HQ 114267 - Customs Brokers; Leasing Employee to Broker; Adequate Supervision and Control - United States International Trade Commision Rulings

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HQ 114267

December 15, 1998

BRO-3-02/BRO-3-03-RR:IT:EC 114267 GG

CATEGORY: BROKERS

Harvey Isaacs, Esq.
Siegel, Mandell & Davidson, P.C.
One Astor Plaza
1515 Broadway
43rd Floor
New York, NY 10036-7900

RE: Customs Brokers; Leasing Employee to Broker; Adequate Supervision and Control

Dear Mr. Isaacs:

This is in response to your request for a ruling, dated September 25, 1997, made on behalf of your client, KAT Import Brokers, Inc. Our response will also address a follow-up letter made by you on June 4, 1998, and telephone conversation that occurred on December 15, 1998.

FACTS:

KAT Import Brokers, Inc. ("KAT") is related to Kamino International, Inc. ("Kamino"), a freight forwarder. Prior to 1991, Kamino was known as Kamino Air Transport, Inc. It filed an application for a broker's license under that name in 1984. Customs declined to issue a license because a license had already been issued to an unrelated company with a similar name, Kamino Air Import Corp. Kamino formed KAT as a result of this denial and had KAT obtain a broker's license. KAT presently maintains nine permitted offices, all of which share common offices with Kamino.

KAT's employees are reflected on Kamino's records as employees of Kamino, and are paid by Kamino. This is done to afford KAT employees the same benefits enjoyed by regular Kamino employees. In turn, KAT pays a fee to Kamino to cover the payroll, fringe and administrative costs involved. That is Kamino's sole function.

All customs business is conducted in KAT's name and the individuals working for KAT are reported to Customs as employees of that company. KAT holds the required powers of attorney from its clients and all invoices for services rendered are issued in KAT's name. All decisions relating to the hiring and firing of personnel, including the placing of advertisements in the employment classified sections of newspapers, are made by KAT. The individual license holders at each permitted location are responsible for the supervision and control over the customs business activities of the leased employees.

Customs previously reviewed this arrangement in internal advice issued to Customs in Los Angeles in 1996. (Headquarters Ruling Letter 226101). We advised that "KAT's use of employees from Kamino to conduct customs business is a failure of KAT to exercise responsible supervision and control under 19 U.S.C. ruling request that you are seeking a reconsideration of that issuance, we infer that this is your intent. You point to another internal Customs memorandum, HQ 223585, dated March 31, 1992, to support your position that the arrangement between Kamino and KAT does not violate Section 641.

In your follow-up letter of June 4, 1998, you suggest that the name change of 1991, which transformed Kamino Air Transport, Inc., into the present Kamino International Inc., removed the impediment to Kamino being able to obtain a broker's license in its own name. The argument is that the name "Kamino International Inc." is sufficiently dissimilar to "Kamino Air Import Corp." to remove any confusion between the two. You indicate that the best solution would be for Kamino to apply for a license under its new name, obtain permits and powers of attorney from KAT clients, and then assume the operations currently undertaken by KAT. KAT would cease doing business once Kamino was fully established.

On December 15, 1998, in a telephone conversation, you proposed another alternative in the event of either a prohibition on the employee leasing arrangement or a denial of a license to Kamino under its new name. To wit, KAT would cease doing business and voluntarily give up its corporate broker's license. Kamino International Inc. would obtain a corporate broker's license under the condition that it first obtain approval to d/b/a KAT Import Brokers.

ISSUE:

1) Whether the arrangement whereby a freight forwarder leases its employees to a broker for the purpose of conducting customs business violates the provisions of 19 U.S.C.?1641. 2) Whether Kamino may obtain a corporate broker's license under its current name, or, alternatively, under the name of "Kamino International Inc. d/b/a KAT Import Brokers."

LAW AND ANALYSIS:

We will first address the matter of issuing a license to Kamino under its new name. It is the determination of this agency that the name change from Kamino Air Transport, Inc., to Kamino International Inc., was not sufficiently radical to dispel the original objection to issuing a license. The name "Kamino International Inc." is still strikingly similar to that of the other broker, Kamino Air Import Corp. The common thread obviously is the use by both companies of the distinctive and unusual name, "Kamino". It is reasonable to assume that importers and Customs could easily confuse the two. Therefore, a new license cannot be granted to Kamino under its current name.

The proposal to close down KAT Import Brokers, Inc., and to issue a license to Kamino International Inc. d//b/a KAT Import Brokers, is acceptable to Customs provided the necessary state approval is first obtained in accordance with 19 CFR ?111.12.

Customs position is clear on the propriety of a broker leasing employees from an unlicensed company, who will then be used in the customs business work of the broker. In Headquarters Ruling Letter (HRL) 113867, dated March 19, 1997, we held that an employee leasing arrangement of a type similar to that of your client would violate Section 641 of the Tariff Act of 1930, as amended, (19 U.S.C.?1641). The unlicensed lessor in that case served as a "co-employer" with the broker of the leased employees. The lessor managed the payroll, workman's compensation, and health benefits; the broker took responsibility for all hiring and firing decisions and supervised the customs business activities of the leased employees. Notwithstanding the claimed separation of functions, Customs determined that the arrangement violated 19 U.S.C. ?1641 because the lessor's status as an employer of persons engaged in customs business placed the lessor in the position of conducting customs business without a license. Section 641(b)(1) specifically precludes unlicensed persons from transacting customs business for others. The broker in HRL 113867 was also found to be in violation of Section 641 because, by leasing rather than employing its workers, the broker had relinquished the control necessary for it to fulfill its duties imposed by 19 U.S.C. ?1641(b)(4). Section 641(b)(4) requires a broker to exercise responsible supervision and control over the customs business that it conducts. We find the situation of KAT and Kamino to be analogous to that described in HRL 113867. For the reasons expressed above, Kamino's leasing of employees to KAT is a violation of 19 U.S.C. ?1641.

This decision is not intended to limit the right of a licensed broker to retain outside entities to perform functions that are unrelated to the customs business of the broker. For example, it would be proper for a broker to engage a janitorial service to clean its offices, or to hire an independent bookkeeper or accountant to go over its books. A distinction can be drawn, however, between these types of services and those provided by the leased Kamino employees. The Kamino employees perform tasks for KAT which qualify as customs business. Therefore, the rules governing brokers apply.

The authority you cite to support your client's leasing arrangement, HQ 223585, is not controlling because it is merely an internal agency memorandum venturing an informal opinion. HRL 113867, supra, takes precedence because it is a formal written ruling.

HOLDING:

The leasing of Kamino employees to KAT for the purpose of performing customs business functions violates 19 U.S.C. ?1641. The holding of HRL 226101 is upheld. Further, your request that a new license be issued to Kamino upon application is denied, because Kamino's new name is still too similar to that of another licensed broker. However, a license may be issued to "Kamino International Inc. d/b/a KAT Import Brokers", provided the currently licensed KAT is dissolved and its license canceled, and the necessary state approval for use of the trade name is obtained and submitted to Customs with the license application.

Sincerely,

Jerry Laderberg
Chief

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