More Private Party-Initiated Trade Enforcement Actions

Dear Friends,

We are writing to let you know about two recent court actions, both of which involve allegations of companies evading antidumping duties evasion on imports of wooden bedroom furniture.  They are as follows:

  • The U.S. Department of Justice (“DOJ”) announced last week than a California importer of wooden bedroom furniture, Z Gallerie LLC (“Z Gallerie”) agreed to pay $15 million to settle allegations that it violated the False Claims Act (“FCA”) by underpaying antidumping duties.  The underlying complaint, initiated by a competitor, alleged that between 2007 and 2014, Z Gallerie purposefully misclassified bedroom furniture on import-related documentation in order to avoid paying antidumping duties to U.S. Customs and Border Protection (“CBP”) upon importation.  A copy of the DOJ press release is available here.
  • The American Furniture Manufacturers Committee for Legal Trade and domestic manufacturer Vaughan-Bassett Furniture Co. (collectively, “the Petitioners”) filed a lawsuit in the Court of International Trade (“CIT”) on Tuesday, alleging that the Department of Commerce (“Commerce”) failed to properly investigate allegations that a Chinese exporter of wooden furniture acted as a “funnel” for other Chinese manufacturers to avoid anti-dumping duties on bedroom furniture exported to the United States. Specifically, the underlying complaint alleged that the Chinese exporter, which had been afforded a separate (and significantly lower) antidumping duty rate of ~7% on exports of wooden bedroom furniture, purposefully put its name on other Chinese manufacturers’ wooden bedroom furniture exports to help those manufacturers avoid being subject to the (much higher) PRC-wide entity rate of ~216%.  The complaint alleged that the Petitioners had alerted Commerce to several suspicious furniture shipments in 2015, but Commerce neither alerted CBP, nor initiated its own investigation.  A copy of the complaint is attached.

These cases are significant for several reasons.

First, they underscore the continued trend of private parties initiating their own trade enforcement actions.  While private party-initiated trade compliance actions are already common (as evidenced by our emails below), the types of private parties initiating such actions is expanding.  Here, these cases were initiated by an e-commerce retail competitor and a U.S. trade group, respectively.

Second, they highlight the government’s continued interest to prosecute antidumping and countervailing duty evasion (particularly when the case is served up to them).  In announcing the Z Gallerie settlement, CBP Commissioner R. Gil Kerlikowske stated that “[u]nder the new Trade Facilitation and Trade Enforcement Act, CBP will likely see an increase in these types of settlements as the streamlined processes take effect concerning allegations of duty evasion.  The Act reinforces CBP’s existing authorities and tools to collect and investigate public allegations of duty evasion improving the overall effectiveness and enforcement of CBP law enforcement actions concerning illicit trade activity, specifically in the area of antidumping and countervailing duty evasion schemes.”

Finally, they illustrate that all companies, regardless of size or sophistication, could find themselves entangled in these types of costly enforcement actions if they lack proper internal controls.  In response to its settlement, Z Gallerie released a statement stating that its “intent was never to defraud the government or evade customs duties.  As a small company navigating a complex set of import rules and trade laws, there is confusion about how the government’s anti-dumping order applies to certain categories of wooden bedroom furniture imported from China”.

With good internal controls, most companies will be able to protect themselves from these types of costly enforcement actions.  If you have any questions, or if you would like to discuss these issues further, please let us know.

Best regards,

Ted

Are you importing articles subject to AD/CVD? Are you sure?

Dear Friends,

We are writing to let you know that US Customs and Border Protection (CBP) is continuing to place significant emphasis on antidumping/countervailing duty enforcement.  For many years, AD/CVD enforcement has been a top priority for CBP, and statistics from FY 2015 indicate that this trend is continuing.  Last year, CBP identified $29 million in AD/CVD noncompliance, and imposed $45.5 million in penalties on imports of steel products alone.  The agency conducts enforcement activities through a combination of targeted inspections and entry summary reviews, but also reports increased involvement on the part of the Centers for Excellence and Expertise (CEEs), as well as collaboration with the private sector.  CBP increasingly looks to the domestic industry protected by AD/CVD orders to educate CBP officials and to monitor the marketplace for instances of potential noncompliance.

