The False Claims Act imposes liability on persons and companies who defraud the government of monies, whether it is by receiving monies based on false statements or material omissions, or avoiding the payment of monies through false statements or omissions. The statute permits both private parties (whistleblowers) and the government to bring actions against the perpetrators of such fraud in order for the government to collect damages, a portion of which will be paid to the whistleblower, if one is involved. Over the past few months we have seen continuing and increasing efforts under the FCA to recover uncollected duties and penalties from importers who undervalue their imported merchandise, or otherwise violate the customs laws such that duties are underpaid [See: Clothing Companies Spin a Yarn with Commercial Invoices, Resulting in $13.4 Million in Fines for Customs Violations from July 21, 2016].
The two cases discussed below are noteworthy in that they appear to continue pushing the envelope with regards to FCA cases. In the first case discussed, United States of America ex rel. Xing Wei v. Yinshun Garment, Inc., et al., it is important to note that the government determined to intervene in the case and pursue the lawsuit, as well as the whistleblower. In this case, employees of the US importer, as well as a downstream purchaser, together with the importer, face the risk of being held liable for customs fraud under the FCA. In the second case, United States ex rel. Customs Fraud Investigations, LLC v. Mueller Industries, et al., the government declined to intervene. Nonetheless, the whistleblower is considering proceeding forward with the lawsuit, seeking to recover damages for both the antidumping duties it alleges should have been paid on the pipe imports, and for marking duties alleged to be due as a result of the origin markings either not being on the pipe as imported, or being removed from the pipes prior to sale in the US.
These developments serve as a reminder that the FCA is being increasingly used by the government and by whistle-blowers for violations of all types involving customs laws and requirements. Moreover, they serve as a warning to employees of importers, especially those tasked with, or otherwise involved in, handling the import transaction, as well as downstream purchasers, to be diligent about all representations made to US Customs and Border Protection on entry documents, including entry forms and invoices.
A “first of its kind” case involving a whistleblower FCA lawsuit filed in New York last week illustrates this trend. In this case, the US government is alleging a double invoicing conspiracy scheme involving the US importer, its managing director, and a wholesale customer designed to defraud the United States out of millions of dollars in customs duties on women’s garments. The government’s complaint alleges that between 2009 and 2014, Chinese Manufacturer Wuxi Yifeng, its US subsidiary Yingshun Garments, who acted as the importer, and Yingshun’s managing director, along with its successor entities, and the US wholesaler Notations, Inc. conspired to underpay customs duties through a double invoicing scheme, thereby avoiding paying millions of dollars in customs duties.
Pursuant to the scheme, the US importer furnished one set of commercial invoices to CBP that under-reported the value of the garments by 75% or more, thereby avoiding paying a significant portion of the customs duties owed to CBP, while providing its customer with another set of invoices that reflected a much higher value for the garments. The complaint further alleges that the managing director played a direct role in the conspiracy by regularly transmitting those irregular invoices and purchase orders which she knew to be false, and by changing the name under which the importer operated to avoid further government scrutiny while continuing the fraudulent double-invoicing scheme.
In addition, the government alleges that the US wholesale customer of Yingshun had an agreed-upon manner of conducting business in furtherance of the double-invoice scheme by accepting irregular invoices, by taking no steps whatsoever to learn about the business dealings of its LDP/DDP vendors, including whether those entities had any knowledge of the US customs law, had previously been found to be violating those laws, or had otherwise engaged in illegal or unscrupulous business practices, and when confronted with evidence of customs undervaluation, took no steps to cause the importer to fix the invoice, stop the fraud, or alert CBP to the fraud.
FCA Lawsuit Alleging Antidumping Duty Evasion and Marking Violations Also Unsealed
In addition to valuation fraud allegations, whistleblowers are filing FCA complaints alleging importers are fraudulently evading antidumping and countervailing duties and country of origin markings. Last week, an FCA lawsuit filed in July of 2014 was unsealed revealing allegations against Mueller Industries and its subsidiaries (Mueller) of evading antidumping duties by intentionally misclassifying household plumbing pipes (circular welded pipe) as American Petroleum Institute Specification 5L line pipes for pipelines from Mexico. Furthermore, Mueller is accused of “knowingly and intentionally” importing pipe from multiple countries in violation of country of origin marking regulations. The government alleges that in many instances the required origin marking was not on the imported pipe and/or the pipe sold to the customer in the US as required by Customs law, and that Mueller made false statements at the time of entry to CBP by not declaring the 10% marking duty obligation.