DRA 1-02
OT:RR:CTF:ER
H272715 KF
Jesse Weisman
JW Customs Brokers
8200 Hampson Street, Suite 225
New Orleans, LA 70188
Re: Propriety of Concurrent Employment as a Corporate Officer for a Brokerage Company and Freight Forwarding Company; 19 C.F.R. § 111.36; 19 U.S.C. § 1641.
Dear Mr. Weisman:
This is in response to your request, dated January 20, 2016, for a ruling on whether a broker may be simultaneously employed, and receive a salary from, a brokerage company and freight forwarding company of which they are a sole proprietor and corporate officer.
FACTS:
JW Customs Brokers, LLC (“JWCB”) is a corporation licensed to conduct customs business pursuant to 19 U.S.C. § 1641(b)(3). According to your request, you are the Chief Executive Officer of JWCB and you conduct the company’s customs business while holding an individual license pursuant to 19 U.S.C. § 1641(b)(2). JWCB employs another broker with an individual license, Ms. Tracie Marie Thomas, who serves as the company’s second corporate officer. JWCB was qualified to obtain a license pursuant to 19 U.S.C. § 1641(b)(3) through Ms. Thomas’ individual license.
You are also the Chief Executive Officer of JW Transport, LLC (“JWT”), a duly authorized freight forwarding and truck brokering company. You conduct JWT’s business operations. You conduct the business of JWCB and JWT simultaneously. You are the sole proprietor of both JWCB and JWT.
ISSUE:
Whether a conflict arises from a customs broker’s simultaneous employment with a brokerage and freight forwarding entity, and whether a customs broker so employed may receive a salary from both entities.
LAW AND ANALYSIS:
Sections 111.37 and 111.36, United States Customs and Border Protection (“CBP”) Regulations, govern the relationship between licensed brokers, importers, and third parties. 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 111.37, CBP Regulations, prohibits a customs broker from allowing an unlicensed person to solicit, promote or perform customs business by utilizing the broker’s license. Customs business includes transactions regarding “the entry and admissibility of merchandise, its classification and valuation, the payment of duties, taxes, or other charges assessed or collected by [United States Customs and Border Protection (“CBP”)] on merchandise by reason of its importation[;] the refund, rebate, or drawback of those duties, taxes, or other charges[; and] the preparation, and activities relating to the preparation, of documents in any format… intended to be filed with CBP in furtherance of any other customs business activity.” See 19 C.F.R. § 111.1; 19 U.S.C. § 1641(a)(2).
Section 111.36(b), CBP Regulations, prohibits a customs broker from “enter[ing] into any agreement with an unlicensed person to transact customs business… in such manner that the fees or other benefits resulting from the services rendered... inure to the benefit of the unlicensed person.” An exception arises under 19 C.F.R. § 111.36(c) for paid referral agreements between a customs broker and freight forwarder. A freight forwarder is a person or entity licensed by the United States Department of Transportation (“DOT”) to conduct “the business of dispatching shipments in foreign commerce between the United States, its territories or possessions, and foreign countries, and handling the formalities incident to such shipments, on behalf of other persons.” See 19 C.F.R. § 111.1; HQ 116443 (May 2, 2005).
In HQ 225012 (July 13, 1994), CBP determined that a customs broker may conduct non-customs business for the benefit a freight forwarder because “[t]here is no statutory or regulatory prohibition against a broker performing work other than customs business.” In HQ 225012, a broker who independently conducted customs business sought CBP’s approval for simultaneous employment with a freight forwarder. CBP explained the broker could conduct customs and freight forwarding business simultaneously because the broker received a fixed salary from the freight forwarder and issued an itemized bill to clients which clearly identified and distinguished the brokerage services performed. Id. No violation of 19 C.F.R. § 111.36 arose from this arrangement because the freight forwarder did not receive any portion of the fees charged for brokerage services and the broker’s salary did not vary contingent on the amount of brokerage services provided, such that no benefit inured to the freight forwarder from customs business transactions. Id. Nor did a violation of 19 C.F.R § 111.37 arise, because the freight forwarder did not participate in any brokerage services (i.e. the broker’s license was not being utilized by an unlicensed person). Accordingly, we find that no conflict arises from your proposed arrangement of simultaneously receiving a salary from a customs brokerage and freight forwarding entity, for work performed simultaneously, so long as you draw a fixed salary from JWT for performing freight forwarding services, conduct customs business without participation from JWT, and issue clients an itemized bill clearly identifying the brokerage services you provided, from which JWT will receive no profit.
We note that in HQ 225012, CBP determined that a broker entering into an arrangement to simultaneously conduct customs and freight forwarding business was obligated to provide a full explanation of the arrangement on CBP Form 3124. The explanation provided had to “adequately characterize the situation” in which they conducted customs business. Id. CBP Form 3124 requires brokers to provide CBP with written notice of any change in the mailing address, business connection, or the name and style under which a broker conducts customs business pursuant to an individual license. See CBP Form 3124, Application for Customs Broker License, July 2014, CBP.gov. Written notice is also required for any change in the mailing address, name, licensed officers or partners, charter, certificate, and articles of a corporation conducting customs business pursuant to its license. Id.
