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

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