Primer on FTZ Board’s Uniform Treatment Regulation
Public Utility, Zone Schedules and Uniform Treatment
Clarification on Grantees Requiring Compliance Reviews
Determination regarding need for a waiver to conduct oversight of a zone participant's operations on behalf of a grantee
Oversight of a zone participant's operations on behalf of a grantee
Consistency of a business model with public utility regulations
Performance of certain activities on behalf of a grantee
Ability of a grantee's contractor to offer information to zone participants
Advice and assistance provided to grantees on applications
Limitations on parties performing functions on behalf of the grantee
Tab Options
Primer on FTZ Board’s Uniform Treatment Regulation
Public Utility, Zone Schedules and Uniform Treatment
Clarification on Grantees Requiring Compliance Reviews
Determination regarding need for a waiver to conduct oversight of a zone participant's operations on behalf of a grantee
Oversight of a zone participant's operations on behalf of a grantee
Consistency of a business model with public utility regulations
Performance of certain activities on behalf of a grantee
Ability of a grantee's contractor to offer information to zone participants
Advice and assistance provided to grantees on applications
Limitations on parties performing functions on behalf of the grantee
October 13, 2016
Richard Tucker
Andrew Mayo
Dear Messrs. Tucker and Mayo:
Our Operator Agreements provide that each Operator will comply with all regulations (including CBP regulations) for operating in a Foreign-Trade Zone. The only means of confirming this is to have someone with the requisite knowledge take a look and make some sort of assessment.
Without the permanent, unconditional approval of our waiver request of January 14, 2015 (which seeks to enable our grantee organization to choose the professional service-provider who may confirm Operator compliance, while also enabling the Operator the freedom to choose their preferred service-provider), one of the following three predicaments will be imposed upon us:
1. We will be unable to utilize the professional of our choice to confirm any Operator’s compliance with government requirements for the use of Zone procedures;
2. We will be unable to require any Operator to hire a 3rd party of its choice to confirm that Operator’s compliance with government requirements for the use of Zone procedures without that 3rd party first obtaining a Board waiver, because, by definition, that activity will be performed on our behalf; and would be performed by that same 3rd party as a service to the Zone participant; and according to the FTZ Board’s definition of “Overseeing” (See letter of Andrew McGilvray dated December 29, 2014) to include, “inspect,” “subject to scrutiny,” “examine,” “verification that Operators are in compliance with Customs regulations,” ”review of proposed and ongoing FTZ processes,” or “confirming that proposed or existing practices of zone participants meet applicable federal requirements,” would constitute a violation of the FTZ Board’s Uniform Treatment regulations;
3. We will be unable to confirm any Operator’s compliance with government requirements for the use of Zone procedures except through the use of our own permanent Airport Authority employee who must be properly trained and well versed in the complexities of FTZ regulatory and operational complexities, and is willing to work for what we can afford to pay- at least until such time as that person realizes that the real money is in being a consultant.
In its response to the same survey question, FTZ 98 stated (in part):
[T]he FTZ Board’s interpretation of its own Uniform Treatment regulations calls into question whether any third party can review the operations of a Zone Operator if that review is in the interest (“on behalf of; a Zone grantee - which, given the terms of most Operator Agreements, could be regarded as occurring every time such a review is done. It may be that the City and other zone grantees have no third party mechanisms by which to assess Operator compliance, and, it may be that Zone Operators may someday have some trouble in meeting one of U.S. Customs core elements of Informed Compliance- that is the use of thirdparty experts for review and assessment.
In the context of the statements quoted above, I am writing to address the matter of a grantee setting a requirement that each operator in the grantee’s zone obtain from a third party of the operator’s independent choosing periodic reviews of the operator’s compliance with regulatory and other governmental requirements that apply to operators’ FTZ activity. Setting a requirement that an operator obtain a review by a third party of its independent choosing does not, standing alone, render the review “on behalf of’ the grantee within the meaning of 15 CFR 400.43(d)(1 )(iii). (We also note that under 15 CFR 400.42(a), “zone participants shall not be required (either directly or indirectly) to utilize or pay for a particular provider’s zone-related products or services.” Any requirement set by a grantee for operators to obtain compliance reviews from third parties of the operators’ independent choosing would need to be implemented in a manner consistent with 15 CFR 400.42(a).)
Specific to the above quote from FTZ 83’s survey response, a grantee establishing a requirement for each operator to obtain periodic compliance reviews from a third party of the operator’s independent choosing does not mean that “by definition, that activity will be performed on [the grantee’s] behalf.” Similarly, specific to the above quote from FTZ 98’s survey response, if a compliance review is “in the interest” of a grantee, it does not mean that the review is performed “on behalf of’ that grantee. The above quoted positions or concerns expressed by FTZ 83 and FTZ 98 appear to involve interpretations of the phrase “on behalf of’ that extend beyond those required by the ordinary meanings of “on behalf of’ (e.g., act for, act vicariously, appearing for, as agent for, be deputy for, be envoy for, be spokesman for, be the authorized agent for, be the authorized representative for, by proxy, representing, stand in for, substitute for). Such a construction would lead to the illogical conclusion that, for instance, audited financial statements are prepared “on behalf of’ the U.S. Securities and Exchange Commission, rather than on behalf of the publicly held companies that procure the audits. (See e.g., the summary of audit requirements on the website of the U.S. Securities and Exchange Commission at https://www.sec.gov/investor/pubs/aboutauditors.htm).
In sum, a grantee is free to set a requirement for operators in the grantee’s zone to obtain periodic compliance reviews from third parties of the operators’ independent choosing. As expressed above, such a requirement would not make the conduct of those reviews “on behalf of’ the grantee within the meaning of 15 CFR 400 .43( d)( 1 )(iii). Therefore, a third party chosen independently by an operator to conduct such a review would not need to obtain a waiver for that activity from the FTZ Board under 15 CFR 400.43(f). I hope this information and clarification have been helpful to you. If you have questions regarding this matter, do not hesitate to contact myself or Elizabeth Whiteman at (202) 482-2862.
