Referrals from Freight Forwarders

HQ H135395 March 23, 2011 BRO-1 OT:RR:CTF:ER H135395 JHR Mr. Octavio Saavedra Saavedra Brokerage 9640 Joe Rodriguez, Suite 1 El Paso, TX 79906 Re: Referrals from Freight Forwarders Dear Mr. Saavedra, This is in response to your correspondence dated November 18, 2010, in which you inquire whether your proposed billing and compensation structure will comply with the requirements of 19 C.F.R. § 111.36(c). Our ruling follows. FACTS: You state that you are a licensed customs broker and owner of Saavedra Brokerage (Saavedra) and have been approached by various freight forwarders that would like to refer import customs brokerage business to you for a commission. You propose the following billing and compensation structure. The freight forwarder would obtain a power of attorney from the importer of record (IOR) on behalf of Saavedra and would notify the IOR in advance that Saavedra is a licensed broker that will be filing entries on its behalf. Saavedra would have direct communication with the IOR and the broker/freight forwarder agreement would not prevent direct communication between the IOR and Saavedra. Saavedra will send an invoice to the freight forwarder, per import transaction, for all duties, charges or fees relating to the brokerage transaction. You state that the original invoice will go to the freight forwarder and a true copy of the invoice, entry summary, and all required back up documentation will be sent to the IOR. The freight forwarder will bill the IOR the same amount as on Saavedra’s invoice, will collect all of the invoiced charges, and then pay Saavedra the complete invoice amount without any discounts. At a later time, the freight forwarder will bill Saavedra for its commission and will send a commission invoice per IOR and per shipment period. The commission invoice will detail the brokerage business referred to Saavedra by the freight forwarder. In addition to inquiring whether the scenario described complies with the requirements of 19 C.F.R. § 111.36(c), you ask whether there are any restrictions on commission amounts and the duration of compensation agreements. Specifically, you ask whether there are regulations that dictate the amount of compensation you may give a freight forwarder, whether you may negotiate any rate you choose, and whether you may give a percentage of your fee as a commission to the freight forwarder. Additionally, you ask whether you may enter into a long term agreement covering multiple IORs, whether you may enter into a long term agreement covering multiple transactions for one IOR, and whether you may enter into a one time agreement for a single transaction for a single IOR. ISSUE: Whether your proposed billing and compensation structure described above will comply with the requirements of 19 C.F.R. § 111.36(c). LAW & ANALYSIS: You inquire whether you may enter into agreements with freight forwarders so that they receive compensation for referring customs business to your brokerage. Brokers are permitted to compensate freight forwarders for referrals provided certain requirements are met. Generally, customs brokers are prohibited from entering into agreements with unlicensed persons to transact customs business for others in such a manner that the fees or other benefits resulting from the services rendered inure to the benefit of the unlicensed person. See 19 C.F.R. § 111.36(b). However, CBP’s regulations specifically carve out an exception for relations with freight forwarders. Pursuant to 19 C.F.R. § 111.36(c), a broker may compensate a freight forwarder for referring brokerage business so long as the relationship between the broker and freight forwarder satisfies certain requirements. These requirements include that the freight forwarder notify the importer in advance of the name of the broker, that the broker transmit directly to the importer a true copy of his brokerage charges if the fees and charges are collected by the freight forwarder, that no part of the agreement nor any action taken pursuant to the agreement forbids or prevents direct communication between importer and broker, and that in making the agreement and in all actions pursuant to the agreement, the broker remains subject to all other provisions in Part 111 of CBP’s regulations. See 19 C.F.R. § 111.36(c). Therefore, if the arrangement you propose satisfies the requirements, you are permitted to provide freight forwarders a commission in exchange for referrals. In HQ 115080 (September 14, 2000), we stated that a licensed customs broker was permitted to receive referrals from a freight forwarder and pay the freight forwarder $10.00 in compensation per referral provided that the requirements of 19 C.F.R. § 111.36(c) were met. The referral arrangement you describe in your ruling request is nearly identical to the arrangement described in HQ 115080 and appears to satisfy all the requirements of 19 C.F.R. § 111.36(c). Accordingly, your proposed arrangement is permissible under 19 C.F.R. § 111.36(c). The regulations are silent as to whether there are restrictions on the type of compensation agreement a broker may have with a freight forwarder. As such, you are permitted to negotiate a compensation agreement based on a flat rate or a percentage of your fee and there is no restriction on the amount of compensation you may provide the freight forwarder. Further, the regulations are silent as to the duration of the agreement between brokers and freight forwarders. Accordingly, you could negotiate one agreement covering multiple IORs, charging a flat fee per import transaction as described in HQ 115080. You are also permitted to negotiate one agreement covering one IOR for multiple transactions. As stated above, the only restriction on the agreement you negotiate with a freight forwarder for referrals is that it comply with the notice, invoicing, and communication requirements as described in 19 C.F.R. § 111.36(c). Additionally, we caution that the broker’s obligations under the applicable statute and regulations are in no way altered because of the freight forwarder’s role in making referrals. See 19 C.F.R. § 111.36(c)(4). HOLDING: The proposed billing and compensation agreement described above is permissible under 19 C.F.R. § 111.36(c). Sincerely, Myles B. Harmon Director Commercial and Trade Facilitation Division