Customs-Related Qui Tam Actions

Dear Friends,

We are writing to let you know about two recent developments that highlight the continued evolution of private party-initiated trade enforcement actions filed under the qui tam provisions of the False Claims Act (“FCA”).  The developments are as follows:

  • Earlier this month, federal prosecutors filed suit in the Southern District of New York (“SDNY”) alleging that a double invoicing scheme, involving a Chinese manufacturer (Wuxi Yifeng Garments), its U.S. subsidiary (Yingshun Garments), and a U.S. wholesale customer (Notations, Inc.), defrauded the United States of millions of dollars of customs duties on garments imported from China.  The complaint, filed following an investigation by U.S. Customs and Border Protection (“CBP”) and Immigration and Customs Enforcement’s (“ICE”) Homeland Security Investigations, alleged that between 2009 and 2014, Yingshun submitted fraudulent commercial invoices to CBP, purposefully undervaluing imported garments by 75% or more.  Additionally, the complaint alleged that Yingshun’s managing director oversaw much of the undervaluation scheme and Notations (who purchased imported garments from Yingshun) actively participated in the scheme by falsely representing to U.S. retail customers that documentation submitted to CBP by Yingshun was accurate.  A copy of the compliant is attached for your reference.
  • Last week, the U.S. Court of Appeals for the Third Circuit remanded a May 2013 suit against a U.S. pipe fittings manufacturer, Victaulic Co., back to the U.S. district judge (who had originally dismissed it).  The underlying complaint alleged that Victaulic (1) purposefully failed to mark its foreign-made pipe fittings to hide the country of origin, and (2) falsified entry documents to avoid having to pay marking duties.  In dismissing the suit, the U.S. district judge found that, while the alleged violations could rise to a claim under the FCA, the relator “provide[d] no basis for its wholly conclusory allegations that [the U.S. company] had falsified its customs entry documents or knowingly avoided paying any required marking duties.”  In remanding the case, however, Judge Jane Richards Roth emphasized that “the plain text of the FCA’s reverse claims provision is clear:  any individual who knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the government may be subject to liability”.  A copy of the Third Circuit’s opinion is attached.

These cases are significant for a few reasons. 

First, the targets being pursued for customs noncompliance under the FCA are expanding.  While private party-initiated trade enforcement actions are increasingly common, most qui tam FCA cases that we have seen focus enforcement efforts against parties that make direct representations to the government (e.g., importers that submit false invoices to CBP).  In the SDNY case, however, federal prosecutors included a U.S. downstream purchaser, that neither imported the subject garments nor made direct representations to the government, as a defendant in the complaint.

Second, the types of parties pursuing customs noncompliance under the FCA are expanding.  Both cases were initiated by relators that had little or no relationship to the target companies.  Specifically, the relator in the SDNY suit was the mother of an ex-employee of the target.  As we originally reported in 2014, the relator in the Third Circuit appeal was Customs Fraud Investigations, LLC (“CFI”), a company that was created for the specific purpose of analyzing potential customs fraud, filing FCA suits, and recovering financial incentives resulting from the settlements of those suits (i.e., the case was brought by an entity that did nothing more than scour the internet for possible violations).  While we have seen cases initiated by various categories of whistleblowers (e.g., competitors, disgruntled employees, trade associations, etc.)  these are the first instances we are aware of where the relators are this far removed from the targets.

Finally, the SDNY suit highlights the government’s willingness to prosecute not only companies for customs noncompliance, but the individual employees involved in the noncompliance, as well.  As discussed above, federal prosecutors named the target importer, as well as its managing director, as defendants in the complaint.

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Taken together, these cases underscore the continued trend (and evolution) of private parties initiating their own trade enforcement actions.  Given the increasing number (and type) of these cases, all companies should make sure they have effective internal controls in place that include processes for vetting suppliers and reporting issues of non-compliance.

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

Government Procurement Rule of Origin-Related Qui Tam Action

We are writing to let you know about the settlement of a False Claims Act (“FCA”) case, involving country of origin claims for construction contracts funded by the U.S. government.