Sincerely,
Andrew McGilvray
December 29, 2014
Richard Tucker
Greg Jones
Dear Messrs. Tucker and Jones:
Although we have provided prior guidance on the proposed BMEs for FTZ 83, the Foreign-Trade Zones staff has again analyzed BME #7 and BME #9 and related information contained in the November 7th e-mail, Mr. Tucker’s e-mail message of October 1, 2014 as well as prior correspondence to determine whether, when viewed within the context of the FTZ Act and the meaning of the FTZ Board’s regulations, these activities constitute “key functions” undertaken on behalf of the zone’s grantee. After completing this review and consulting the FTZ Board member delegates with whom you have met previously, the Assistant Secretary of Commerce for Enforcement and Compliance and the Deputy Assistant Secretary of the Treasury for Tax, Trade, and Tariff Policy, we conclude that identified activities that FTZ Corporation would perform under BME #7 and BME #9 constitute a “key function” undertaken on behalf of the zone’s grantee.
As we have previously discussed (see letter from Andrew McGilvray to Richard Tucker, dated September 12, 2014). and as you correctly note in your November 7th email, the FTZ Act mandates that all FTZ’s operate as a “public utility” and “afford” to all zone users “uniform treatment under like conditions” (19 U.S.C. § 81 n). The FTZ Board’s regulations (15 CFR Part 400) advance these requirements in part via provisions that, among other things, seek to ensure that zone participants receive uniform, not disparate treatment. As noted in our letter of October 29, 2014 to Mr. Tucker, one of these provisions, found at 15 CFR §400.43(d) precludes firms that offer/provide zone-related products or services to zone participants from undertaking any “key function” within a designated zone (see letter from Andrew McGilvray to Richard Tucker, dated October 27, 2014). (The regulations further provide that parties that violate 15 CFR §400.43 may be subject to the penalties set forth in 15 CFR § 400.62(c).) Further 15 CFR §400.43(d)(1) provides that, “[o]verseeing zone participants’ operations on behalf of a grantee” are among the functions that are considered to be “key functions.”
In September 2013, FTZ 83 submitted to the FTZ Board a waiver application for FTZ Corporation which, among other things, stated that FTZ Corporation would not be engaged in the specific key function of “[o]verseeing zone participants’ operations on behalf of [the] grantee.” After the FTZ Board approved this application, subject to certain restrictions in May 2014, however, Mr. Tucker (on behalf of FTZ 83) subsequently submitted an email on October 1, 2014 to the FTZ staff that stated, in part, as follows:
[S]ound practice demands that the Airport Authority as the Zone Grantee should choose the party that conducts any verification that Operators are in compliance with Customs regulations …
Whether it be in FTZ compliance or air passenger safety, the nature of our business is such that closing our eyes to possible problems, then pointing the finger at someone else if problems do occur, is not a viable choice for us… Due diligence is essential to the trust that we have built. Review of proposed and ongoing FTZ processes is nothing more than the exercise of that due diligence …
I believe that Zone grantees have a right to confirm for themselves - by in-house means or, alternatively, “be free to select the expert consultant of their choice” - to confirm that the proposed or existing practices of Zone participants meet the requirements of “participating in a federal program.” (Emphases added.)
These comments were made in reference to BME #7 and BME #9.
Because the waiver application that FTZ 83 submitted to the FTZ Board in September 2013 specifically stated that FTZ Corporation would not be performing any oversight activities, we responded to Mr. Tucker’s October 1, 2014 email in a letter dated October 29, 2014. Our October 29 letter stated, in relevant part, that “the above-quoted language in your October 1, 2014 e-mail indicates that FTZ Corporation’s actions … involve, for example, ‘verification that Operators are in compliance with Customs regulations’ and/or ‘[r]eview of proposed and ongoing FTZ processes.’ Those actions appear to constitute performance of the key function of ‘[o]verseeing zone participants’ operations on behalf of [the] grantee.”’
On November 7, 2014, Mr. Tucker responded to our October 29, 2014 letter via email. This November 7th e-mail contained the following statements:
Let me assure you that the Huntsville-Madison County Airport Authority has no desire - either directly or through a third party - to “oversee” the Zone-related activities of FTZ 83 Zone Operators … “Overseeing” [previous operators’] operations — that is, according to the Oxford English Dictionary, to “Supervise (a person or work), especially in an official capacity,” would have been antithetical to the core principle of our Zone project.
Neither we nor FTZ Corporation are in the business of supervising or directing any Zone participant in the way it conducts its day-to-day zone operations . Accordingly, neither the Grantee nor FTZ Corporation “oversees” Zone participants’ operations. We do , however, employ a third-party expert - specifically the FTZ Corporation - to review, verify, and/or confirm that proposed and existing operations meet the requirements imposed by federal agencies for operation within the FTZ program . (Emphasis added.)
We appreciate that the November 7th email was submitted to us in an effort to remove any chance of a misunderstanding regarding the FTZ Board’s interpretation and application of the statute and regulation with respect to the proposed BME #7 and BME #9, particularly with respect to the definition of the word “overseeing” (within the context of 15 CFR §400.43(d)), and the temporal nature of any “oversight” activity that FTZ Corporation may perform (e.g., in that any oversight activity that FTZ Corporation may perform may not reach the level of “day-to-day” oversight). We disagree, however, with the conclusion that is reached in the November yth email that the activities that FTZ Corporation would undertake under BME #7 and BME #9 do not constitute overseeing zone participants’ operations.
As a threshold matter we note that the Oxford English Dictionary contains several definitions of the word “oversee.” These definitions include: “to keep watch over” and “to examine the various parts of, inspect.” The American Heritage Dictionary also defines the word “oversee” to mean “to subject to scrutiny; examine or inspect.” We note that none of these definitions mandate the conduct of any form of “day-to-day” activity.
First, with regard to the definition of the word “oversee,” the October 1, 2014 e-mail states that FTZ Corporation would perform activities that include “verification that Operators are in compliance with Customs regulations,” “[r]eview of proposed and ongoing FTZ processes,” and “confirm[ing] that the proposed or existing practices of Zone participants meet [applicable federal] requirements …. ” We determine that these activities are the equivalent of “keep[ing] watch over,” “inspect[ing],” “subject[ing] to scrutiny,” or “examin[ing]” zone participants’ operations.
