Customs Conference Update

Dear Friends,

Yesterday, I had the privilege of speaking at ACI’s Advanced Forum on Customs & Trade Enforcement here in Washington, DC.  I spoke on a panel with an attorney from US Customs and Border Protection (CBP) Headquarters about the interplay between transfer pricing and customs valuation.  I have attached the slides from our presentation here for your reference.

I also wanted to pass along a tidbit I picked up from one of the other panels that addressed CBP audits.  As we have advised previously, CBP is conducting more audits, but fewer of those audits are traditional Focused Assessments (FA’s).  Instead, with the transition of enforcement responsibilities to the Centers of Excellence and Expertise (CEE’s), CBP is conducting many more “targeted” or “single-issue” audits (e.g., quick response audits, survey audits, etc.).  These focused audits are aimed at issues of perceived non-compliance, rather than at the internal controls the company has in place over one or more areas (like a traditional FA).  Also, the CBP speaker on the audit panel made it clear that, while the primary benefit of the Importer Self-Assessment program (ISA) is being removed from the CBP audit pool, that means being removed from the FA audit pool only.  Stated differently, ISA member can be (and frequently are) the subject of the targeted audits being directed by the CEE’s and conducted by Regulatory Audit.  If CBP is conducting fewer FA’s, and more targeted audits, this calls into question whether ISA members are really getting much benefit from the ISA program.

We hope this is helpful.  If you have any questions about either intercompany customs valuation or the audit issues discussed above, please let us know. 

Best regards,
Ted

 

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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

Customs Valuation Implications of Year-End Transfer Price Adjustments

Dear Friends:

Just a quick reminder for those of you working at multinational companies which operate on a calendar year basis – do not forget to ask your tax colleagues whether any retroactive transfer pricing adjustments were made at, or before, year end (assuming they do not send this information to you on their own).  

If such adjustments were made (whether upward or downward), please be sure to consider the customs valuation implications here in the United States and elsewhere.  The failure to declare upward transfer pricing adjustments is a very common enforcement issue in many jurisdictions (largely because the issue is so easy to identify and often involves significant amounts/penalties); whereas downward adjustments could lead to a refund of customs duties, taxes and fees in some jurisdictions (including the US, the EU, and Canada).  A quick note to your tax colleagues now could save a potential headache down the line, or put some money back in the company’s pocket. 

As part of our customs compliance assessment process, we have developed a questionnaire tailored to these issues for sending to your in-house tax colleagues.  If you think the questionnaire would be helpful to you, just let me 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

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 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.

Best regards,

Ted

Another Customs Valuation-Related Qui Tam Action

Dear Friends:

We are writing to let you know about the settlement of (yet) another False Claims Act (FCA) case involving customs valuation issues.

The U.S. Attorney’s Office for the Northern District of California announced yesterday that an importer of cable assemblies, Bizlink Technology, Inc. (BTI), has paid $1.2 million to settle allegations that it violated the FCA by underpaying customs duties on merchandise it imported from China during the period 2006-2008.  A copy of the USAO’s press release is available here.

The underlying complaint alleged that BTI engaged in a dual invoicing scheme that both undervalued and mis-described the imported goods so as to pay less than the full amount of customs duties and fees owed upon importation.  The complaint alleges that BTI paid less than 10% of the duties and fees that were lawfully owed on the imported merchandise.  The case was filed by a  former employee who left the company “due to a corporate reorganization which eliminated his position.”

There are a couple of important take away’s from this case.

First, this case is part of the growing trend of private parties (e.g., former employees, competitors, etc.) increasingly turning to the FCA to address trade compliance violations by others (see string below).  The combination of the financial incentives provided by the FCA (e.g., relators get a portion of the recovery; here, the relator received $252,000 as his share of the settlement), reduced resources for U.S. Customs and Border Protection/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 to grow.

Second, since the bar for filing these cases is not high (i.e., anyone can file), all companies should make sure that they have (i) a process for employees to raise potential issues to management and (ii) a process for management to investigate and address credible issues.  It is important to remember how these cases work.  The relator files the case in U.S. district court under seal (i.e., the target is not made aware of the case).  The government is notified and conducts an investigation.  If there is merit to the allegations, the government steps in and takes over the prosecution of the case.  In most situations where the government steps in, the cases settle shortly thereafter (i.e., the government gets involved in cases with merit, which then settle).  The government’s investigation generally involves gathering information from the target, so, if the target can at that stage pull something out of its file that shows it was aware of the allegation, investigated it and either (a) addressed it, or (b) concluded it was unfounded, that will go along way in influencing how the government sees the case and its decision whether to step in or not.  So, in short, with good internal controls, most companies will be able to protect themselves from these sorts of cases.

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 Valuation-Related Qui Tam Action

Dear Friends:

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.

Best regards,

Ted