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

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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:

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

Dual-Invoicing Customs Fraud Case: A Lesson for Retailers (and Others)

Dear Friends:

We thought that you might be interested in a recent dual-invoicing customs fraud case that caused a large U.S. retailer significant heartburn.  The case offers important lessons that all importers should heed.

Background

A third-party supplier to a major multi-channel electronic retailer pled guilty in U.S. federal court to the criminal charge of intentionally defrauding the United States of more than $1 million in customs duties.  The supplier, Fai Po Jewellery (H.K.) Co., Ltd. (“Fai Po”), was ordered to pay nearly $2 million in criminal fines and restitution and placed on probation for a period of three years.[1]

According to the U.S. Department of Justice, Fai Po ran a double-invoicing scheme under which it fraudulently evaded the payment of U.S. customs duties by invoicing the U.S. purchaser for the true cost of the goods, while enclosing with the shipments invoices that intentionally understated the value of the merchandise (the merchandise involved was subject to high U.S. duty rates).  The invoices that accompanied the shipments were used by an express courier/customs broker to clear the goods.  As noted in the U.S. Immigration and Customs Enforcement (“ICE”) press release, the U.S. purchaser was not aware of the scheme (i.e., the U.S. purchaser was not the importer of record) and did not benefit from it.

Implications for US Retailers

While the media and legal blogs have focused on the direct implications for the foreign supplier, the case is also instructive for U.S. retailers or other importers who purchase goods on “delivered” terms.

In the retail industry, it is quite common for retailers to purchase merchandise on “delivered” terms and to have suppliers be responsible for importing the merchandise into the United States.  Under such an arrangement, the retailer generally does not receive copies of the entry documents submitted to U.S. Customs and Border Protection (“CBP”), as the supplier, or its designated customs broker, acts as the importer of record of the merchandise.  Although a U.S. retailer does not act as the importer of record under such an arrangement and may, in fact, have limited knowledge in connection with the information submitted to CBP regarding the importation of the merchandise, such an arrangement does not shield the retailer from potential liability for duties owed to CBP, as the retailer may still be the “ultimate consignee” of the merchandise under U.S. customs law.

In addition, a U.S. retailer under such an arrangement may be exposed to potential civil penalties under 19 U.S.C. §1592.  In this regard, U.S. customs law prohibits any person from entering or attempting to enter merchandise into the United States by material and false statements or acts or by material omissions, and from aiding or abetting a person to commit the foregoing violations.  See 19 U.S.C. §1592(a)(1)(A)-(B).  U.S. courts have held persons other than the importer of record liable for violations of 19 U.S.C. §1592.

Actions to Consider

The lesson for U.S. retailers here is that arrangements with third-party foreign suppliers to purchase merchandise on “delivered” terms do not necessarily insulate the retailers from potential liabilities under U.S. customs law.  U.S. retailers who utilize such arrangements should review agreements with their suppliers to ensure that the suppliers are required to include invoices with each shipment of merchandise.  In addition, retailers should make certain their internal controls include procedures to review their purchase orders against the suppliers’ invoices to ensure that the prices match, as well as procedures for addressing any situations in which the prices do not match.

Conclusion

U.S. retailers that recognize the risks associated with such arrangements can take steps to minimize the likelihood of finding themselves in a situation similar to that of Fai Po’s U.S. customer.  Having documented internal controls to address such risks and evidence that such controls are followed can also reduce the risk of potential penalties under U.S. customs law.

*             *             *

We trust that the foregoing is helpful.  If you have any questions about supplier arrangements or your obligations under U.S. customs law, please let us know.

Best regards,

Ted


[1] The retailer sued Fai Po in a related civil action.  The case was dismissed in November 2013 after the parties reached a settlement.

Another Customs-Related Qui Tam Action

Dear Friends:

I am writing to let you know about another customs-related qui tam action.

Last week, the U.S. Department of Justice announced that an Ohio-based company had agreed to pay $1.1 million to resolve allegations that it had intentionally filed false customs declarations to avoid the payment of antidumping and countervailing duties on Chinese-origin aluminum extrusions.  The announcement states that DOJ is also pursuing claims against 4 other companies and two individuals for similar violations.  A copy of DOJ’s press release can be found here.

The defendants are alleged to have transshipped Chinese-origin aluminum extrusions through Malaysia to hide the true country of origin (China) and avoid the payment of ADD/CVD upon importation into the United States (as many of you know, aluminum extrusions from China are subject to ADD/CVD rates of well over 100%).

The case was originally filed by a whistleblower under the qui tam provisions of the False Claims act.  The whistleblower (known as the “relator” under the False Claims Act) is entitled to a meaningful portion of any recovery from this action (including the $1.1 million collected thus far).

This case is part of a larger trend we have been seeing develop over the last couple of years – namely, that private parties are increasingly turning to the False Claims Act to address potential trade compliance violations by others (e.g., competitors, employers, etc.).  In addition to the obvious financial incentives (again, whistleblowers under the False Claims Act are entitled to a meaningful percentage of any recovery the government makes as a result of the case), government enforcement efforts in this area are viewed as increasingly resource-constrained, inefficient and/or ineffective.  In contrast, local U.S. Attorney Offices are showing strong interest in prosecuting these types of violations (particularly those involving government procurement, such as “buy America” violations, and antidumping/countervailing duty issues).  We expect to see this trend continue for some time.

The 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.  Similarly, if you are aware of non-compliance by others that is unfairly tilting the playing field (e.g., a competitor not paying antidumping/countervailing duties rightfully owed, or misstating the origin of their products, to get a competitive advantage), there are steps you can take to address it, even if the responsible government agency has not done so.

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