Second, with regard to the public utility/uniform treatment provisions of the FTZ Act and FTZ Board’s regulations, we note that if a grantee were to engage a single firm to ”[r]eview” zone participants’ “proposed and ongoing FTZ processes” - including tasking such a firm to determine whether all zone participants were “in compliance with Customs regulations” and/or “to review, verify, and/or confirm that proposed and existing [zone user] operations meet the requirements imposed by federal agencies for operation within the FTZ program” - such a firm would be uniquely positioned to potentially exercise significant influence over zone participants. The FTZ Board’s regulations recognize that this type of arrangement holds the potential to impair the public utility/uniform treatment principles of the FTZ Act (see, e.g., Foreign-Trade Zones in the United States, Proposed Rule; Request for Comments, 75 FR 82340, 82342 (Dec. 30, 2010) (noting importance of “preclud[ing] certain conflicts of interest that could otherwise lead to non-uniform treatment of actual or potential zone users by private firms that assist zone grantees in zone management”); see also Preamble, Foreign-Trade Zones in the United States, Final Rule, 77 FR 12112, 12131 (Feb. 28, 2012) (noting the “risk that zone users will experience implied pressure to procure a particular private party’s services as a condition of obtaining access to the federal FTZ program”). . ). As a result, 15 CFR §400.43(d)(1 )(iii) specifically includes “[o]verseeing zone participants’ operations on behalf of a grantee” among the key functions that may not be undertaken on behalf of a zone grantee by a firm offering/providing zone-related products/services to zone participants.
Given this, and after consulting the FTZ Board member delegates on the matters discussed in this letter, we determine that the activities contained in FTZ 83’s BME #7 and BME #9 are, in fact, encompassed by the key function of 15 CFR §400.43(d)(1 )(iii). This determination is consistent both with the definition of the word “oversee” described above, and with the public utility/uniform treatment provisions of the FTZ Act and the FTZ Board’s regulations.
15 CFR §400.43(d) precludes any firm that offers or provides zone-related products or services to zone participants from performing any “key function” on behalf of that zone’s grantee absent a waiver from the FTZ Board specific to the performance of the key function in question. FTZ 83 requested and was approved for a waiver, subject to certain conditions or limitations, pertaining to FTZ Corporation’s performance of a different key function, namely “[a]pproving, or being a party to, a zone participant’s agreement with the grantee ( or person acting on behalf of the grantee) pertaining to FTZ authority or activity (including activation by CBP)”, see 15 CFR §400.43(d)(1)(ii) (see Waiver Decision dated May 30, 2014). Therefore, if FTZ Corporation offers/provides zone-related products/services to zone participants in FTZ 83, it may not undertake for the zone’s grantee activities that we have determined constitute the performance of the separate key function of 15 CFR §400.43( d)( 1 )(iii).
If you have questions regarding these matters, do not hesitate to contact myself or Elizabeth Whiteman at (202) 482-2862.
Sincerely,
Andrew McGilvray
October 29, 2014
Richard Tucker
Dear Mr. Tucker:
[S]ound practice demands that the Airport Authority as the Zone Grantee should choose the party that conducts any verification that Operators are in compliance with Customs regulations …
Whether it be in FTZ compliance or air passenger safety, the nature of our business is such that closing our eyes to possible problems, then pointing the finger at someone else if problems do occur, is not a viable choice for us… Due diligence is essential to the trust that we have built. Review of proposed and ongoing FTZ processes is nothing more than the exercise of that due diligence …
I believe that Zone grantees have a right to confirm for themselves - by in-house means or, alternatively, “be free to select the expert consultant of their choice” - to confirm that the proposed or existing practices of Zone participants meet the requirements of ”participating in a federal program.” (Emphases added)
n September 2013, FTZ 83 had submitted to the FTZ Board an application for a waiver for FTZ Corporation pursuant to 15 CFR 400.43(f). Regarding whether FTZ Corporation would undertake the specific key function of “[o]verseeing zone participants’ operations on behalf of
Pursuant to 15 CFR 400.43(d), a firm that offers/provides zone-related products/services to zone participants in a zone may not undertake a “key function” on behalf of the zone’s grantee absent a waiver from the FTZ Board specific to the performance of the key function in question. Currently, FTZ 83 has not requested any waiver pertaining to FTZ Corporation “[o]verseeing zone participants’ operations on behalf of [the] grantee.”
In your e-mail of October 1, 2014, you also raised Business Model Elements other than numbers 7 and 9. Your e-mail messages (including attachments) of August 1 and October 1, 2014 have indicated that zone participants are not charged - either directly or indirectly- for Business Model Elements other than 7 and 9. If that is the case then there would be no concern about those Business Model Elements relative to the FTZ Board’s public utility regulation (15 CFR 400.42).
If you have additional questions in this regard or if there is additional information that you would like to present for consideration, please let us know.
Sincerely,
Andrew McGilvray
September 12, 2014
Richard Tucker
Dear Mr. Tucker:
The questions you raise tie directly to the FTZ Act’s mandate that all FTZ’s operate as a “public utility” (19 U.S.C. §81n) and to the FTZ Board’s regulations (15 CFR Part 400) that implement this public utility requirement. As you know, during 2010-2012, the FTZ Board conducted a comprehensive notice and comment rulemaking process that was designed to “improve flexibility for U.S.-based operations, particularly for most circumstances involving exports; enhance clarity; and strengthen compliance and enforcement” (Foreign-Trade Zones in the United States, Proposed Rule, 75 FR 82340 (Dec. 30, 2010)) in the FTZ program. As part of this process the Board solicited comments on this proposed rulemaking, and provided the public approximately five months to submit such comments, after which the public was provided an additional one-month period to submit “reply comments.”
During the rulemaking process, the Board received scores of comments, including those submitted by the National Association of Foreign-Trade Zones (NAFTZ) - an organization that represents approximately 650 public and private organizations involved in the FTZ program - related to the FTZ Act’s public utility requirement. In its comments, the NAFTZ stated that it believed that the FTZ Board needed to adopt new public utility regulations in order “to ensure that Zone Participants are not forced to use or pay for the services of Administrators beyond reimbursement to the Grantee of expenses incurred for zone project administration requirements.” (NAFTZ comment submission regarding the FTZ Board’s proposed regulations, May 4, 2011, page 62.) This proposal was supported by dozens of other parties. Another party similarly commented that ”[s]ubzone operators should have choice in whom they select for a particular service and should not be forced … to pay for consulting or expert services as a condition of participating in a federal program … There is a real cost for these services and subzone operators should be free to select the expert consultant of their choice and not be required to contract with a particular technical expert in order to be able to operate within a zone.” (Reply comment submission from Kelley, Drye and Warren, June 27, 2011, page 2.)
