In October 2017, US Immigration and Customs Enforcement (“ICE”), part of the Department of Homeland Security, announced a settlement with Notations, Inc. (“Notations”) in a whistle-blower suit brought in the US District Court for the Southern District of New York. It was alleged that Notations violated the False Claims Act (“FCA”) by causing false records and statements to be made to the US government and by conspiring with others to defraud the government. The Notations settlement1 is noteworthy because Notations was not the party that submitted the false records and statements to the US government, as it did not serve as the importer of record for the relevant purchases. Notations was the largest US customer of the importer of record. Nonetheless, the US government successfully sought liabilities beyond mere conspiracy, based on this US customer’s failure to conduct due diligence on the importer of record for its duty-paid purchases2 and ignoring warning signs that the importer of record’s business practices suggested fraud.3 The settlement should set off an alarm to US purchasers who may not realize that receipt of duty-paid merchandise does not absolve it of an “obligation . . . to detect instances in which the entity serving as the importer of record was defrauding (US Customs and Border Protection (“CBP”)).”4
Under the FCA (31 USC § 3729), any person who, among other things, “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government,”5 is liable to the US government for civil penalties, as well as three times the damages sustained as a result of the action. A feature of the FCA that sets it apart from most other US laws is that it allows private parties to bring suits on behalf of the government in what are known as “qui tam” actions. In such an action, the private party bringing the suit is called a “relator.” These actions are first filed under seal at which time the government investigates and then decides whether or not to take over the case, i.e., “intervene.” Regardless of the government’s decision, the relator is entitled to a share of the government’s recovery if the suit eventually prevails. 6
The qui tam action in this case was originally filed in 2013 by the relative of a former employee against the importer of record, i.e., the US subsidiary of a garment manufacturer in China; a former employee of the importer; and a wholesaler (i.e., Notations) that purchased goods from the importer. The government intervened in September 2016, alleging that the parties, including Notations, conspired to commit fraud by employing a double invoice scheme whereby the importer provided Notations with one (accurate) invoice reflecting the actual price paid for the goods but provided CBP with a different invoice reflecting lower prices in order to avoid paying the required duties. The government also alleged that Notations violated the FCA by knowingly causing false importation documents (i.e, CBP Form 7501 based on fraudulent invoices) to be submitted to CBP. The complaint alleged that Notations took no action to verify that the importer was acting in compliance with CBP regulations and requirements. Interestingly, Notations had previously been acting as its own importer of record and therefore had knowledge of such requirements. Notations also allegedly ignored numerous red flags seeming to indicate that the importer was not acting appropriately. For example, Notations’ bank flagged a problematic invoice for lacking basic information but Notations did not investigate the problem nor request changes to the invoice. Notations also allegedly accepted an invoice that grossly undervalued the goods and, despite the fact that the invoice should have been easily recognizable as undervalued, Notations took no action to cause the importer to correct the invoice. Similarly, according to an import manager who worked at Notations, it was not part of her job responsibilities to take any steps to correct a problematic invoice.7 As a result of the double invoice scheme, the importer underpaid customs duties that were owed to the government.
As part of its settlement, Notations agreed to pay $1 million in damages and admitted to failing to take any action in response to the multiple red flags indicating that the importer was undervaluing the goods purchased by Notations and therefore was underpaying customs duties.
This case is an example of how broadly the FCA can be enforced. A company may be held liable under the FCA if it fails to conduct due diligence on its suppliers making import entries and/or if it ignores red flags of any action by other parties to defraud the US government of customs duties, even if that company is not the importer of record. Ignorance alone is not enough to defend against an FCA allegation, as actual knowledge is not required. Companies should take a proactive approach to ensure that their import compliance programs include proper procedures to carefully vet foreign suppliers, even those that supply goods on a delivered, duty-paid basis.