Earlier this week, the U.S. Department of Justice (“DOJ”) announced that a U.S. manufacturer of glass space frames agreed to pay $3 million ($500,000 criminal fine, $2.5 million civil fine) to resolve allegations that it improperly used foreign materials on construction projects involving federal funds.  A copy of the DOJ press release is available here.

As you know, contracts funded by the U.S. government are generally subject to laws requiring the use of domestic materials (e.g., the Buy America Act, the Federal Transit Administration’s Buy America provision, §1605 of the American Recovery and Reinvestment Act, etc.).  Here, the underlying complaint alleged that from 2004 to 2013, the Company knowingly – and in violation of its contractual obligations – used noncompliant foreign materials on several federally funded construction projects.  More specifically, the complaint alleged that the Company repackaged materials and falsified documents relating to certain federally funded construction projects in order to hide that the materials used were noncompliant foreign materials.

There are several key takeaways from this settlement.

First, this settlement underscores the government’s continued interest (and willingness) to prosecute government procurement rule of origin violations.  In announcing this settlement, the U.S. Attorney reiterated that “domestic preference statutes are designed to promote American businesses and to protect U.S. economic interests.  When companies subvert those interests by violating ‘Buy American’ provisions…and when they undertake efforts to conceal that they have done so…the U.S. Attorney’s Office will pursue all appropriate criminal and civil sanctions”.

Second, this case underscores the growing trend of private parties initiating their own trade enforcement actions.  Here, the suit was initiated by a former employee, who provided evidence regarding the knowing use of noncompliant foreign materials on several specific federally-funded projects.  The former employee stands to receive approximately $400,000 from the settlement.

Third, as part of the settlement agreement, the Company agreed not to contest debarment from federally funded projects.  While the Company stated that Buy America requirements applied to only a small part of its business, such a disbarment could have severe consequences for companies whose business includes a meaningful amount of government procurement sales/contracts.

To that end, it is more important than ever that companies have documented controls of their government sales.  With good internal controls, most companies will be able to protect themselves from these types of costly enforcement actions.

We hope this is helpful.  We have regularly advise clients on compliance with government procurement related rules of origin (including implementing effective controls to prevent situations like the one described above).  If you have any questions about the settlement or these issues more broadly, please let us know.

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

Another Customs-Related Qui Tam Action

We are writing to let you know about a second settlement stemming from a False Claims Action (FCA) case that we brought to your attention back in 2013.

If you recall, the U.S. Department of Justice (DOJ) announced in November 2013 that an Ohio-based company had agreed to pay $1.1 million to resolve allegations that it intentionally filed false customs declarations to avoid the payment of antidumping duties (ADD) and countervailing duties (CVD) on Chinese-origin aluminum extrusions.  In that announcement, DOJ named 4 other companies and 2 individuals against which it was pursuing claims for similar violations.

Last week, DOJ announced that 3 of the 4 companies named in its November 2013 announcement had agreed to pay more than $3 million to resolve allegations that they made false declarations to U.S. Customs to avoid paying ADD and CVD on Chinese-origin aluminum extrusions (the defendants agreed to pay $2,300,000, $650,000 and $100,000 respectively).  As with the Ohio-based company, the 3 defendants were alleged to have transshipped Chinese-origin extrusions through Malaysia to hide the true country of origin (China) and to avoid the payment of ADD and CVD upon importation into the United States.  A copy of DOJ’s press release can be found here.

There are a few key take-a-ways from this case.

First, this settlement further underscores the government’s commitment to prosecute duty evasion (particularly, once it is brought to their attention). In announcing this settlement, U.S. Attorney A. Lee Bentley III reiterated that “importers who used fraud to avoid paying [ADD and CVD] duties gain an unfair business advantage over competitors who abide by the rules.”   Commissioner R. Gil Kerlikowske echoed the U.S. Attorney’s statements by reiterating that U.S. Customs works diligently with DOJ to “aggressively pursue duty evasion.”