The FTZ Board considered these comments seriously and sought to incorporate and reflect them in its new regulations. As such, the revised public utility regulation that the FTZ Board issued at the close of the notice and comment process (15 CFR 400.42(a)) now provides that “[a] rate or charge (fee) may be imposed on zone participants to recover costs incurred by or on behalf of the grantee for the performance of the grantee function” but that “zone participants shall not be required (either directly or indirectly) to utilize or pay for a particular provider’s zone-related products or services.” In issuing this regulation, the Board explained that “[a]ny effective requirement for a user to pay for additional products or services in order to be permitted to use the zone would be inconsistent with the principles associated with the Act’s public utility requirement.” The public utility mandate of the FTZ Act, as implemented by the Board’s regulations, thus informs our reply to your inquiry.
In your correspondence you note that FTZ 83 has delineated fourteen BMEs that Huntsville Foreign-Trade Zone Corporation (HFTZC) undertakes in administering the zone; you have also indicated that HFTZC undertakes twelve of those BMEs at “no charge” to zone participants and that charges are imposed only for the following two BMEs:
“7. Review of applications to activate with CBP (Start-up fee)”
“9. Reduce potential grantee liability (compliance reviews, 3-party Operator Agreements) (Operator fees).”
With respect to the fees that FTZ 83 currently charges zone participants, FTZ 83’s most recent zone schedule indicates that each zone operator is required to pay HFTZC a start-up fee of $10,000 as well as an.annual “manufacturing/production” operator fee of up to $30,000 or a monthly “non-manufacturing/production” operator fee of up to
Based on this information, and as we set out in more detail in the attached appendix, we conclude that the requirements that zone participants pay for BME # 7 in its entirety and pay for the “compliance reviews” component of BME # 9 are incompatible with the FTZ Board’s public utility regulation. This is because BME #7 and the “compliance reviews” component of BME #9 appear to involve “zone-related products or services” of the sort offered to users by a range of consulting firms. (The “3-party Operator Agreements” component of BME # 9 does not appear to be incompatible with the public utility regulation because operators’ agreements, in general, are encompassed in “the performance of the grantee function” rather than constituting “a particular provider’s zone-related products or services.”) The remaining BMEs in question would not be incompatible with the public utility regulation if performed at “no charge” - either direct or indirect - to zone participants.4
In addition, in response to your questions regarding a possible shift to operators’ agreements involving solely the grantee and the operator, if HFTZC were not a party to such an agreement then HFTZC would not be performing the “key function” identified in FTZ 83’s waiver request. Therefore, HFTZC would not need a waiver under 15 CFR 400.43(f) in order to provide zone-related products/services to the operator in question. For any operator subject to an agreement to which HFTZC would be a party, the waiver requirement would continue to apply to HFTZC.
Please note that the findings described in this letter and detailed further in the attached appendix are based on the information received to this point. If you feel that the analysis does not reflect actual circumstances, you are welcome to submit additional information for us to take into account. If you have questions regarding these matters, do not hesitate to contact myself or Elizabeth Whiteman at (202) 482-2862.
Sincerely,
Andrew McGilvray
Attachment
APPENDIX: Discussion and Analysis In Response To Questions From FTZ 83
FTZ 83 has presented what it describes as “Business Model Elements” (BMEs) undertaken by the zone’s “administrator,” Huntsville Foreign-Trade Zone Corporation (HFTZC), and has requested guidance as to whether those elements are permissible under the FTZ Board’s regulations. In particular, FTZ 83’s e-mail of August 1, 2014, requested that we further address BMEs # 1, 2, 3, 4, 6, 7, 8, 9, 10, 13 and 14 based on information contained in FTZ 83’s prior communications to the FTZ Board and staff.
FTZ 83 has provided the following descriptions for the Business Model Elements in question: “1. Cost benefit analyses for potential Zone participants (no charge*). 2. Inform potential Zone participants of Operational/security requirements (no charge*). 3. Review of potential Zone participants operations in the context of Board/trade policy (no charge*). 4. Review of potential Zone participants operations in the context of Operational/logistical considerations (no charge*). 6. Coordinate with FTZB applicants and/or their service-providers (no charge*). 7. Review of applications to activate with CBP (Start-up fee). 8. Coordinate with activation applicants and/or their service-providers (no charge). 9. Reduce potential grantee liability (compliance reviews, 3-party Operator Agreements) (Operator fees). 10. Respond to requests for information from existing and potential Zone participants (no charge*). 13. Assist Grantee in developing Zone-related policies (no charge*). 14. Inform Grantee of regulatory requirements for Grantees and Operators (no charge*). *Denotes that this function continued to be performed during the several-year period when there was no Operator fee income.”
Background: Public Utility Regulation Regarding Forced Use of Services
The FTZ Act (19 U.S.C. §§81a-81u) includes a requirement that each zone operate as a “public utility” and authorizes the FTZ Board to issue implementing regulations. During 2010-2012, the FTZ Board undertook its first rulemaking process since 1990-1991. In comments submitted for the 2010-2012 rulemaking process, the National Association of Foreign-Trade Zones (NAFTZ) - “a trade association of 650 members representing public and private organizations involved in the foreign-trade zones program … including zone grantees, operators and users” (NAFTZ Press Release, August 27, 2014) - proposed a specific approach which it stated was intended “to ensure that Zone Participants are not forced to use or pay for the services of Administrators beyond reimbursement to the Grantee of expenses incurred for zone project administration requirements.” (NAFTZ comment submission regarding the FTZ Board’s proposed regulations, May 4, 2011, page 62.) More than 40 additional parties supported NAFTZ’s proposed approach. Furthermore, the Board received a reply comment that “[s]ubzone operators should have choice in whom they select for a particular service and should not be forced … to pay for consulting or expert services as a condition of participating in a federal program … There is a real cost for these services and subzone operators should be free to select the expert consultant of their choice and not be required to contract with a particular technical expert in order to be able to operate within a zone.” (Reply comment submission from Kelley, Drye and Warren, June 27, 2011, page 2.)
