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.