An Interesting Customs-Related Whistleblower Case

Dear Friends,

We are writing to let you know about a recently unsealed customs-related False Claims Act (“FCA”) case involving low value e-commerce shipments imported under “Section 321” (so-called “de minimis” value shipments that are permitted to enter the United States without entry duty and tax free).  There are a number of details that make this case interesting.

Facts

The original whistleblower complaint was filed by an aggrieved former employee in May 2016.  As is customary, the case remained under seal until the United States decided to join the litigation.  Once the United States entered the case, the complaints were unsealed in July 2017.  While this is only the most recent in a series of False Claims Act (“FCA”) cases involving customs valuation, this is the first known False Claims Act case specifically involving Section 321.

The complaint asserts that the Defendant, a UK-based online retailer of women’s apparel, routinely split individual U.S.-bound orders into shipments that fell below the de minimis threshold for the explicit purpose of avoiding the payment of customs duties.  Under Section 321, shipments below the specified dollar threshold (historically $200, but recently increased to $800) to a single customer on a single day may be entered duty and tax free.  U.S. law expressly forbids the splitting of shipments to get under the dollar threshold.

The complaints include eyebrow-raising allegations— e.g., an excerpt from an employee handbook with detailed instructions on how and why orders were supposed to be split; an alleged conversation among supervisors “boasting” about duty evasion and acknowledging its illegality.  The government’s complaint is too large to attach here.  If you would like to see it, however, just reply to this message and we will send it to you.

Observations

While some of the facts alleged seem to suggest this is a more extreme case, it nevertheless holds important insight for all companies importing into—or even just selling into—the United States.  A few thoughts:

  • Extraterritorial reach of U.S. customs law. This is one of the few cases we are aware of where the government has pursued only a non-U.S. entity for violations of U.S. customs law.  The government’s complaint goes on at length to establish why it has jurisdiction over the Defendant (which counted the United States as its most important market).  This suggests a willingness on the part of the U.S. government to hold entities outside the United States liable for U.S. customs violations.  While the U.S. government has regularly exercised such jurisdiction in other trade contexts, this is rare in the customs context.  In addition, it appears that the U.S. government will have help in this context. The New York Times has an interesting article on this case that focuses on the U.S. law firms that are seeking potential UK and EU whistleblowers for future cases.
  • Risk of high volume, low value shipments.  The case challenges common assumptions about the customs risk associated with selling in the U.S. market.  One common assumption is that high volume, low value shipments present a lower customs risk than larger value commercial shipments, particularly when sent by express courier or U.S. mail, and especially when the seller is not the importer of record into the United States.  This case provides a powerful counterpoint to that line of thinking.  The FCA authorizes the government to collect “treble damages”—that is, three times whatever damages it actually suffered as a result of the false claims. In this case, the potential loss of revenue to the government might be in the single digit millions of dollars, so treble damages is a meaningful sum.  The False Claims Act, however, also authorizes a penalty on a per infraction basis (recently raised to $10,000 per infraction).  This apparently modest FCA penalty provision could prove to have enormous impact in the e-commerce space.  Just a few hundred offending monthly shipments across a 5 year window could easily yield a mandatory penalty in the range of hundreds of millions of dollars.

Recommendations

We have recommended in the past, and wish to reiterate again, the importance of having not only effective internal controls over customs matters, but also an effective avenue for employees to notify company leadership about potential compliance issues (to reduce the feeling that they need to go outside the company to effectuate change).  We have significant experience advising companies on how to test and improve trade-related internal controls in a cost-effective manner and would be happy to discuss that experience with you.

We hope this helpful.  If you have any questions, or would like to discuss these issues further, please let us know.

Best regards,
Ted

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The Future of KORUS

Dear Friends,

As you have likely seen in the press over the past few days, there has been a good deal of speculation about whether the Trump Administration would withdraw from the Korea-U.S. Free Trade Agreement (KORUS).  While it is still a possibility, it appears that the decision has been placed on hold for the time-being.