After considering the full range of comments submitted, the FTZ Board incorporated the above-referenced approach proposed by the NAFTZ and supported by numerous other parties in adopting the current public utility regulation (15 CFR 400.42(a)) which states that “[a] rate or charge (fee) may be imposed on zone participants to recover costs incurred by or on behalf of the grantee for the performance of the grantee function” but that “zone participants shall not be required (either directly or indirectly) to utilize or pay for a particular provider’s zone-related products or services.” In the Preamble to the new FTZ regulations, the Board explained: “Any effective requirement for a user to pay for additional products or services in order to be permitted to use the zone would be inconsistent with the principles associated with the Act’s public utility requirement. This bar extends both to a direct requirement to procure a product or service and to an indirect requirement for such procurement. .. “(Preamble, Foreign-Trade Zones in the United States, Final Rule, 77 FR 12112, 12128 (Feb. 28, 2012) (Preamble).)
Questions for Evaluating Functions Undertaken for Grantee
The FTZ Board’s regulation cited above implements the statutory public-utility requirement. Under that regulation, the following two sequential questions guide our analysis as to whether or not the grantee may charge zone participants for particular functions performed on the grantee’s behalf:
Are zone participants “required (either directly or indirectly) to utilize or pay” for the function?
If zone participants are “required ( either directly or indirectly) to utilize or pay” for the function, does the function involve activities that constitute “a particular provider’s zone-related products or services?”
Application of Two Questions to BMEs Presented
Question# 1: Are zone participants “required (either directly or indirectly) to utilize or pay” for the activities of HFTZC under any of the BM Es at issue?
FTZ 83’s zone schedule (with an effective date of February 25, 2014) states that “[e]ach Operator of Foreign-Trade Zone No. 83 and its Subzones shall pay the Zone Project Administrator Operator fees as set forth in the table herein listed below.” The zone schedule lists a “start-up fee” of $10,000 applicable to any operator in FTZ 83. For “manufacturing/production operators,” FTZ 83’s zone schedule also includes annual fees that range from $20,000 to $30,000 - depending on whether the operator is a primary manufacturer or a first or lower tier supplier. For “non-manufacturing/production operators,” FTZ 83’s zone schedule includes monthly fees of up to $2,000.
In more recent communications with the FTZ Board staff, FTZ 83 has listed fourteen BMEs under the question, “What are the elements of the current business model?”. FTZ 83 states that twelve of those BM Es are at “no charge” to zone participants, with charges to zone participants for only the following two BMEs:
“7. Review of applications to activate with CBP (Start-up fee)”
“9. Reduce potential grantee liability (compliance reviews, 3-party Operator Agreements) (Operator fees).”
BME # 7 thus appears to require each operator to pay a start-up fee of $10,000 for
Specific to Business Model Element 9, FTZ 83 has characterized the goal of that element as to “reduce potential grantee liability.” To address grantees’ concerns about potential liability, the FTZ Board adopted in 2012 a new regulation (15 CFR 400.46 - “Grantee liability”) which articulates the “[e]xemption from liability” that applies to grantees unless a grantee “create[s] liability for itself that otherwise would not exist” by “undertak[ing] detailed operational oversight of or direction to zone participants.” Therefore, under 15 CFR 400.46, “compliance reviews” conducted on behalf of a grantee can only serve to create potential liability from which the grantee would otherwise have been exempt. It should also be noted that HFTZC’s role in the “3-party Operator Agreements” cited in Business Model Element 9 was addressed previously pursuant to 15 CFR 400.43(f) in the context of FTZ 83’s waiver request of September 27, 2013, and the FTZ Board’s approval of a waiver with certain conditions on May 30, 2014.
With regard to the other BMEs in question, FTZ 83 indicates that zone participants do not pay for activities under those elements. In addition, there is no information indicating that zone participants are otherwise “required” to “utilize” HFTZC for such activities.
If FTZ 83’s statements that there is “no charge” for each of the other Business Model Elements at issue were to mean that there is no direct charge (i.e., no separate payment required for each function) but that those Business Model Elements are funded indirectly through FTZ 83’s fees, then it would be necessary to assess whether activities of HFTZC under Business Model Elements 1, 2, 3, 4, 6, 8, 10, 13 and 14 constitute “a particular provider’s zone-related products or services” versus “the performance of the grantee function.” Based on the basic description provided by FTZ 83 for each Business Model Element, Business Model Elements 1, 2, 3 and 4 each appear to be a function whereby HFTZC provides a zone-related product or service that a range of consulting firms vie to provide to zone participants. In contrast, Business Model Elements 6, 8, 10, 13 and 14 each appear to involve - or to be closely tied to - “the performance of the grantee function” rather than constituting “a particular provider’s zone-related products or services” (of the sort that a range of providers offer to zone participants). In this context, FTZ 83 charging fees to recover costs {plus a reasonable return on investment, as applicable) for HFTZC to undertake Business Model Elements 6, 8, 10, 13 and 14 would not be inconsistent with the public utility appear to be inconsistent with the public utility regulation so long as “[r]espond[ing] to requests for information from existing and potential Zone participants” involves providing information of a general nature (rather than detailed, technical guidance of the type that would constitute a zone-related product/service that a range of providers offer to zone participants).)
Question # 2: Given that zone participants must pay for BMEs 7 and 9, do any of the activities of HFTZC under those BMEs constitute “a particular provider’s zone-related products or services?”