It also bears noting that the stakes are growing for companies which intentionally seek to evade lawful antidumping and countervailing duties.  The Customs Reauthorization Bill (which was finally passed by Congress today—more on this later) includes significant substantive provisions targeting AD/CVD evasion.

In light of all this, we recommend that importers periodically review the orders that are in effect to ensure that in-scope merchandise has not gone unnoticed—particularly for some of the wider ranging orders, such as those on aluminum extrusions and various steel products.

If you would like to review a summary of the products and countries covered by current AD/CVD orders, just let us know—we are happy to forward a summary chart.

Best regards,

Ted

CBP and AD/CVD Scope Issues

Dear Friends,

We are writing to bring your attention to a recent decision by the U.S. Court of International Trade (CIT) (Sunpreme, Inc. v. United States) with significance for importers of products which may or may not be covered by an antidumping or countervailing duty order.  The decision highlights that unless an importer’s products are clearly covered by the scope of an AD or CVD order, CBP is powerless to require the importer to file Type 03 entries and pay cash deposits of antidumping and countervailing duties until Commerce issues a decision finding the products to be in-scope.

The products imported in Sunpreme had some features described by the scope of the AD and CVD Orders on Crystalline Silicon Photovoltaic Cells (solar panels), and some features specifically excluded from these orders.  For several years, the plaintiff filed Type 01 entries for its product without issue, before CBP began rejecting entries, requiring that they be refiled as Type 03 with cash deposits of AD and CV duties.  The importer engaged in a protracted discussion with CBP over the applicability of the orders, which included visits by CBP to the importer’s U.S. manufacturing facilities, written correspondence, and testing by a CBP lab.

When CBP ultimately decided that the products were covered by the orders, the importer responded by formally requesting a scope ruling from Commerce and by filing suit at the CIT challenging the cash deposits CBP had already collected, and challenging the suspension of liquidation.  Commerce considered the importer’s scope request, and decided that a full-blown scope inquiry was warranted (which is still underway).  The CIT considered and granted the importer’s request for a preliminary injunction, forbidding CBP from collecting further cash deposits during the pendency of litigation.  In granting the injunction, the Court ruled that the importer is likely to prevail on the merits of its underlying case (which would result in obtaining refunds of the cash deposits CBP had previously collected).

The key takeaway from the case is that CBP’s handling of AD and CVD matters is limited to a ministerial (i.e., administrative) functions.  In cases when CBP must decide if a product is covered by AD and CVD orders, it can only conclude that a product is in scope based on “observed factual information” and clear scope language.  In other words, CBP may only require an importer to file Type 03 entries and collect cash deposits of AD and CV duties when the scope decision is clear cut.  CBP may not interpret ambiguous scope language in reaching that outcome.  As the CIT put it:

“At the point CBP realized it was unsure that the language of the Orders included Plaintiff’s merchandise, it could not place the goods within the scope of the Orders because Congress charged Commerce with clarifying and interpreting its antidumping and countervailing orders.”

If you find yourself in a good faith dispute with CBP regarding whether or not your imports are subject to an AD or CVD order, we encourage you to keep this case in mind (and to give us a call!).

Best regards,

Ted

Another Customs-Related Qui Tam Action

Dear Friends,

We are writing to let you know about the settlement of a False Claims Act (“FCA”) case, involving the payment of antidumping duties on imports of wooden bedroom furniture.

Earlier this week, the U.S. Department of Justice (“DOJ”) announced that a U.S. furniture company (and its general partner) (“the Company”), agreed to pay $15 million to settle allegations that it knowingly evaded the payment of antidumping duties on wooden bedroom furniture from China.  The underlying complaint alleged that between 2009 and 2012, the Company purposefully misclassified bedroom furniture as office furniture (and other types of furniture not subject to antidumping duties), and falsified invoices and other documents in order to import the Chinese-manufactured furniture without raising a flag with U.S. Customs and Border Protection (“CBP”).  A copy of the DOJ’s press release is found here.

This case is important for a couple of reasons.

First, the case is part of a growing trend of private parties initiating their own trade enforcement actions.  Here, this suit was initiated by a U.S. competitor.  After being underbid on several large-scale contracts, the competitor launched its own investigation (which included attending tradeshows, pretending to be an client, and engaging in email correspondences discussing how antidumping duties could be avoided on purchases, etc.).  The competitor handed all of the evidence it gathered over to the DOJ, and was awarded $2.25 million as its share of the settlement.

