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

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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.

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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.

Canada and Mexico Question U.S. Country of Origin Labeling Requirements

Dear Friends:

You may have seen in the news over the last few weeks stories about a dispute between the United States and Canada (and to a lesser extent Mexico) over U.S. country of origin labeling requirements for meat.

The U.S. Department of Agriculture recently issued final regulations requiring the country of origin labeling for certain cuts of beef. Canada and Mexico have alleged that this final rule is not consistent with an earlier WTO decision finding that a previous version of the USDA regulations were inconsistent with the United States’ WTO obligations. Now that the USDA has issued its final regulations, Canada, in particular, is publicly raising the possibility that it will impose sanctions on imports from the United States. Sanctions in this area generally take the form of additional customs duties on unrelated imported goods; often times the duties are upwards of 100%.

While the imposition of sanctions will need to be approved by the WTO (and, as a result, is a little ways off), the negotiation process has begun. On Friday, Canada’s Ministers of International Trade and Agriculture issued a statement that included a draft list of tariff classifications Canada is considering hitting with sanctions. The list primarily covers U.S. agricultural products and foodstuffs (e.g., certain types of meat, fruits, vegetables, ketchup, etc.), it also includes certain manufactured items (e.g., furniture, jewelry, etc.). The complete list is worth a quick read and can be found here. Canada is publishing this list now, so the U.S. exporters that are impacted have time to pressure their Congressional representatives to resolve the USDA meat labeling issue.

All U.S. companies that export products to Canada should review the list. If your products are currently included, there are steps you should take now to minimize the chances that they are included on the final list of products ultimately subject to the sanctions. We, together with our colleagues in Canada, have a great deal of experience with these issues and would be happy to advise further, if helpful. If it would be, just let me know.

Best regards,

Ted