The sole activity listed for BME # 7 is “Review of applications to activate with CBP” while BME # 9 is listed as having two components: “compliance reviews” and “3-party Operator Agreements.” [Based on the information provided to date by FTZ 83 and publicly available information about the FTZ program, “compliance reviews” appears to pertain to examination of FTZ operators’ records for compliance with CBP requirements (and, potentially, requirements of other agencies overseeing FTZ activity), while “review of applications to activate with CBP” appears to pertain to evaluation for conformity with CBP’s requirements of applications to be submitted to CBP requesting to “activate” designated FTZ space. Based on the “summary of remarks” of Richard A. Tucker, Executive Director of the grantee of FTZ 83, dated March 12, 2014, “3-party Operator Agreements” pertains to that fact that “[o]ur Operator Agreements are three-party agreements among the Grantee, Operator and Administrator [i.e., HFTZC].”] A review of marketing materials for various consulting firms indicates that ”[r]eview of applications to activate with CBP” and “compliance reviews” are each a zone-related product or service of a type that multiple companies vie to provide to zone participants. For example, among sponsors listed in the program for the 2014 Annual Conference of the NAFTZ, at least five firms offer these types of services based on the materials on their websites. [The firms in question - in order as listed on the “sponsors” page of the conference program - are: Indigo Trade Solutions; Foreign-Trade Zone Corp. (which is related to HFTZC); Page Fura P.C.; PointTrade Services, Inc.; and Rockefeller Group Foreign-Trade Zone Services.] Based on this, we conclude that BME # 7 (“Review of applications to activate with CBP”) and the “compliance reviews” component of BME # 9 constitute “a particular provider’s zone-related products or services.”(We note that FTZ 83 would be free to require each of its operators to undergo periodic compliance reviews. However, the public utility regulations would not permit FTZ 83 to require operators to use a particular provider for such reviews). The “3-party Operator Agreements” component of BME # 9, however, does not appear to be incompatible with the public utility requirement because operators’ agreements, in general, are encompassed in “the performance of the grantee function” rather than constituting “a particular provider’s zone-related products or services.”
Conclusion
Based on the information and characterizations provided by FTZ 83, we conclude that, with the exception of BMEs # 7 and 9, the BMEs in question are not inconsistent with 15 CFR 400.42(a) because zone participants are not “required (either directly or indirectly) to utilize or pay” for the associated activities of HFTZC.
With regard to BMEs # 7 and 9, our analysis concludes that zone participants are required to “pay” for the associated activities of HFTZC. Further, the sole activity (“Review of applications to activate with CBP”) conducted under BME # 7 and the “compliance reviews” activity under BME # 9 involve “a particular provider’s zone-related products or ,services.” Therefore, pursuant to 15 CFR 400.42(a), FTZ 83 may not require zone participants to utilize or pay for those activities conducted by HFTZC (as currently required through the “start-up” fee and “operator” fees payable to HFTZC under FTZ 83’s zone schedule). On the other hand, FTZ 83’s conclusion of “3-party Operator Agreements” (under BME # 9) appears to constitute “performance of the grantee function” - rather than “a particular provider’s zone-related products or. services” - and FTZ 83 may therefore recover associated costs through commensurate charges to zone participants for this function.
Background:
Regarding public utility, the 2012 regulations clarified that fees may be imposed on zone participants by (or on behalf of) grantees to recover costs associated with the grantee function. The regulations also state that, “Other than the uniform rates and charges assessed by, or on behalf of, the grantee, zone participants shall not be required (either directly or indirectly) to utilize or pay for a particular provider’s zone-related products or services.” (15 CFR 400.42(a))
In addition, to prevent potential conflicts of interest and failure to provide the uniform treatment required by the FTZ Act, the 2012 regulations ordinarily bar a “person” (15 CFR 400.43(d)(2)) that offers or provides FTZ-related products/services to users of a zone from also performing any of three “key functions” (15 CFR 400.43(d)(1)) for the grantee of that zone. The regulations also allow parties to request from the FTZ Board a waiver of that general prohibition.
In the fall of 2013, waivers were submitted by FTZs 83, 134 and 158 relating to FTZ Corp’s role as “administrator” of those zones. On May 30, 2014, the FTZ Board approved the waivers subject to certain conditions. On June 6, 2014, in response to a question regarding a potential zone user in the Huntsville area, a letter was provided to FTZ Corp by the Executive Secretary of the FTZ program staff providing additional guidance on permissible activities under the public utility provision of the regulations. The June 6 letter, and a response to follow-up questions, clarified that FTZ Corp can offer information, including information
In preparation for a meeting on June 19, 2014, a document was provided by FTZ Corp which included a list of elements of FTZ Corp’s current “business model”. In the meeting, FTZ Corp requested specific guidance on whether the business model elements were permitted under the 2012 regulations. Although the document indicated that there was no fee that funded many of the activities (which would itself make them permissible), further guidance on each activity was requested. The response below relates to three of the business model elements provided (numbers 5, 11 and 12 in the original document) and assumes that mandatory fees are being used to fund the activities. Further guidance on the remaining business model
Specific Business Model Elements
Review of applications to FTZ Board
Response: Assuming that the review of the application does not fall under 15 CFR 400.43(d)(1)(i), which would require a waiver for any “key categories of persons” (including those offering FTZ-related products or services), applications are generally – and in some cases must be – submitted by a grantee on behalf of a zone participant. A grantee (or an entity on behalf of a grantee) routinely reviews applications prior to submission to the FTZ Board. A grantee (or an entity on behalf of a grantee) is able to conduct this type of activity.
Coordination with local and state industrial recruitments efforts
Response: As described, this activity would not directly involve zone participants that may be charged a fee or any activity that would require a waiver from the FTZ Board. Grantees routinely work with local and state economic development agencies on the recruitment and retention of businesses to an area. A grantee (or an entity on behalf of a grantee) is able to conduct this type of activity.
Assist Grantee in reviewing/finalizing FTZ Board Annual Report
Response: The preparation of the annual report was not included in the 2012 regulations as a “key function” of a grantee and therefore no waiver is needed for “key categories of persons” (including those offering FTZ-related products or services). Both the FTZ Act and regulations require that each grantee submit a report to the FTZ Board on an annual basis. As a result, the preparation of the annual report is a function of a grantee organization and it is expected that a grantee (or an entity on behalf of the grantee) will perform this function.
ADDITIONAL QUESTIONS – June 19 Meeting
Do the new regulations perceive a three party structure to be an actual or potential conflict of interest and therefore prohibit third party structure?
Response: The 2012 regulations do not preclude a grantee from contracting with an outside party to perform certain functions. In fact, the regulations specifically include provisions related to parties that are performing functions on behalf of the grantee.
However, the regulations do recognize that when an outside party is performing certain grantee functions, there is the potential for conflicts of interest and, therefore, they include provisions to prevent potential conflicts of interest. For example, if a party is undertaking a “key function” on behalf of a grantee, that party would not be able to offer or provide FTZ-related services to zone participants. The regulations also allow parties to submit a request to the FTZ Board for a waiver of this provision.
Do other zones deliver similar benefits?
