When Importer Security Filing Rules Conflict With Accepted Trade Finance Practice

A few months ago a banking client called me with a novel problem. A prospective borrower who sought financing for in-bound ocean shipments balked at a routine request. My client would not finance the shipments unless the carrier issued bills of lading that named the bank as consignee. The prospective borrower feared that doing so may subject it to fines under the Importer Security Filing Regulation ¹19 C.F.R. §149 (2009). (the “ISF Regulation”).

Having the lender be named consignee on all bills of lading (and take possession of the originals) is the accepted practice in the trade finance industry and for good reason: it allows the lender to perfect its security interest in the shipment and control the shipment if the borrower fails to perform its obligations. Any attempt to modify that practice would be met with significant resistance. But the prospective borrower’s concern was based on a close reading and literal interpretation of the ISF Regulation. It raised the specter that the regulation could have a disruptive effect on the industry.

The ISF Regulation was adopted by U.S. Customs and Border Protection (“CBP”) to fulfill its mandates under several statutes enacted in the wake of the September 11, 2001 terrorist attacks ²Trade Act of 2002, Pub. L. No. 107-210, 116 Stat. 933 (codified as amended at 19 U.S.C. 2071 (2002)), and Security and Accountability for Every Port Act of 2006, Pub. L. No. 109-347, 120 Stat. 1884 (codified at 6 U.S.C. Ch. 3 (2006)).. The aim of this effort was to collect information regarding cargo destined for importation into the U.S., one of many steps taken by the CBP to improve the safety and security of U.S. ports and the international maritime supply chain and prevent them from being used for terrorist activities.

In January 2008, when CBP issued its notice of proposed rulemaking for what eventually became the ISF Regulation, it was already collecting a significant amount of information regarding incoming ocean cargo from both carriers and importers. Carriers were required to submit cargo information to CBP no later than 24 hours before the cargo was laden aboard a vessel at a foreign port. Importers were required to file entry information, including CBP Form 3461 (“Form 3461”) and/or CBP Form 7501 (“Form 7501”) after arrival of the goods at a U.S. port of entry. Prior to the adoption of the ISF Regulation, importers were not required to submit advance cargo information to CBP.

The ISF Regulation, which became effective on Jan, 26, 2009 (though CBP delayed compliance for a year, to give the trade sufficient time to adjust operations), required for the first time that someone other than the carrier provide advance information regarding incoming ocean cargo to CBP. It requires in pertinent part that the party causing the goods to arrive in the U.S. (typically the goods’ owner, purchaser or consignee or an agent for any of those parties) submit to CBP at least 24 hours before the goods are laden aboard the vessel at the foreign port, a filing (an “Importer Security Filing” or “ISF”) that provides certain information regarding the shipment, including the identity of the seller, the buyer, the importer of record, the consignee ³The ISF Regulation requires submission of the consignee number, not its name or address, and defines the consignee number as the “Internal Revenue Service (IRS) number, Employer Identification Number (EIN), Social Security Number (SSN), or CBP assigned number of the individual(s) or firm(s) in the United States on whose account the merchandise is shipped.” 19 C.F.R. §149.3(a)(4) (2009)., the manufacturer or supplier of the goods, the ship to party, the country of origin, the statistical reporting number under which the goods are classified under the Harmonized Tariff Schedule of the United States (HTSUS), the location where the goods were stuffed into containers, and the identity of the consolidator who stuffed the goods. All of this information has to be provided at the lowest bill of lading level (i.e., at the house bill of lading level, if applicable) ⁴19 C.F.R. §149.3(a) (2009) requires in pertinent part that “the following elements [which include the consignee number] must be provided for each good listed at the six-digit HTSUS number at the lowest bill of lading level (i.e. , at the house bill of lading level, if applicable).” , and that creates a dilemma for the importer: while the regulation requires that the data submitted in the ISF match the bill of lading, CBP would not allow entry for goods identified on the ISF as having been consigned to a lender.

The ISF Regulation describes the consignee as “the individual(s) or firm(s) in the United States on whose account the merchandise is shipped”, a definition that is broad enough to include a negotiating bank named as consignee on the merchandise bill of lading. However, a closer reading of the ISF Regulation and CBP’s response to various trade comments reveals that CBP expects the person identified as the consignee on the ISF to be not the nominal consignee named on the bill of lading but someone else altogether — the “ultimate consignee” for the shipment.

