As you know, we have been seeing a trend in recent years where private parties are increasingly turning to the False Claims Act to address potential trade compliance violations by others (e.g., competitors, employers, etc.). Local U.S. Attorney Offices have shown a strong interest in prosecuting these types of violations. To date, the majority of these actions have involved issues, such as government procurement “buy America” violations and antidumping/countervailing duty issues. Last week, however, the U.S. Department of Justice intervened in a second case involving a common customs valuation issue for most importers—undeclared additions to value. In October 2013, we let you know of a similar case brought against OtterBox (see below).
The new qui tam action was brought against women’s apparel importers Siouni and Zarr Corp., Danny & Nicole, Dana Kay and their individual owners, who supply U.S. specialty retailers and department stores. The complaint alleges that the defendants intentionally understated the value of apparel imported into the United States from Vietnam since 2001 to avoid the full payment of ad valorem duties on the merchandise generally ranging from 21%-28%. Specifically, the complaint alleges that the defendants made separate payments, apart from the commercial invoice prices for the merchandise, to the apparel manufacturers, and knowingly did not include the value of these payments in the customs value of the merchandise. The complaint alleges that the additional payments of approximately $2.50 per garment resulted in an estimated underpayment of duties of at least $3 million per year.
The case appears to have been filed by an individual who was an employee of one of the defendants. As a whistleblower, the individual is entitled to a meaningful portion of any recovery from the action. The complaint in this case seeks, among other things, a $10,000 penalty for each customs entry of undervalued merchandise under the False Claims Act (31 U.S.C. §3729), eight times the actual loss of customs duties for fraud under the U.S. customs law (19 U.S.C. §1592) and treble damages of the foregoing amounts. The defendants have been under investigation by the U.S. Government since February 2013 and we expect that the U.S. Department of Justice will announce a settlement of this case shortly.
These recent cases illustrate the importance of having good internal controls over customs issues (and customs valuation issues, in particular). Costly enforcement actions such as these should prompt all companies to review their internal controls over this area and ensure they are working effectively. 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.