As you know, one of the big focuses for the Trump Administration is addressing bilateral trade deficits (i.e., a country exporting more goods and services to the United States than the United States exports to that country).  This view drives much of the President’s trade policy (and rhetoric).  The effort to combat trade deficits is central to the U.S. position in the NAFTA renegotiations (and our relationship with Mexico, in particular), as well as our relationships with China, Germany and others.

As for Korea, there is more than just trade involved here (e.g., North Korea).  These other geo-political concerns likely played a big role in the decision not to withdraw from KORUS at this time.  We expect that the parties will continue to negotiate to address the Administration’s concerns (the United States ran a net trade deficit of $17 billion with Korea in 2016 — for just goods, the deficit was $27.7 billion; but for services there was a surplus of $10.7 billion).  If the deficit concern is not addressed to the Administration’s satisfaction (which Korea has not done to date), withdrawal is a real possibility.

As a result, we recommend that all companies that rely on KORUS, either for imports into the United States, or exports to Korea, review their long-term contracts to make sure they are covered in case the Administration does decide to withdraw.  For example, if you entered into a contract assuming that the goods would be able to be imported duty free (into either country), would you (or your customer) be able to get out of the contract if the U.S. withdraws from KORUS?  Who will bear the significant increase in duties?  Better to think about these types of issues now, so you are prepared if it actually happens.

We hope this is helpful.  If you have any questions about these issues, please let us know.

Best regards,
Ted

ACI Advanced Forum on Customs & Trade Enforcement

Dear Friends,

I have the good fortune to be speaking at the ACI Advanced Forum on Customs & Trade Enforcement in Washington, DC September 26-27, 2017.  It looks like it is going to be a good event and I wanted to let you know that, if you were considering attending, I have a discount code you can use.  More information about the conference is available here: https://www.americanconference.com/customs-trade-enforcement/ and here: 675L18_S.pdfLJ.

If you are going to attend and would like the discount code, just let me know.

Thanks,
Ted

 

Interesting Customs Enforcement Action

Dear Friends,

I recently came across a story about customs enforcement in Singapore that I thought you might find to be of interest.

The case involves a marketing manager in Singapore who was sentenced by a Singapore court to a fine of SGD$92,000 (roughly, $68,000) for counterfeiting U.S.-Singapore Free Trade Agreement Certificates of Origin provided to a U.S. customer, and for making false statements to the Singapore government when applying for the certificates.  It appears that the marketing manager was engaged in a scheme to help defraud the U.S. government of antidumping duties (i.e., passing Chinese-origin uncovered innerspring units as being of Singapore origin) and, in the process, making false statements to Singapore Customs.  A copy of the Singapore Customs press release is available here.

There are several interesting things about this case.  First, the prosecution was based on information supplied to Singapore Customs by U.S. Customs and Border Protection (CBP).  It appears that CBP may have uncovered the fraud on the U.S. side and then provided information about the exporter to the Singapore authorities.  Second, it appears that CBP may have uncovered the fraud when the U.S. importer/customer underwent a CBP audit.  See Headquarters Ruling #h270834 (March 2, 2017).

We hope you find this interesting/helpful.  If you have any questions, please let us know.

Best regards,

Ted

 

Trump on Trade/NAFTA’s Future – Part III

Dear Friends,

On the NAFTA front, there were two further developments this past week of which we wanted to be sure you were aware.

The first was a notice from the U.S. Trade Representative’s Office published in the Federal Register on Tuesday requesting public comment and input on what the U.S. position should be in negotiations with Canada and Mexico to modernize NAFTA.  Specifically, the USTR is interested in comments addressing the following topics:

(a) General and product-specific negotiating objectives for Canada and Mexico in the context of a NAFTA modernization.
(b) Economic costs and benefits to U.S. producers and consumers of removal of any remaining tariffs and removal or reduction of non-tariff barriers on articles traded with Canada and Mexico.
(c) Treatment of specific goods (described by HTSUS numbers), including comments on (1) Product-specific import or export interests or barriers, (2) Experience with particular measures that should be addressed in negotiations, and (3) Addressing any remaining tariffs on articles traded with Canada, including ways to address export priorities and import sensitivities related to Canada and Mexico in the context of the NAFTA.
(d) Customs and trade facilitation issues that should be addressed in the negotiations.
(e) Appropriate modifications to rules of origin or origin procedures for NAFTA qualifying goods.
(f) Any unwarranted sanitary and phytosanitary measures and technical barriers to trade imposed by Canada and Mexico that should be addressed in the negotiations.
(g) Relevant barriers to trade in services between the United States and Canada and Mexico that should be addressed in the negotiations.
(h) Relevant digital trade issues that should be addressed in the negotiations.
(i) Relevant trade-related intellectual property rights issues that should be addressed in the negotiations.
(j) Relevant investment issues that should be addressed in the negotiations.
(k) Relevant competition-related matters that should be addressed in the negotiations.
(l) Relevant government procurement issues that should be addressed in the negotiations.
(m) Relevant environmental issues that should be addressed in the negotiations.
(n) Relevant labor issues that should be addressed in the negotiations.
(o) Issues of particular relevance to small and medium-sized businesses that should be addressed in the negotiations.
(p) Relevant trade remedy issues that should be addressed in the negotiations.
(q) Relevant state-owned enterprise issues that should be addressed in the negotiations.

Comments on these issues (or any others) must be submitted to USTR by June 12, 2017.  In formulating any comments, it is important to keep in mind that this Administration has a different perspective than previous ones when it comes to modernizing or liberalizing NAFTA.  We believe that this effort (at least from a US perspective) will be aimed more squarely at benefitting the United States than previous efforts (which may have looked more at benefitting the NAFTA region as a whole, or US companies with operations in Mexico or Canada).  The following quote from the summary is clear (and consistent with the Administration’s messaging on trade to date): 

“The United States intends to commence negotiations with Canada and Mexico regarding modernization of the North American Free Trade Agreement (NAFTA). The NAFTA was negotiated more than 25 years ago, and, while our economy and U.S. businesses have changed considerably over that period, NAFTA has not. The United States seeks to support higher-paying jobs in the United States and to grow the U.S. economy by improving U.S. opportunities under NAFTA.”

Emphasis added.  A copy of the notice is available here.

The second development relates to a study the USTR requested the U.S. International Trade Commission undertake related to NAFTA imports.  The study, entitled “Probable Economic Effect of Providing Duty-Free Treatment for Currently Dutiable Imports,” will examine the impact of providing duty-free treatment to imports of currently dutiable imports from Canada and Mexico.  Specifically, the ITC will provide a report containing its advice as to the probable economic effect of providing such treatment on (i) industries in the United States producing like or directly competitive products, and (ii) consumers.  The ITC has been asked to look at every dutiable article in the Harmonized Tariff Schedule.  The ITC has also been asked to specifically address the probable economic effects of eliminating tariffs on any dutiable agricultural imports from Canada or Mexico.   

The report is due by August 16, 2017.  A copy of the ITC notice of initiation can be found here and the USTR’s letter to the ITC can be found here.

*     *     *

These efforts to modernize NAFTA/trade with Canada and Mexico represent a ‘once in a generation’ opportunity.  Every company that produces articles in the NAFTA territory, sources articles in the NAFTA territory or competes with articles produced or sourced in the NAFTA territory has a strong incentive to participate in this process.  Given how quickly it is moving, companies need to assess their opportunities/challenges and decide how best to engage now.  Those who do not do so will likely find themselves at a competitive disadvantage once this process is over. 

We are helping numerous clients perform this assessment, as well as develop and implement strategies (offensive or defensive) to maximize the potential benefits.  If you have any questions about how to go about this, please let us know.

Best regards,
Ted

 

International Trade-Related Executive Orders

Dear Friends,

What an interesting time to be working in international trade! 

We are writing to make sure you saw the Executive Orders President Trump issued over the past few days on international trade issues.  All of the Executive Orders are available here.