Second, this settlement displays the government’s continued willingness to prosecute trade compliance violations under the FCA.  In announcing this settlement, the U.S. Attorney stated that “companies that cheat by fraudulently mislabeling their imports undermine U.S. manufacturers and others that obey the rules, and hurt consumers and taxpayers”.  Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the DOJ’s Civil Division, echoed the U.S. Attorney’s statement and declared that “[the DOJ] will zealously pursue those who seek an unfair advantage in U.S. markets by evading duties owed on goods imported into [the U.S.]”.  Although, as noted previously, one wonders if the government really collected as much as it could/should have here (particularly, given that intentional actions appear to have been involved here).

The increase in the number of private party-initiated trade compliance FCA actions, coupled with increased enforcement by the government agencies involved, should provide significant incentive for companies to review their internal controls — particularly with respect to antidumping and countervailing duty issues — and ensure that they are working effectively.   Otherwise, companies may find themselves embroiled in expensive enforcement actions, like the one described above.  Similarly, if you are aware of non-compliance by others that is unfairly tilting the playing field (e.g., a competitor not paying antidumping duties rightfully owed to get a competitive advantage), there are steps you can take to address it, even if the responsible agency has not done so.

We hope that this is helpful.  If you have any questions about this case, or if you would like to discuss the issues raised here further, please let us know.

Best regards,
Ted

Third Settlement – Another Customs-Related Qui Tam Action

Dear Friends,

Further to our emails below, we wanted to let you know about a third settlement stemming from a False Claims Action (FCA) case that we brought to your attention back in 2013.

Since the initial November 2013 announcement, the U.S. Department of Justice (DOJ) has collected more than $4.58 million in settlement payments to resolve allegations that 5 companies and 2 individuals participated in schemes to intentionally file false customs declarations to avoid the payment of antidumping duties (ADD) and countervailing duties (CVD) on Chinese-origin aluminum extrusions.  As of February of this year, 4 of the 5 companies (but neither individual) had settled.

Last week, DOJ announced that the individuals named in its November 2013 press release had agreed to pay $435,000 to resolve allegations regarding their participation in these schemes (the individuals agreed to pay $385,000 and $50,000, respectively).  More specifically, the two individuals were alleged to have: (1) conspired with domestic importers to submit false information to evade the duties; and (2) formed a company to act as the importer of record for the goods in an attempt to shield the real importers from liability.  A copy of the press release can be found here.

The significance of this settlement is that it highlights the government’s willingness to prosecute not only companies for customs noncompliance, but the individual employees involved in the noncompliance as well (one of the individuals here was a U.S. sales representative).  In announcing this settlement, Principal Deputy Assistant Attorney General Benjamin C. Mizer confirmed that the DOJ is “pursuing claims against anyone involved in a scheme to seek an unfair advantage in U.S. markets by evading duties on imported goods, including individuals who make such evasion possible by the businesses that import the goods”.

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

Best regards,

Ted

Directed Audits for ISA Members?

Dear Friends,

I thought you might be interested in a recent development involving the U.S. Customs and Border Protection (CBP) Importer Self-Assessment (ISA) Program.

As you know, ISA is a voluntary program that provides U.S. importers willing to invest significant resources in their internal controls with the opportunity to assume responsibility for monitoring their own compliance.  Importers that implement robust internal controls over customs matters, test those controls periodically to ensure that they are working effectively, and make any necessary changes to those controls (as well as file appropriate disclosures with CBP) are subject to less scrutiny.  More specifically, importers that participate in the ISA program are removed from CBP’s regulatory audit pool for Focused Assessments (i.e., customs compliance audits).  Such importers are, however, still subject to periodic review and re-certification by CBP.