Second, and notwithstanding the foregoing, the government seems willing to settle these cases for a lot less than they otherwise could.  This case appears to have involved fraud/intentional acts.  The civil liability for such acts alone would be likely be several times the agreed-up settlement amounts.

Finally, given the fact that the underlying complaint was originally filed back in April 2011 (i.e., nearly 4 years ago), companies named in FCA complaints (or otherwise subject to FCA investigations) can face years of lengthy, expensive and exhausting litigation.

Given the increasing number of these qui tam cases, all companies should review their internal controls (and processes for reporting issues of non-compliance with such controls) to 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 is helpful.  If you have any questions, or would like to discuss these issues further, please let us know.

Best regards,

Ted

Trade Troll’s FCA Case Dismissed

Dear Friends:

We are writing to let you know about the recent dismissal of a customs-related False Claims Act (“FCA”) suit.

Last week, a U.S. district court judge dismissed an FCA suit brought against a U.S.-based producer of iron and steel pipe fittings.  The underlying complaint alleged that the U.S. company (1) purposefully failed to mark its foreign-made pipe fittings to hide the country of origin, and (2) falsified entry documents to avoid having to pay marking duties.  In dismissing the suit, the judge found that, while the alleged violations could rise to a claim under the FCA, the relator “provide[d] no basis for its wholly conclusory allegations that [the U.S. company] had falsified its customs entry documents or knowingly avoided paying any required marking duties.”

This case is interesting for a couple of reasons.

First, the case was initiated by a relator that had no relationship to the target company.  The relator in this case, Customs Fraud Investigations, LLC (“CFI”), is a company started for the specific purpose of analyzing potential customs fraud, filing FCA suits against companies, and recovering financial incentives resulting from the settlements of those suits (it is interesting that CFI’s principal is also a trade consultant for a major Washington, DC law firm).  CFI did not appear to have any insider knowledge of alleged violations and instead filed the complaint based on assumptions it made based on publicly available data.  This is the first instance we are aware of where the relator is a corporate entity that has no relation to the target (i.e., is not a former employee, competitor, etc.).  The intellectual property space has seen ‘non-practicing entities’ (also referred to as ‘patent trolls’) bring claims against companies for years and it appears that we may be seeing a similar model emerge on the trade side.

Second, if the government declines to intervene in an FCA action, it generally means that the case is a clunker.  Once the relator files its complaint, the government is given the opportunity to investigate and decide whether to step in and take the case over.  In most situations where the government steps in, the cases settle shortly thereafter.  If the government decides not to intervene, the relator can still prosecute the case, but, as with the situation here, that is usually a signal that the case is not very likely to succeed.

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

Government Procurement Rule of Origin-Related Qui Tam Action

Dear Friends:

We are writing to let you know about the settlement of a False Claims Act (“FCA”) case, involving country of origin claims for products sold to the U.S. government.

Earlier this week, the U.S. Attorney’s Office for the District of Maryland announced that a U.S. division of a Korean electronics manufacturing giant agreed to pay $2.3 million to settle allegations that it knowingly provided inaccurate country of origin information to the authorized resellers of its products.  This settlement stems from a qui tam suit filed in 2011 by a former employee.  A copy of the USAO’s press release if available here.

The underlying complaint alleged that from 2005 to 2013, the Company caused authorized resellers to resell certain products to the U.S. government under General Service Administration (“GSA”) Multiple Award Schedule (“MAS”) contracts in violation of the Trade Agreements Act (19 U.S.C.  § 2501, et. seq.) (“TAA”).  More specifically, the complaint alleged that the Company knowingly provided its resellers with false certifications regarding the origin of its products (i.e., certifications that its products were made in TAA-complaint countries, when in fact many of the products were produced in non-TAA countries, such as China).  The resellers relied on the Company’s certifications in making sales to the U.S. government under the MAS contracts.

There are a couple of key takeaways from this settlement.

