We are writing to let you know about the settlement of a False Claims Act (FCA) case, involving customs valuations issues, that we brought to your attention back in January.
On Wednesday, the U.S. Attorney’s Office (USAO) for the Southern District of New York announced that women’s apparel importers Siouni and Zarr Corp., Danny & Nicole, Dana Kay and their individual owners, agreed to pay $10 million to settle allegations that they violated the FCA by intentionally understating the value of apparel imported since 2001. The underlying complaint alleged 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. A copy of the USAO’s press release is available here.
There are a couple of key takeaway’s from this case.
First, given the increasing number of FCA-related trade cases brought by current/former employees (here the employee who brought the case will be entitled to receive up to 30% of the $10 million), companies should develop (1) procedures for employees to elevate potential issues to management (e.g., ensuring that procedures related to “hotlines” include trade issues, etc.), and (2) a process for management to review, investigate and address credible issues. With good internal controls, most companies will be able to protect themselves from these costly enforcement actions.
Second, while these cases generally result in significant settlements, the Department of Justice appears to be willing to settle these cases quickly and for less money than the government would otherwise be entitled to collect. While $10 million is a sizeable settlement, the FCA requires liable defendants to pay a civil penalty plus 3 times the amount of damages which the government sustains. Here, the complaint alleged that the defendants’ additional payments resulted in an estimated underpayment of duties of at least $3 million per year and the settlement alleged that the defendants owed the government “millions of dollars in duties”. In the alternative, the U.S. civil customs penalty statute (19 U.S.C. §1592) would require the repayment of the duty, plus impose a penalty of up to the domestic value of the merchandise (since this was fraud). Either way, the government could have collected significantly more than the $10 million settlement. Thus, while the Department of Justice appears willing to make these cases “hurt”, they also appear willing to sacrifice some of the potential recovery for a quick victory. It will be interesting to see if U.S. Immigration and Customs Enforcement and/or U.S. Customs and Border Protection starts devoting more resources to enforcement based on these FCA actions.
Finally, as part of the terms of the settlement, the defendants agreed to cooperate fully with the government in any investigation of, or enforcement action against, any other entities and/or individuals involved in this case. If your company conducts business with Siouni and Zarr Corp., Danny & Nicole, Dana Kay or their individual owners, we strongly recommend that you review your interactions with the defendants in order to identify (and address) any credible issues that could be the subject of further investigations/enforcement actions stemming from this case.
We hope this is helpful. If you have any questions, or if you would like to discuss these issues further, please let us know.