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

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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 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

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

Customs Valuation-Related Qui Tam Action

Dear Friends:

Further to our emails below, we wanted to let you know about an interesting customs valuation-related qui tam action that was just recently unsealed (at least in part).

The case involves a claim brought against OtterBox, a U.S. based importer of protective cases for smartphones, tablets, and computers, by its former supply chain director (who also happens to be a licensed customs broker).  The complaint alleges that OtterBox knowingly failed to include certain assists in the value declared to US Customs and Border Protection for articles imported into the United States over a 5-year period.  More specifically, the complaint alleges that the relator (i.e., the former supply chain director) repeatedly advised OtterBox management of its obligations under U.S. customs law regarding the alleged additions to value, but was ignored.

The Company has filed a motion to dismiss based on the fact that it had voluntarily disclosed the same violation to US Customs almost a year before the qui tam complaint was filed.  OtterBox argues that its prior disclosure provides a “safe harbor” and, thus, the relator has failed to state a claim upon which relief can be granted.

This case is interesting for several reasons.  First, while private party-initiated trade enforcement actions are increasingly common in this era of shrinking government resources, the majority of the cases to date have focused on ‘bigger ticket’ items, such as the failure to deposit antidumping/countervailing duties (which are, often times, hundreds of percent of the value) or intentional false statements as to origin in the government procurement context.  This case, in contrast, involves a pretty common customs valuation issue (i.e., additions to value), which likely had only a modest duty impact.  Second, it was filed by a licensed customs broker, who may have been motivated, at least in part, out of a concern for her license.  Finally, the case presents an interesting legal issue that has not been addressed previously – namely, whether the filing of a valid prior disclosure bars a subsequent qui tam claim filed under the False Claims Act.

Regardless of how this case turns out, companies should heed the warning.  It is extremely important that all companies have a mechanism that allows trade-related concerns to be raised and addressed in a timely and effective manner.  It is also, of course, important to make sure that all additions to value are properly declared to US Customs (upon entry or otherwise).

We hope that this is helpful.  If you have any questions about these issues, please let us know.

Best regards,

Ted