BRO 3-05
OT:RR:CTF:ER
H276784 SMS
Maureen Celmer
Welke Customs Brokers USA, Inc.
36 Delaware Street
City of Tonawanda, NY 14150
Re: Request for a binding ruling regarding Customs broker relations with unlicensed persons
Dear Ms. Celmer:
This is in response to your letter dated May 5, 2016, requesting a ruling on whether World Trade Center Buffalo Niagara (“WTCBN”) and the Council of Smaller Enterprise (“COSE”), may promote the services of Welke Customs Brokers USA, Inc.,(“Welke”) within the regulations regarding Customs broker relations with unlicensed persons, under 19 C.F.R. § 111.36.
FACTS:
Welke is a licensed Customs broker that proposes to enter into agreements with WTCBN and COSE to promote its services to importers, for a referral or finder’s fee. Welke explained that WTCBN is a non-profit business development organization that helps companies grow, by offering consulting, education, and training. COSE is also a non-profit organization that offers its members networking and educational events, and advocacy on legislative and regulatory issues, to help grow small businesses.
In the first scenario, Welke proposes to enter into separate agreements with WTCBN and COSE, where Welke will pay a referral fee for promoting its services, which result in a business relationship with an importer. The relationship will be directly between Welke and the importer and would include negotiations of services, fees, and the issuance of a power of attorney to conduct Customs business. All brokerage charges would be invoiced directly to the importer with service payments made to Welke. Welke stated that “[n]o part of the agreement for compensation between Welke and the WTCBM or COSE, nor any action taken pursuant to the agreement, forbids or prevents direct communication with the importer or other parties of interest and Welke.” In the second scenario, Welke proposed to have the same arrangement with WTCBN and COSE, but without entering into a formal agreement. Thus Welke requests a binding ruling as to whether WTCBN and COSE may promote its services for a referral or finder’s fee under 19 C.F.R. § 111.36.
ISSUE:
Whether Welke’s proposed arrangement constitutes permissible Customs Broker relations with unlicensed persons, under 19 C.F.R. § 111.36.
LAW AND ANALYSIS:
Sections 111.36 and 111.37, CBP Regulations (19 C.F.R. §§ 111.36 and 111.37) govern the relationship between licensed Customs 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 111.36(a) of the CBP Regulations precludes a broker from entering into an agreement with an unlicensed person, except a freight forwarder, to perform Customs business for a third party when fees generated from the transaction inure to the benefit of the unlicensed person. See 19 C.F.R. § 111.36(a). CBP has previously analyzed different fee arrangements that involved Customs brokers and a third party. In Headquarters Ruling (“HQ”) 113965, dated June 6, 1997, CTS, a licensed Customs broker, planned to compensate retired Customs broker employees and Customs brokers to sell the brokerage services it offered. The individuals would operate as independent agents of CTS and would be compensated on a commission basis. We found that the independent agents who were licensed brokers, may solicit business for a licensed broker, and receive commissions as compensation. However we cautioned that their activities must not fall under the definition of “Customs business” due to concerns about the adequacy of Customs supervision and control. See HQ 113965 (June 6, 1997). However, CBP held that unlicensed independent agents, may not accept commissions from a licensed broker for promoting the broker’s brokerage services. Id. We explained that because a commission is generally a percentage of the fee paid for services, section 111.36(a), would bar the payment of commissions to unlicensed persons, as it is derived from the fees paid by clients for Customs business. Id. See also, Headquarters Ruling Letter (HRL) 113715 (Jan. 9, 1997) (an unlicensed customs consultant that would be receiving a monetary benefit stemming from a contractual agreement between the unlicensed consultant and a broker for the transaction of Customs business by the broker for the consultant’s client, would result in a violation of § 111.36(a)). In HQ 113965, we noted that 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 was unacceptable as a way to compensate the unlicensed agents.
The question here is whether the arrangement proposed by Welke falls within the provision under 19 C.F.R. § 111.36(a). The method of paying the independent non-profit organizations must therefore be examined. Under the proposed arrangements, Welke will compensate the organizations by paying them a referral or finders’ fee for promoting their services, only once a business relationship between Welke and an importer is formed. In its original request, Welke did not elaborate on the type of fee that would be issued. On July 28, 2016, we asked for clarification on the type of payment that Welke would issue to its referring organizations. Welke clarified that it proposes to use a commission plan based fee that is calculated as a percentage of the entry fee. Welke further explained that the commission will be paid either per importer or per shipment, over the life span of the business relationship, but not to exceed five years.
Welke’s proposed commission based payment method, tied to entry transactions would violate the regulations prohibiting performance of Customs business for a third party, when fees generated from the transaction inure to the benefit of the unlicensed person. See 19 C.F.R. § 111.36(a). This situation is analogous to the arrangement outlined in HQ 113965, where we explained that because a commission is generally a percentage of the fee paid for services, section 111.36(a), would bar the payment of commissions to unlicensed persons, as it is derived from the fees paid by clients for Customs business. See HQ 113965 (June 6, 1997). Accordingly, the commission as proposed is an unacceptable way to compensate unlicensed agents.
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 may not prevent their promotional activities on behalf of Welke. Section 111.37 of CBP Regulations 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. See 19 C.F.R. § 111.37. In HRL 225023, dated February 23, 1994, CBP interpreted section 111.37 to allow a Canadian Customs broker, which 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, which would occur where 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. Accordingly, as explained in HRL 225023, Welke’s unlicensed agents could carry out functions in Welke’s name that did not rise to the level of “Customs business”, without violating section 111.37 of the regulations.
Lastly, while not proposed in the current request, we caution, that if Welke decides to enter into a similar agreement with a licensed Customs broker, it must still take care to restrict their function to marketing activities and not to undertake any action that could be construed as Customs business. While compensating a licensed Customs broker to solicit business is not a violation of section 111.36, restrictions to allow only solicitation activities are imperative, to prevent a violation of section 111.37. The Customs Service, in a Position Statement appearing in 54 Federal Register 13136, dated 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. In 54 Fed. Reg. 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).
54 Fed. Reg. 13136 (Mar. 30, 1989). As CBP explained in HQ 113965, a relationship between a broker and an independent contractor raises concerns due to the absence of a bona fide employer-employee relationship. Any customs work potentially performed by the broker/agent for Welke’s clients would lack the oversight and direction of Welke as required by 19 U.S.C. § 1641(b)(4). See HQ 113965. Accordingly, any licensed sales agents potentially hired by Welke must advise their own employees not to perform any task for Welke’s clients that would be considered Customs business. A failure to follow these precautions could result in the imposition of penalties against Welke.
HOLDING:
Unlicensed independent agents, may not accept commissions from Welke for promoting its brokerage services per 19 C.F.R. § 111.36.
This decision is limited to the specific facts set forth herein. If the terms of the import or export contracts vary from the facts stipulated to herein, this decision shall not be binding on CBP as provided for in 19 C.F.R. § 177(b)(1), (2) and (4), and § 177.9(b)(1) and (2).
Sincerely,
Gail Kan, Acting Chief
Entry Process and Duty Refunds Branch