Response: We are not aware if other zones use a structure similar to that within FTZ 83. Many zone grantees are not involved in the operational activities of zone participants.
Any party that falls into a “key category” within the meaning of 15 CFR 400.43(d)(2) would need a waiver from the FTZ Board to perform a “key function” on behalf of a grantee. Generally, review of specific information regarding a company’s FTZ operations with CBP are not part of a grantee’s functions. Involvement in a company’s operations actually could create liability for a grantee where it would not otherwise exist.
For more information, see 15 CFR 400.46:
If so, under what structure are they able to comply with the new regulations?
Response: We have only received one other request for a waiver (relating to FTZ 147 – the request is still pending).
Do the new regulations prevent us from delivering these benefits to our current and future users, to our economic developers and provide the current efficient operation of our zone by the grantee?
Response: The 2012 regulations are designed to provide additional clarity and consistency with respect to a zone’s statutory requirement to operate as a public utility, while ensuring that zone participants have options when paying for FTZ-related services. In terms of specific activities, the May 30 waiver decision and June 6 response to a question regarding VF Jeanswear provide additional guidance on what is permissible within the regulatory framework. If there are questions on any specific activities, please provide us with detailed information on the activity so that we can provide a more specific response.
We have successfully delivered these benefits to carry out the FTZ purposes for over 20 years, with no notification of complaint to us—What has changed?
Response: The FTZ Act has always required that each zone be operated as a public utility (19 USC 81(n)). In recent years, the FTZ Board members have recognized the need to provide guidance to grantees on the meaning of operating as a public utility while also ensuring that zones throughout the country are operated in a manner consistent with the FTZ Act. Prior to the 2012 revisions, the FTZ regulations had not been updated since 1991. In that time, the FTZ program grew considerably and the overall business and trade environment also changed. The regulations were revised in 2012 to meet the growing needs of the current zone program.
The public utility and uniform treatment sections of the 2012 regulations apply equally to all zones and were developed following and on the basis of substantial public comment. The FTZ Act requires that each zone be operated as a public utility – the regulations simply address the statutory requirement’s implications for individual zones’ operations.
Is there any way to grandfather our business model and let us service our community essentially the way we have done so for 20+ years? If so, please tell us how.
Response: The regulations do not include a provision for grandfathering existing situations. Instead, the regulations include the possibility of a waiver of the uniform treatment provision upon approval by the FTZ Board.
If there is additional information that was not considered in the initial waiver request, or if
From: Andrew McGilvray
Hello Craig,
a grantee’s contractor (such as HFTZC) may on behalf of the grantee “offer information” (to use Greg’s terminology) that does not constitute providing “technical expertise” – that holds regardless of whether that “offer [of] information” is funded by the zone’s mandatory fees
a grantee’s contractor (such as HFTZC) may on behalf of the grantee “offer information” that constitutes providing technical expertise provided that “offer [of] information” is not funded (directly or indirectly) by the zone’s mandatory fees
a grantee’s contractor (such as HFTZC) may not on behalf of the grantee “offer information” that constitutes providing technical expertise if that “offer [of] information” is funded (directly or indirectly) by the zone’s mandatory fees.
However, specific to VF Jeanswear, HFTZC may on behalf of the grantee “offer information” regardless of whether that “offer [of] information” constitutes providing technical expertise because the “start-up” fee funding that activity was payable before the public utility regulation’s delayed compliance date of February 28, 2014. To reiterate: That finding not apply for a zone’s mandatory fee that was payable after February 28, 2014. Any such fee payable after February 28, 2014 may not directly or indirectly pay for technical expertise from a particular provider (such as HFTZC).
Hi Andrew,
I appreciate the letter and response. You indicate that providing technical advice to VF or any firm would not require or be based on the receipt of any funds or fees, and would have occurred regardless of whether a fee was paid or not, I interpret your letter as allowing us to provide technical advice to assist those companies seeking to save money using the FTZ program. Am I correct?
Thanks,
Craig M. Pool
February 5, 2013
Christina L. Wood
Dear Ms. Wood:
I am writing in response to your inquiry about the potential impact of the Foreign-Trade Zones (FTZ) Board’s revised regulations on certain activities conducted for the Dallas/Fort \Worth International Airport (DFW), grantee of FTZ 39, by Ernst & Young (EY). Specifically, you inquired whether the cited activities that EY undertakes for FTZ 39 would be prohibited under 15 CFR 400.43(d) - which has a delayed compliance date of February 28, 2014 for existing business arrangements - absent the FTZ Board’s issuance of a waiver for EY’s activities for FTZ 39 pursuant to 15 CFR 400.43(f). You stated that EY provides zone-related services to users of FTZ 39 and also provides advice and assistance to DFW Airport as grantee of FTZ 39. In particular, given that EY provides zone-related services to users of FTZ 39, you noted that EY will be prohibited by 15 CFR 400.43(d)(1) from “[t]aking action on behalf of [FTZ 39], or making recommendations to [FTZ 39], regarding the disposition of proposals or requests by zone participants pertaining to FTZ authority or activity (including activation by CBP).”
The specific activity undertaken by EY that you presented as potentially prohibited under 15 CFR 400.43(d)(1) pertains to EY’s role in advising and assisting FTZ 39 on issues related to letters from local taxing authorities regarding impacts of potential FTZ designations. You provided the following context and summary of EY’s role:
Texas is a state in which local jurisdictions assess personal property tax on inventory, and as such, the views of local taxing authorities are pertinent to a Foreign-Trade Zones Board decision on applications. DFW has a stated policy which requires evidence of taxing authority concurrence be obtained by the potential zone user prior to an application being filed. DFW publishes a standard form letter for each taxing authority to use as evidence of its concurrence. Taxing authorities, however, do not always provide the letter we request, in which case we regularly turn to EY for advice. As you are aware, EY has particular expertise with this provision of the FTZ Act, and because of its long history with DFW, on potential risks to DFW of accepting a non-standard letter as meeting the DFW policy. When we conclude that a particular letter is not sufficient to meet our requirements, we notify the potential applicant of the deficiency and request that the applicant obtain appropriate clarification from the taxing authority. With the approval of the potential applicant, we sometimes ask EY to contact the taxing authority directly to clarify its position in direct communication with DFW.
