IMPORT PROCESS MODERNIZATION:

Potential Enforcement Implications Of The Automated Commercial Environment/

International Trade Data System (ACE/ITDS) On Cosmetic Imports

J. Michael Taylor

Partner, International Trade

King & Spalding

Washington, DC

+1 202-626-2385

jmtaylor@kslaw.com

Lisa Dwyer

Partner, FDA & Life Sciences

King & Spalding

Washington, DC

+1 202-626-2393

ldwyer@kslaw.com

Daniella Taveau

Global Regulatory and Trade Strategist

King & Spalding

Washington, DC

+1 202-626-2623

dtaveau@kslaw.com

May 4, 2016

ROADMAP

• The Border As We Know It – Past And Present

• What Is The Big Deal About ACE Implementation?

• FDA Enforcement Trends

• Other Trade Issues And Trends Affecting Cosmetics

THE BORDER AS WE KNOW IT

REASONABLE CARE - IMPORT

• Importers Are Responsible For Declaring The Value, Classification, And Rate Of Duty On Entered Merchandise

• Informed Compliance -- The Importer Of Record Is Required To Exercise “Reasonable Care” In Preparing And Submitting Information To Customs

• Customs Data Are Provided To Customs And Border Protection (CBP) And FDA Data Items Are Provided To FDA

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ENTRY OF A GOOD - CUSTOMS

• Tariff Classification ― Merchandise is classified under the Harmonized Tariff Schedule subheading

that provides the most accurate product description

― Further manufacturing, importing of component parts, and the modification of specifications all affect classification

• Valuation ― Tariffs usually are calculated on an ad valorem basis, i.e., as a percentage of

the value of the imported merchandise

― Valuation is usually based on the price paid or payable for the merchandise

• Country Of Origin ― Substantial transformation changes the country of origin

― Generalized System of Preferences

― Free Trade Agreements

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FORM 7501

• “Entry Summary”

• Typically Filed By Broker

• Provides Customs With Essential Data

• Includes “Declaration”

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FDA AT THE BORDER

• FDA Determines Whether An Article Is In Compliance With Acts Enforced By FDA

― FDA Inspectors At The Border

― MoU Between Customs And FDA

• Historically – Some Collaboration, But Customs Acted At FDA’s Request

― Customs: revenue and homeland security

― FDA: health and safety

― Overlapping Jurisdiction: Labelling

• Customs Clearance/Release Of FDA Items Historically Conditioned On Importers’ Control/Ability To Return (Conditional Release)

FDA CURRENTLY GATHERS KEY DATA

• FDA Cargo Admissibility Process – Traditionally Requires ACS Data Submissions To Customs And OASIS Data Submissions To FDA

“The FDA district office receives notification from CBP of all formal and informal entries of articles under FDA jurisdiction at ports of entry located in the district's territory. Through the use of CBP's Automated Commercial System and FDA's Operational and Administrative System for Import Support (ACS/OASIS) some electronic entries may be forwarded to offsite districts for processing during certain periods of time, e.g., late night coverage of air carrier hubs. Automated Broker Interface (ABI) Filers using the CBP's ACS for cargo release are required to provide FDA with information on entries submitted through ACS. The means of receiving notification for non-ABI/OASIS entries can be arranged through local CBP/FDA District agreements. The most satisfactory and efficient means for FDA to receive notification is through FDA's Regulatory Procedures Manual - April 2013 Chapter 9 Import Operations and Actions 9-3 electronic entry system-the Operational and Administrative System for Import Support (OASIS). Entries processed through this system will be electronically screened against criteria developed by FDA.”

Source: FDA Regulatory Procedures Manual, Chapter 9 (April 2013)

THOUGHTS ON CUSTOMS ENFORCEMENT

• Focus Returning To Recoupment Of Lost “Revenue”

• Possible Seizure Of Goods

• Bad Publicity -- Particularly In Era Of “Security”

• Monetary Penalties Based On Culpability

Loss Of Duties/Taxes/Fees If No Duty Loss Negligence 2x loss 20% dutiable value

Gross Negligence 4x loss 40% dutiable value

Fraud domestic value domestic value

• Incorrect Statements Can Result In False Claims Act Cases

• Country-Of-Origin Marking A Hot Issue (10% Marking Duty)

• Prior Disclosures Can Take Penalties Off The Table For Non-Fraudulent Entries

• Separate Penalties/Duties Can Be Owed For Improper Recordkeeping, Improper Marking, etc.