To address your more general inquiry regarding conflicts arising from a broker simultaneously conducting customs and freight forwarding business, we look to the requirements and limitations regulating how a broker conducts customs business with another entity. You stated that you and Ms. Thomas are both licensed corporate officers of JWCB, and that Ms. Thomas qualifies JWCB’s district permit. You provided no information on the extent of your respective involvement in the company’s daily affairs, or regarding the details of any business arrangements between JWCB and JWT. Pursuant to 19 C.F.R. § 177.1(d)(2), we direct you to the information below as general guidance on well-established principles of customs law due to your incomplete ruling request. We address the following potential conflicts arising from the information you provided: (i) you owe simultaneous managerial obligations to JWCB and JWT; (ii) JWCB and JWT may share client information; and (iii) JWT may refer clients to JWCB.
Simultaneous managerial obligations owed to a customs brokerage and freight forwarding entity.
A customs broker who is the sole proprietor of a licensed brokerage entity is required to “exercise responsible supervision and control” over the customs business conducted by its brokerage entity. See 19 C.F.R. § 111.28(a). Responsible supervision and control requires a “degree of supervision and control necessary to ensure the proper transaction of the customs business of a broker, including actions necessary to ensure that an employee of a broker provides substantially the same quality of service in handling customs transactions that the broker is required to provide.” See 19 C.F.R. § 111.1. Although “regulations for brokers do not prohibit a person from serving as an officer of more than one entity,” as the sole proprietor of JWCB you are required to exercise responsible supervision and control over its customs business regardless of your simultaneous obligations to JWT. See HQ H135698 (July 8, 2012); 19 C.F.R. § 111.28(a).
To illustrate the varying forms of supervision and control which may be required of a sole proprietor, 19 C.F.R. § 111.1 lists the following: “the issuance of written instructions and guidelines to employees of the broker; … the availability of an individually licensed broker for necessary consultation with employees of the broker; the frequency of supervisory visits[;] the frequency of audits and reviews[; and] the extent to which the individually licensed broker who qualifies the district permit is involved in the operation of the brokerage.” CBP has also determined that at least one licensed officer must be “involved in the management of the daily operations of the corporation.” See HQ H114313 (December 8, 2010). Therefore, either you or Ms. Thomas must be involved in managing the daily operations of JWCB.
Sharing client information between a customs brokerage and freight forwarding entity.
Pursuant to 19 C.F.R. § 111.24, records and information “pertaining to the business of the clients serviced by the broker are to be considered confidential, and the broker must not disclose their contents… to any person.” Prior to disclosing client information obtained in the course of conducting customs business to another person or entity, a broker must first obtain their clients’ consent. See HQ 225023 (February 23, 1994).
In HQ 225023, a customs brokerage entity was audited for multiple potential regulatory violations including sharing client information with its Canadian parent company. CBP determined that no violation of 19 C.F.R. § 111.24 occurred because client information was provided to the unlicensed parent company, who disclosed the information to its subsidiary customs brokerage entity. Id. The brokerage entity therefore did not disclose client information obtained in the course of conducting customs business. Id.
Accordingly, whether a violation 19 C.F.R. § 111.24 may occur as between JWCB and JWT depends on the flow of client information between the two entities. If JWCB shares client information with JWT, a violation of 19 C.F.R. § 111.24 will occur unless JWCB first obtains client consent to the disclosure. If instead JWT shares client information with JWCB, then no violation will occur because 19 C.F.R. § 111.24 does not apply to circumstances in which information is disclosed by an entity other than a customs broker.
Client referrals to a customs brokerage entity by a freight forwarding entity.
A freight forwarder who refers clients to a customs broker may be compensated for the referral subject to the requirements enumerated in 19 C.F.R. § 111.36(c). Such a referral arrangement constitutes a business relationship between a licensed and unlicensed person, subject to the restrictions on a freight forwarder profiting from customs business pursuant to 19 C.F.R. § 111.36(b). To avoid conflict with 19 C.F.R. § 111.36(b), CBP determined in HQ 113965 (June 6, 1997) that unlicensed persons cannot be compensated for referring clients to a broker in the form of a commission because a commission is derived from the fees a broker bills to clients for conducting customs business.
In HQ 113965, a customs broker sought to hire potentially unlicensed persons on a commission basis to act as independent agents who market the broker’s services. CBP found that commissions were an unacceptable form of compensation due to the sharing of customs business fees with an unlicensed person, and explained that any method of compensation directly tied to a particular customs business transaction may give rise to a conflict with 19 C.F.R. § 111.36(c). Id. If JWT will refer clients to JWCB in exchange for compensation, the compensation should not take the form of a commission or other method enabling the sharing of a profit derived directly from a particular customs business transaction.
If instead JWT will refer clients to JWCB without accepting any form of compensation, the requirements of 19 C.F.R. § 111.36(c) will not apply to the referral arrangement because the regulation is expressly limited in scope to the conditions of a freight forwarder’s compensation by a broker.
HOLDING:
Based on the information provided, we find that a broker may simultaneously serve as an employee of a customs brokerage and freight forwarding entity, and draw a fixed salary from both entities, if the freight forwarding entity does not participate in any customs business and clients receive an itemized bill clearly identifying and distinguishing the services provided by the broker.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruing letter, either directly, by reference, or by implication, is accurate and complete in every material respect.” If any fact in the transaction varies from the facts stipulated to herein, this decision shall not be binding on CBP, as provided for in 19 C.F.R. § 177.9(b).
Sincerely,
Monika R. Brenner, Acting Chief
Entry Process and Duty Refunds Branch