Two women’s apparel companies alleged to have systematically imported goods into the United States without declaring their full value recently settled a civil customs fraud lawsuit with the US Attorney for the Southern District of New York. The settlement required the companies — Dana Kay, Inc. and Siouni & Zar Corporation — to admit responsibility for fraudulent conduct and pay $10 million as damages and penalties under the False Claims Act.
Dana Kay, Inc. and Siouni & Zar Corporation are importers of women’s apparel under the brand names “Dana Kay” and “Danny & Nicole,” among others, sold at small specialty stores and large department stores. The complaint filed in the New York federal court alleges that, from 2003 through 2012, the companies engaged in a fraudulent scheme to avoid paying customs duties by presenting the government with invoices that significantly undervalued the imported apparel. Specifically, the complaint alleged that the companies paid overseas garment manufacturers the full value of the apparel, but deducted a flat fee for each garment before calculating the duty owed to the US government. The complaint alleged that the companies entered the artificially-lowered values on customs entry forms presented to the government, and thereby avoided paying millions of dollars in customs duties.
The alleged scheme came to light after a whistleblower filed a lawsuit under the qui tam provisions of the federal False Claims Act, 31 U.S. §§ 3729 et seq. Those provisions permit private parties with knowledge of fraud committed against the US government to file a lawsuit on behalf of the government and share in any recovery. Before proceeding with the suit, a qui tam plaintiff must disclose to the government the information on which his or her claim is based. If the government chooses to intervene in the action, as it did here, it assumes the role of lead prosecutor and files the complaint in federal court.
Of the settlement, James T. Hayes, the Special Agent-in-Charge of the New York Field Office of the US Immigration and Customs Enforcement’s Homeland Security Investigations (HSI), stated: “These two importers should serve as example that HSI is committed to ensuring a level playing field for all who work in the international trade industry.” This is not the first time that the government has targeted customs fraud. In late 2012, a whistleblower received $8 million out of a $45 million settlement after reporting misrepresentations by a competitor to Customs to avoid antidumping and countervailing duties. (U.S. ex rel Dickson v. Toyo Ink Manufacturing Co. Ltd., No. 09-cv-438 (W.D.N.C.)).
Robust compliance programs — including employee training and hotlines established to address employees’ concerns about the company’s compliance with government regulations — are the best defense to a False Claims Act investigation. Rigorous compliance programs not only help to prevent violations, but they also increase a company’s ability to mitigate exposure by investigating allegations and making voluntary disclosures when warranted.