The term “ultimate consignee” does not appear anywhere in the ISF Regulation, but Section 149.6 of the regulation ⁵19 C.F.R. §149.6. (2009) states that if the ISF is filed via the same electronic transmission as entry or entry/entry summary documentation (in other words, if the importer uses a single electronic transmission to submit data for the ISF, Form 3461 and/or Form 7501), the importer is only required to provide the importer of record number, the consignee number, the country of origin and the commodity HTSUS number once to be used for purposes of all three filings. Form 3461 and Form 7501 require the importer of record for any incoming shipment to report the name, address and identification number of the “ultimate consignee” for the shipment. CBP has defined the ultimate consignee at the time of entry ⁶See CBP Directive CD 3550-079A (2001), as amended by CBP’s Amendment to the Current Reporting Requirements for the Ultimate Consignee at the Time of Entry or Release (2005). as “the party in the United States, to whom the overseas shipper sold the imported merchandise. If at the time of entry … the imported merchandise has not been sold, then the Ultimate Consignee at the time of entry … is defined as the party in the United States to whom the overseas shipper consigned the imported merchandise. If the merchandise has not been sold or consigned to a U.S. party at the time of entry …, then the Ultimate Consignee at the time of entry … is defined as the proprietor of the U.S. premises to which the merchandise is to be delivered.”

CBP has indicated on several occasions ⁷See, e.g., Importer Security Filing and Additional Carrier Requirements, 73 Fed. Reg. 71,730 at 71,733, 71,743 (Nov. 25, 2008). that the information it expects reported on the ISF is the identification number of the ultimate consignee (the party reported or to be reported as such on Form 3461). When asked specifically what should be submitted for the consignee number(s) when a shipment has been consigned to a vendor’s negotiating bank, CBP responded that “for shipments that are consigned to … vendor’s negotiating bank, where … [that party] will not be the actual consignee if the goods are not consigned before arrival in the United States, the … [i]mporter may need to designate a warehouse in the United States to receive the goods and, therefore, to be listed as the consignee.” ⁸Importer Security Filing and Additional Carrier Requirements, 73 Fed. Reg. at 71,749.

The tie-in between the ISF Regulation and the entry declarations and the pronouncements of CBP both before and after its adoption of the regulation leave little doubt that even though the language of the regulation appears to require submission of an identification number of the person “on whose account the merchandise is shipped”, which matches the consignee number on the bill of lading, what CBP is actually looking for is the identification number of the purchaser of the goods (if they have been sold before shipping), the actual consignee of the goods (if they have been consigned before shipping but not sold) or the owner of the premises in the U.S. to which the goods will be delivered (if they have been neither sold nor consigned before shipping).

We haven’t seen any enforcement actions involving the ambiguity in the ISF Regulation, mainly because customs brokers and officials have adopted a practical approach to this issue — in situations that involve a negotiating bank, brokers have been providing the identification number of the ultimate consignee in the ISF, and customs officials have been ignoring the requirement that the ISF be consistent with the bill of lading. But some importers are obviously uneasy about the ambiguous language of the regulation and their attorneys are reduced to interpreting unrelated CBP statements in trying to offer comfort to their clients.

CBP would do a great service to the importer community by modifying the ISF Regulation to eliminate the ambiguities that give rise to the importer’s dilemma and bring the regulation in line with CBP’s apparent intent. Two provisions would need to be changed: Section 149.3(a), which requires that the data in the ISF match the bill of lading, should be modified as follows:

“(a) Shipments intended to be entered into the United States and shipments intended to be delivered to a foreign trade zone. Except as otherwise provided for in paragraph (b) of this section, the following elements that appear in the bill of lading must be provided for each good listed at the six-digit HTSUS number at the lowest bill of lading level ( i.e. , at the house bill of lading level, if applicable). The manufacturer (or supplier), country of origin, and commodity HTSUS number must be linked to one another at the line item level.”

Section 149.3(a)(4), which describes the consignee too broadly, should be modified as follows:

“(4) Consignee number(s). Internal Revenue Service (IRS) number, Employer Identification Number (EIN), Social Security Number (SSN), or CBP assigned number of the individual(s) or firm(s) in the United States on whose account the merchandise is shipped ultimate consignee of the shipment.”

These small changes would be sufficient to put to bed any concerns among importers that complying with their lenders’ requests that bills of lading be consigned to them would violate the ISF Regulation.