First, this settlement underscores the Dept. of Justice’s interest in prosecuting government procurement rule of origin violations.  In announcing this settlement, Assistant Attorney General Stuart F. Delery reiterated that it “upholds important trade priorities by ensuring that the United States only uses its buying power to purchase from countries that trade fairly with us.”  Thus, while the FCA has evolved to address a variety of trade compliance violations, the importance of “guarding against abuse of federal procurement programs” has not fallen from the Dept. of Justice’s focus.

Second, given the increasing number of FCA-related trade cases being initiated by current/former employees (here the former employee who brought the case will be entitled to receive up to 30% of the $2.3 million), it is more important than ever that companies have documented controls over their government sales (whether direct, or indirect, as was the case).  The government procurement rules of origin can be confusing (to say the least) and, if this is a meaningful part of your business, steps should be taken to ensure that the certifications are being done correctly.  In addition, it is important that companies have:

(1)          a reporting structure for employees to report potential trade compliance issues to management;
(2)          procedures for management to review, investigate and address credible trade compliance issues; and
(3)          periodic audits to review the effectiveness of the substantive controls, as well as the employee reporting and management review procedures.

With good internal controls, most companies will be able to protect themselves from these types of costly enforcement actions.

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

Best regards,
Ted

Update on Another Customs Valuation-Related Qui Tam Action

Dear Friends:

We are writing to let you know about the settlement of a False Claims Act (FCA) case involving customs valuation issue that we first brought to your attention back in October of 2013.

The U.S. Attorney’s Office for the District of Colorado and U.S. Customs and Border Protection (CBP) announced yesterday that OtterBox, a U.S.-based importer of protective cases for smartphones, tablets, and computers, agreed to pay $4.3 million to settle allegations that it knowingly undervalued imported merchandise and underpaid customs duties.  The underlying complaint alleged that from January 1, 2006 to December 31, 2011 OtterBox knowingly omitted the value of “assists” from the dutiable value declared upon entry and knowingly made other false statements in documents submitted to CBP.  A copy of the press release announcing the settlement is available here.

This case is interesting for several reasons.

First, the case was brought be a former employee who was responsible for the Company’s international trade compliance.  The complaint alleged that this employee brought the assist issue to management’s attention, but was ignored.  The complaint followed.

Second, the case presented an interesting legal issue that had not been previously addressed – namely, whether the filing of a valid prior disclosure bars a subsequent qui tam claim filed under the FCA.  Although the court did not have the opportunity to decide the issue, a sizeable settlement was reached, and approved, despite the fact that OtterBox had voluntarily disclosed the same violation to CBP almost a year before the complaint was filed.  This suggests that a voluntarily self-disclosure filed after the initiation of an FCA action does not bar that action from proceeding.

Third, this settlement highlights the growing trend in prosecuting trade compliance violations under the FCA.  In announcing this settlement, the U.S. Attorney stated that “Customs duties are a significant source of revenue for the United States” and this settlement demonstrated that “the Department of Justice will zealously enforce their lawful collection.”  The combination of the financial incentives provided by the FCA (e.g. the private party bringing the complaint, known as the relator, is entitled to a portion of the recovery; here the relator received $830,000), reduced resources for CBP / U.S. Immigration and Customs Enforcement in this area, and strong interest in prosecuting these types of cases by many local U.S. Attorney’s Offices means that this trend is going to continue.  CBP appears to have been more involved in this action than in others, so it will be interesting to see if CBP devotes more resources to enforcement based on these FCA actions.

Finally, this rise of private party-initiated trade compliance actions should incentivize all companies to review their internal controls over this area and ensure that they are working effectively.  Otherwise, companies may find themselves embroiled in expensive enforcement actions, like those described above and below.

We hope that this is helpful.  We have significant experience advising clients on how to test (and improve, when necessary) trade-related internal controls.  We also are advising several clients on how best to address potential non-compliance by competitors/others.  If you have any questions, or if you would like to discuss these issues further, please let us know.

Best regards,

Ted