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AUTOMATED COMMERCIAL ENVIRONMENT/ INTERNATIONAL

TRADE DATA SYSTEM

WHAT IS ACE?

• “Automated Commercial Environment”

• Under Development For Years

― National Customs Automation Program (NACP) was part of NAFTA implementation Act (1993)

― Significant budget overruns

― Ten + years behind schedule

― Has been up and running for years for some products, but voluntary

― “Fully functional” by December 2016??

• A “Single Window”

• CBP and 46 Partner Government Agencies

WHAT IS ACE? (cont’d)

• Replaces Automated Commercial System (ACS)

. . . BUT Automated Broker Interface (ABI) still part of system

• 356-Page ACE Supplemental Guide For FDA Entries (Changed/Updated Often)

• No More Post Entry Amendments (PEAs); Must Use Post Summary Corrections (PSCs)

• Reconciliation Tools Available In July (e.g., Valuation Reporting Tool)

WHAT IS ACE? (cont’d)

• Importer Portals

― Easier for importers to run reports

― Data continue to be confidential outside of Importer, Importer’s Agent, and Government

― Some ability to uniquely identify data (DUNS numbers)

• Note: Customs Did Not Amend Recordkeeping Obligations

“MANDATORY” DEADLINES

Source: http://www.cbp.gov/trade/automated/ace-mandatory-use-dates

ACE IMPLEMENTATION FOR FDA

• CBP and FDA “have determined that the National Customs Automation Program (NCAP) test concerning the electronic transmission of certain import data fro all FDA-regulated commodities through the Automated Commercial Environment (ACE) has been a success as ACE is capable of accepting FDA-regulated electronic entries.” 81 Fed. Reg. 18634 (March 31, 2016).

• “Despite the FDA PGA Message Set test concluding, CBP is not, at this time, decommissioning the Automated Commercial System (ACS) for transmitting data.” Id.

― ACS not decommissioned like for other PGAs, for time being

― Use of ACE “encouraged”

― Summer 2016? December 2016?

ACE DATA ELEMENTS FOR COSMETICS

• FDA Sees ACE As Way To Gather Key Data Available At Import

• Significant Data Gathering Tool (Formatted For Easy Search)

• Excerpts Follow From FDA Supplemental ACE Guidance

ACE DATA ELEMENTS FOR COSMETICS (cont’d)

ACE DATA ELEMENTS FOR COSMETICS (cont’d)

ACE DATA ELEMENTS FOR COSMETICS (cont’d)

ENFORCEMENT

• Data Mining

― FDA now has easy access to Customs data

― Customs now has easy access to FDA data

• Ports Continue To Be Their Own Fiefdoms

. . . But,

― Data now provide national insight – “connect the dots”

― Centers for Excellence and Expertise (CEE)

• “Single Window” Allows One-Stop Data Delivery By Importers And One-Stop Shopping For Regulators

• Little Discussion, But New Tool For CBP Regulatory Audit Over This Industry

FDA ENFORCEMENT TRENDS

COSMETICS – SURVEILLANCE/ENFORCEMENT

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• FDA Surveillance

― Import process examination

― Complaints from industry/consumers

― Inspections

― Data from the voluntary registration program

― FDA research/published literature

― Cosmetic Ingredient Review findings

― Data from foreign governments/other U.S. agencies

• Enforcement Actions

― Warning/Untitled Letters

― Seizures

― Injunctions

WHY DO WE CARE ABOUT ACE?

