed persons, would thus prevent retired customs employees
and brokers whose licenses have lapsed or been suspended from
accepting a commission that was derived from fees paid by clients
for customs business performed by CTS. See Headquarters Ruling
Letter (HRL) 113715, dated January 9, 1997; HRL 225023, dated
February 23, 1994; HRL 225507, dated December 7, 1994; HRL
221330, dated May 20, 1991; and HRL 305499, dated February 10,
1978. It is possible that a different payment method, such as a
flat amount paid by CTS to its agents that is not tied to any
particular transaction, would not trigger the regulation.
However, the commission as proposed is unacceptable as a way to
compensate the unlicensed agents.
Technically, the receipt of a commission by an independent
agent who is a licensed broker for services performed by CTS is
not a violation of 19 CFR 111.36(a). This is because the
commission paid to the salesperson does not benefit an unlicensed
person, but rather, a licensed one, and the regulation applies
only to agreements with unlicensed persons. However, although
not prohibited by 111.36(a), such an arrangement does potentially
raise questions about the adequacy of supervision and control.
Counsel for CTS has stressed that the function of the
independent agents will be to sell brokerage services provided by
CTS. The agents will not perform, or bill, any of these services
themselves. We caution, however, that they must take care to
restrict their function to marketing activities and not to
undertake any action that could be construed as customs business.
The concern is that because of the absence of a bona fide
employer-employee relationship between CTS and the licensed
agent, any customs work done by the broker/agent for CTS's
clients would lack the oversight and direction of CTS as required
by 19 U.S.C. 1641(b)(4). The Customs Service, in addressing this
issue in a Position Statement appearing in 54 Federal Register
13136, March 30, 1989, expressly forbade licensed customs brokers
from conducting customs business for another licensed broker's
client, in the absence of either a bona fide employer-employee
relationship or the establishment of a new broker-client
relationship under C.S.D. 79-111.
By authorizing the sales agents to reveal their association
with CTS, that company is obligated to ensure that no violation
of 19 CFR 111.37 will occur. This regulation prevents a broker
from allowing his license or his name to be used by or for any
unlicensed person, other than his own employees authorized to act
for him, or by or for any broker whose license has been
suspended, in the solicitation, promotion or performance of any
customs business or transaction. In 54 FR 13136, Customs stated
that:
If an independent contractor relationship is
claimed between two brokers, and the customs
transaction is performed in the name of the
hiring broker by an employee of the
independent contractor who is not a licensed
broker, the hiring broker is in violation of
19 CFR 111.37 and 19 U.S.C. 1641(d)(1)(C).
Applied to CTS's situation, this means that licensed sales agents
hired by CTS must advise their own employees not to perform any
task for CTS's clients that would be considered customs business.
A failure to follow these precautions could result in the
imposition of penalties against CTS.
Finally, if a satisfactory compensation method is found and
implemented for the unlicensed agents, thus avoiding the
application of section 111.36(a), section 111.37 would not
necessarily serve to prevent their promotional activities on
behalf of CTS. This is because of the interpretation of that
regulation by Customs in HRL 225023, supra. In that particular
case, Customs allowed a Canadian customs broker that was not
licensed in the United States to solicit clients for its licensed
U.S. subsidiary broker. Customs explained that "the purpose of
[111.37] is to prevent a licensed broker from serving as broker
in name only. That is, the actual Customs entry would be
prepared by an unlicensed person." The solicitation activities
of the Canadian broker were found not to violate section 111.37
because the actual entry documents were filed by the U.S. broker.
This means that CTS's unlicensed agents could carry out functions
in CTS's name that did not rise to the level of "customs
business".
HOLDING:
Independent agents who are licensed brokers may solicit
business for CTS, and receive commissions as compensation,
provided their activities do not fall under the definition of
"customs business".
Unlicensed independent agents, including licensed agents
whose licenses have been suspended, may not accept commissions
from CTS for promoting CTS's brokerage services.
Sincerely,
Jerry Laderberg
Chief
Entry and Carrier Rulings Branch