The Presidential Executive Order Addressing Trade Agreement Violations and Abuses was signed on April 29, 2017.  It directs the Secretary of Commerce and the United States Trade Representative to conduct “comprehensive performance reviews” of all international trade and investment agreements the United States is a party to, as well as trade relations with those WTO member countries with which the United States does not have a trade agreement, but does have a significant trade deficit in goods. The goal of these reviews is to (i) identify violations or abuses by our trading partners, (ii) trade or investment agreements that have not created new U.S. jobs, had favorable effects on our trade balance, increased U.S. exports, etc., and (iii) make recommendations to address the issues identified in (i) and (ii). 

Based on statements President Trump has made to date, we expect that NAFTA as it relates to trade with Mexico, the Korea-U.S. Free Trade Agreement, the WTO Government Procurement Agreement and others to receive negative marks under the standards to be used in the performance reviews.  What will be more interesting are the recommendations that are made to address those perceived shortcomings (e.g., revising rules of origin, withdrawing from agreements, etc.).  The performance reviews must be submitted to the President by October 26, 2017.

The Presidential Executive Order on Establishment of Office of Trade and Manufacturing Policy was also signed on April 29, 2017.  It creates a new Office of Trade and Manufacturing Policy (OTMP) within the White House.  The stated mission of the OTMP “is to defend and serve American workers and domestic manufacturers while advising the President on policies to increase economic growth, decrease the trade deficit, and strengthen the United States manufacturing and defense industrial bases.”

These Executive Orders encapsulate much of the President’s trade policy, which is focused on (1) seeking to identify and remedy unfair trading practices, and (2) reducing the trade-in-goods deficits the United States has with other countries.  Companies should be viewing these Executive Orders as a creating an opportunity to engage with the Administration to help shape the recommendations for addressing the problems that they perceive exist with trade.

We are assisting numerous clients navigate these issues.  If you would like to discuss your specific situation and what you should be doing further, just let us know.

Best regards,
Ted

Buy American, Hire American

Dear Friends,

President Trump is expected to sign an Executive Order today in furtherance of his “Buy American, Hire American” agenda.  The agenda, which includes pushing Congress for a $1 trillion infrastructure spending bill to help fix roads, bridges, tunnels, airports, etc. (which has not materialized, thus far), seeks to ensure that government procurement dollars are spent in accordance with existing ‘Buy America’ legislation (i.e., legislation that requires, or gives preference to, U.S.-qualified products in U.S. government-funded procurements).  It also seeks to ensure that this legislation is properly enforced.

As any company who participates directly or indirectly in the government procurement market knows, this can be a confusing area.  There is no one “Buy America” standard across the federal government.  Often, just figuring out which standard (e.g., the Buy American Act of 1933, the Trade Agreements Act of 1979, the Surface Transportation Assistance Act of 1982, etc.) applies can be quite an ordeal, particularly if you are further down the chain – you supply a customer who supplies the government.  The good news is that, for those companies that have invested in figuring this out (or at least figuring out the piece that impacts them), there is quite an opportunity here.  As today’s Executive Order demonstrates there is going to be a renewed focus on acquiring qualifying articles, which means people can expect more scrutiny of their certifications.  That is also the potential bad news – this is an area where procurement officers have historically had a great deal of discretion and audits are relatively rare.  Given the Trump Administration’s interest in this issue, we expect that to change (i.e., a lot more scrutiny of the certifications).

If you are selling directly or indirectly to the government, then we recommend that you review your processes for ensuring that your “Buy America” certifications are accurate and auditable (i.e., make sure you are retaining the right supporting documentation).  Companies that are confident in their programs are expected to have a distinct advantage in this space for the foreseeable future.

We hope this is helpful.  If you have any questions about these issues, please let us know.  We have a great deal of experience in this area helping companies set up compliance programs, advising on compliance, obtaining final determinations of origin and defending enforcement actions.  We’d be happy to answer any questions you may have.

Best regards,
Ted