You also presented your position on whether the activity in question should be considered a “key function” subject to 15 CFR 400.43(d)(1):
We do not believe that the EY activity described above is a key function as defined, in the regulations. EY does not make a recommendation on the ultimate disposition of an application. Instead, EY advises DFW on its view of qualification of the non-standard letter under DFW policy, risks to DFW related to accepting the non-standard letter as evidence of concurrence, and recommendations to reduce risk and/or bring the letter into conformity with DFW policy. While the ultimate impact of EY advice that a letter does not meet DFW policy may be a DFW decision not to submit an application until taxing authority letters are brought into conformity with DFW policy, We do not believe that EY should be viewed as making a recommendation on “the disposition of proposals or requests by zone participants pertaining to FTZ authority.”
Based on your characterizations of the activity in question, our determination is that the activity is not a “key function” subject to 15 CFR 400.43(d)(1). Our determination is also based on our understanding that, although FTZ 39 may take into account the advice of EY on potential risks associated with accepting a non-standard letter from a taxing authority, any ultimate recommendation (and action) on the disposition of the specific proposal/request to which such a letter pertains is generated internally by FTZ 39. We have also taken into account that FTZ 39 provides a standard letter for taxing authorities to use - with no involvement of EY - in providing concurrence on a proposed FTZ designation, and that FTZ 39 seeks advice or assistance from EY only when a taxing authority has diverged from the language of the standard letter.
We recognize that when a specific proposal/request includes a non-standard, taxrelated letter and FTZ 39 therefore consults EY regarding the risks associated with accepting that letter, the advice provided by EY could conceivably affect FTZ 39’s decision on the disposition of the proposal/request. More broadly, professional advice obtained by a grantee regarding any element of a proposal/request could conceivably affect a grantee’s decision-making on that proposal/request. However, the regulation in question was not intended to be applied so broadly as to eliminate FTZ grantees’ ability to obtain professional advice regarding individual elements of proposals/requests. In sum, in the context of the information and analysis outlined above, EY would not be prohibited by 15 CFR 400.43(d)(1) from providing advice and assistance to FTZ 39 so long as EY’s role does not encompass making a “recommendation” on the overall “disposition” of the proposal/request in question.
If you have any questions regarding the contents of this letter, do not hesitate to contact me at (202) 482-2862, or Matthew Walden of the Office of the Chief Counsel for Import Administration at (202) 482-2963.
Sincerely,
Andrew McGilvray
Executive Secretary
August 23,2012
Terrence P. Parent
Dear Mr. Parent:
I am writing in response to your letter dated June 26, 2012, which you submitted in your role as Vice Chairman of Metroplex International Trade Development Corporation, grantee of FTZ 168. In your letter you describe the creation of Foreign Trade Zone Services Company, LLC (FTZSC), which you describe as a “for-profit entity owned and controlled by the Grantee.” Your letter also indicates that FTZSC “is responsible for processing all zone inquiries, offer[s] advisory services, and will prepare FTZ Board applications,” and that FTZSC will also “provide oversight and control of zone operations on behalf of the grantee.”
I note that the FTZ Board’s revised regulations (15 CFR Part 400) issued earlier this year address in §400.43(d)(2)(i) a “person” (i.e. , “any individual, corporation or entity” - see 15 CFR 400.2(1)) that engages in “offering/providing a zone-related product/service to or representing” a “zone participant” (i.e. , “a current or prospective zone operator, zone user or property owner” - see 15 CFR 400.2(x)) in a given FTZ. Section 400.43(d)(2)(ii) addresses any “person that stands to gain from a person’s offer/provision of a zone-related product/service to or representation of a zone participant in the zone.” Section 400.43( d)(2)(iii) addresses any “person related, as defined in [§ 400.43(e)], to the person identified in” §§400.43(d)(2)(i) and (ii). Any “person” described in the §§400.43(d)(2)(i), (ii) or (iii) is barred from undertaking “key functions” identified in §400.43(d)(1 ).
Based on your description (cited above) of the intended functions and operations of FTZSC, it appears that FTZSC would be engaged in offering/providing a zone-related product/service to or representing zone participants of FTZ 168. As such, FTZSC - and any employee or officer or other “related” person, as well any person who would stand to gain from FTZSC’s offering/providing a zone-related product/service - would be barred from undertaking the key functions delineated in §400.43(d)(1 ):
(i) Taking action on behalf of [the] grantee, or making recommendations to [the] grantee, regarding the disposition of proposals or requests by zone participants pertaining to FTZ authority or activity (including activation by CSP);
Your letter indicated that FTZSC would “provide oversight and control of zone operations on behalf of the grantee.” However, in light of FTZSC’s anticipated function of offering/providing zone-related products/services, §400.43(d) would clearly bar FTZSC from ”[o]verseeing zone participants’ operations on behalf of [the] grantee.”
Similarly, FTZSC would be barred from “[t]aking action on behalf of [the] grantee, or · making recommendations to [the] grantee, regarding the disposition of proposals or requests by zone participants pertaining to FTZ authority or activity (including activation by CSP)” and from “’[a]pproving, or being a party to, a zone participant’s agreement with the grantee (or person acting on behalf of the grantee) pertaining to FTZ authority or activity (including activation by CSP).” I should reiterate that the bars on the activities cited in the preceding sentences would extend to any employee or officer of FTZSC or other “related” person, as well any person who would stand to gain from FTZSC’s offering/providing a zone-related product/service. Therefore, for example, an employee or officer of FTZSC - or someone who would stand to gain from FTZSC’s offering/providing a zone-related product/service - could not undertake the function of approving operators’ agreements for FTZ 168.
I should note that §400.43(f) of the regulations will allow “a grantee or other person subject to” §400.43(d) to request that the FTZ Board issue a case-specific waiver of § 400.43(d)’s prohibition on the person’s undertaking any key function delineated in § 400.43(d)(1). In determining whether to authorize a waiver, the Board would consider the specific circumstances presented. Finally, I should also note that any violation of § 400.43 of the regulations could subject the violator (individual, corporation or entity) to a fine of up to$ 1,000 per day for every day of continued violation (see §400.62(c)).
If you have any questions regarding the contents of this letter, please contact me at (202) 482-2862, or Matthew Walden of the Office of the Chief Counsel for Import Administration at (202) 482-2963.
Sincerely,
Andrew McGilvray
Executive Secretary