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• Import Process – Increasingly Important Surveillance Tool

― Oversight – cosmetics may be examined at time of entry by FDA and US Customs

― Import Alerts have been used historically to focus resources

― ACE will allow FDA to examine more cosmetic imports even more efficiently

― Focus likely still to be on products subject to Import Alerts

― Increased ability to monitor products that are not subject to Import Alerts

― More ability to monitor will likely lead to more detentions/ enforcement actions

WHY DO WE CARE ABOUT ACE? (cont’d)

• Imports Increasingly Important To Industry

― Import lines more than doubled between 2005 and 2014 (FDA)

― 2005 – approx. 1.16 million import lines

― 2014 – approx. 2.60 million import lines

― Value of cosmetic imports almost doubled between 2005 and 2014 (PCPC Study 2015)

― 2005 – approx. $6 billion

― 2014 – approx. $11.1 billion

COSMETIC IMPORTS (PCPC Study (2015))

WHY DO WE CARE ABOUT ACE? (cont’d)

• Import Detentions Can Be Resource Intensive

― Process for detention

― Generally starts with an Import Alert

― Allegedly adulterated/misbranded product is detained/refused entry

― FDA “Notice of Action” to owner/consignee of allegedly adulterated/misbranded product

― Owner/consignee entitled to informal hearing

― If owner fails to show product is in compliance, has 90 days to:

― Destroy product

― Re-export product, or

― Bring product into compliance

WHERE WILL FDA FOCUS ENFORCEMENT?

• Predicting FDA Action/Inaction

• Precedent Is Useful Guide

― 1,955 import refusals in FY2014

― Labeling violations - 47.4%

― FDA-regulated products improperly marketed as cosmetics - 34.4%

― Color additive violations – 15.7%

― Poisonous/harmful ingredients or insanitary conditions (e.g., microbial contamination) – 2.4%

WHERE WILL FDA FOCUS ENFORCEMENT?

• Notable Import Alerts

― Import Alert # 66-38 – “Exaggerated Anti-Aging Claims” (1988/2015)

― Product counteracts, retards, or controls the aging process may be “drug” claims

― Product rejuvenates, repairs, restructures skin may be “drug” claims

― Import Alert #53-17 – Cosmetics with Microbial Contamination (2016)

― Targets: Eye shadow, lipstick, kits containing those items

― Import Alert # 53-15 – Eye Area Cosmetics w/ Kohl, Kajal, or Surma (2015)

― Certain products from Germany labeled as “FDA Approved”

― Report that Surma (aka Kohl) manufactured in India and other countries contained lead

OTHER TRADE ISSUES AND TRENDS AFFECTING

COSMETICS

OTHER TRADE ISSUES AFFECTING COSMETICS

• Endocrine Disruptor Legislation in the E.U.

― Roadmap released June 2014 outlining four options

― Option 1: No change

― Option 2: WHO/IPCS definition to identify endocrine disruptors (hazard identification).

― Option 3: WHO/IPCS definition to identify endocrine disruptors and introduction of additional categories based on the different strength of evidence for fulfilling the WHO/IPCS definition.

― Option 4: WHO/IPCS definition to identify endocrine disruptors and inclusion of potency as element of hazard characterization (hazard identification and characterization)

EFFECTS ON TRADE IN COSMETICS

• All Commodities Including Cosmetics will be Subject to ED Legislation

― Any cosmetics containing endocrine disruptors could be considered violative of E.U. law.

― Which ingredients are endocrine disruptors?

― How does this relate to REACh?

― How does it affect the existing cosmetic directive, (EC) N° 1223/2009?

― How are other countries likely to react?

WHAT CAN BE DONE TO ADDRESS CONCERNS?

• The Cosmetic Industry Needs a Strategy

― Many stakeholders are affected including cosmetics, agriculture, textiles, chemicals, and medical devices.

― building coalitions

― U.S. government

― other governments

― industry

― yes, even NGOs

― public perception

CONTACT INFORMATION

Mike Taylor (jmtaylor@kslaw.com)

Lisa Dwyer (ldwyer@kslaw.com)

Daniella Taveau (dtaveau@kslaw.com)

King & Spalding LLP

1700 Pennsylvania Avenue, NW

Washington, DC 20006-4706

202-737-0500

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