The development of interest involves a letter CBP HQ recently sent to at least certain ISA members about the antidumping duty order on wooden bedroom furniture from China.  CBP’s letter advises ISA members that the U.S. Department of Commerce determined in May 2014 that 4 different styles of wooden chests imported by a prominent furniture company are within the scope of the order.  Given that this was a fairly surprising result (the petitioners had agreed with the furniture co. that these chests were outside the scope of the order), CBP believes that a fair number of importers may not have tendered antidumping duties when importing similar chests.  CBP’s letter requires the ISA members to conduct a self-assessment “to determine if you imported wooden chests from China under HTSUS subheadings 9403.50 and 9403.60, to determine whether the chests fall under the scope of the order.”  If the self-assessment reveals that within-scope-merchandise was imported, but ADD were not tendered upon importation, then CBP asks that the ISA member file a prior disclosure or post-entry amendment.  The letter provides the ISA members who received it five weeks to respond with the results of their self-assessment and proposed corrective action.  [It is also worth noting that CBP’s letter fails to mention that the scope ruling at issue has been challenged at the U.S. Court of International Trade and that action is currently pending.]

The interesting part here is whether CBP has the authority to require ISA members to conduct self-assessments.  There is no question that CBP could conduct its own assessment, but it is choosing not to do so.  Instead, CBP is asking ISA members to do so, requiring them to share the results with CBP and requiring them to take certain corrective actions (e.g., requiring them to file a prior disclosure).  CBP is trying to use the companies participation in a voluntary program (which is not governed by statute or regulation) to do something it could not otherwise do.

This is dangerous precedent that all ISA members (whether they received this letter or not), and all companies considering joining ISA, should be mindful of.   There would seem to be nothing stopping CBP from issuing similar generic letters requiring all ISA members to conduct a self-assessment on any number of issues (e.g., assists, transfer price adjustments, royalties, NAFTA claims, etc.) and file a prior disclosure or post-entry amendment if errors are found.

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

Best regards,

Ted

CBP Proposal to Require Personal Data from Importers

Dear Friends,

I am writing to make sure you saw a notice US Customs and Border Protection had published in the Federal Register earlier this month related to the Importer ID Input Record (CBP Form 5106).  This notice is significant because it is proposing to revise this form to require a great deal more data from importers/ultimate consignees, including personal data about corporate officers.  I expect that if this change goes through all importers (not just new importers) will be required to re-register with CBP using the new form.  A copy of the notice is available here.

As you know, the current version of the CBP Form 5106 (copy available here) is pretty bare-boned (i.e., it requires very little information from the importer).  CBP is seeking to change that, so it can better assess a company’s risk (a laudable goal).  Specifically, CBP states that the additional information it is seeking “will enhance CBP’s ability to make an informative assessment of risk prior to the initial importation, and will provide CBP with improved awareness regarding the company and its officers who have chosen to conduct business with CBP.”  CBP also states that it expects the officers whose information is submitted will “have importing and financial business knowledge of the company”.

The issue here is that CBP is treating the importing community as a monolithic entity and requiring the same information from everyone – thus, a private company that imports $15 million a year worth of wooden bedroom furniture from China (which is subject to antidumping duties) has to provide the same intrusive (and arguably not relevant) info as a public company that imports $1.5 billion a year of duty free merchandise.  Does CBP need the same data from each of these companies to assess risk?  For example, does it really need to know who the company’s primary banking institution is in both cases?  Does CBP really expect that the officers in the second example will have “importing knowledge” of the company? (how many trade compliance people want a CBP import specialist calling their CEO or CFO and asking?)  Does CBP really need the direct phone, email address, social security number and passport information for the officers of a large company?

While CBP may need more information about the importers it regulates, the current proposal does not seem fully baked (to me).  It is simply not clear how the information sought to be collected will actually help CBP achieve its goal in most cases.  It would be better if CBP adopted a “risk based approach” for this and focused tailoring the questions to the companies based on the risk they actually present.  For example, CBP’s form could ask for more, less or different info depending on whether a company is publicly traded in the US or private (which would give CBP an indication as to whether the importer is subject to Sarbanes Oxley requirements/controls); whether an importer is a “large importer” or a “small importer” (e.g., will you import more than $10 million a year worth of merchandise, $100 million, $1 billion?), etc.

A number of clients have raised concerns with this notice and we will be preparing comments for companies to submit by December 8, 2014.  The cost for participating in this effort will not be significant (i.e., the cost of preparing a brief letter divided by the number of clients who would like to submit comments).  If you would like to participate in this effort, please let me know.

Best regards,

Ted