The US False Claims Act (FCA) provides an opportunity for a private party to sue, on the government’s behalf, any individual or company that has made false statements to avoid paying funds owed to the federal government. The government can choose whether to intervene and take over the lawsuit. But, in any case, the whistleblower is entitled to receive a significant percentage of the funds recovered for the government by the lawsuit. Recently, whistleblower claims alleging false statements made to US Customs and Border Protection (CBP) during the import process have been making the news and providing additional insights into the responsibilities – and risks – for companies importing into the United States. 

The FCA provides penalties of approximately $5,000 to $11,000 per violation, plus treble the amount of the government’s damages. These amounts might not be large for a one time error or misstatement. However, for imports, companies often make declarations to CBP in the same way, over and over, across multiple, repeat shipments. Thus, with each shipment made containing the false statement, penalties and damages can multiply across the years, leading to high potential liability amounts. The incentive for a whistleblower to file the case arises because the whistleblower can personally collect approximately ten to thirty percent (depending on the details) of the recovery. These FCA cases serve as powerful reminders of the compliance issues that face every importing company and of the responsibilities (and potential liabilities) for information and omissions on the entry paperwork for each and every import shipment.

Two fundamental issues for an importer to analyze and confirm in the import declaration to CBP are value and country of origin. Four recent whistleblower cases show just how errors on these two issues can form the basis for a FCA lawsuit by an individual against the importing company. 

Valuation

OtterBox. In August 2013, the US District Court for the District of Colorado unsealed the records of a whistleblower suit filed almost two years earlier against OtterBox, makers of cases for personal electronics. The whistleblower suit was filed by OtterBox’s former supply chain director. The former employee alleged that OtterBox knowingly failed to include the value of certain assists (goods provided to the manufacturing facility without charge) in calculating and declaring the total value of finished imports into the United States. 

According to the documents released to the public, the manufacturing process would start with domestic engineers designing a new product and sending a product blueprint to an independent engineering company (IEC) in China. The IEC would send the blueprint to a manufacturer in order to get an estimate of tooling costs and production costs. The IEC would notify OtterBox of the proposed costs, and if acceptable, OtterBox would send a purchase order to the Chinese manufacturer for the design and manufacture of the tooling. The manufacturer would present a blueprint for the tooling to the IEC for review. If the items did not pass inspection, the tooling would be modified and the process repeated. If the items passed, 100 units would be produced and sent to OtterBox in the United States for further inspection. Once the product passed, OtterBox would send a second purchase order and a second inspection batch would completed by the IEC. Then, if approved again, the full production runs would start. OtterBox would pay the IEC directly, in three installments: once to the IEC for their work on the project, once to the manufacturer for the engineering and manufacture of the tool or mold, and once to the manufacturer for the actual production of the approved product units. However, the lawsuit alleged that the expenses associated with the IEC’s work and the manufacturer’s cost of designing and manufacturing the product molds were not accounted for in the product transaction value on the customs paperwork. The lawsuit alleged that OtterBox knowingly failed to specify on the customs entry documents the additional expenses associated with the IEC’s work and the manufacturer’s cost of designing and manufacturing the product molds.

Recent news reports suggest that OtterBox and its former employee may have reached a settlement, but CBP and court approval are pending. 

Dana Kay. In June 2011, a garment cutter at Dana Kay Inc. filed a whistleblower suit against the company, several related companies and several individual owners and executives at the companies. Dana Kay and its related companies imported apparel for sale to consumers through J.C. Penney, Sears, Dress Barn and other outlets. The case was filed in the Southern District of New York and remained under seal until December 2013. The complaint alleged that the full value of the garments was not declared to CBP. According to the complaint, the parties would reduce the price declared to CBP by $1 to $3 per garment. This $1 to $3 amount would be covered by a separate document titled a “debit note” representing a separate amount to be paid the manufacturer, apart from the usual invoice, while that separate amount was not included in the total price declared to CBP. The complaint alleges that the importer directed the manufacturer of the amounts to be listed on the “debit notes” and made sure the broker did not include this value in the price declared to CBP. The complaint further alleges that the participants knew that the arrangement was incorrect, and in fact were advised of the illegality by an import consultant, but, nonetheless, discussed increasing the “debit note amount.” The duty rates applicable to the garments generally were over 20% and, according to the complaint, the decreased value scheme cost the US Government over $3 million in revenue.

The United States intervened in the case in January 2014, supporting the allegation that the companies and individuals had defrauded the United States of millions of dollars. SeeUnited States v. Siouni and Zarr Corp., et al., S.D.N.Y., 11-cv-04247-CM.

Country of Origin

Basco. The Department of Justice recently announced that an Ohio-based company, Basco Manufacturing Co., agreed to pay $1.1 million to resolve allegations, initially brought by a whistleblower, that Basco made false country of origin declarations on customs entries. The government’s settlement involved allegations that Basco knew that the aluminum extrusions it was importing were from China and were merely repackaged in Malaysia, but declared the goods to be of Malaysian origin in order to avoid paying antidumping and countervailing duties. When the government announced this settlement, it also announced that it had filed a complaint against four other companies and two individuals based on similar allegations. That lawsuit is captioned United States ex rel. Valenti v. Tai Shan Golden Gain Aluminum Products Ltd., et al., Case No. 11-cv-368 (M.D. Fla.).

Toyo. In a similar settlement last year, the DOJ announced a $45 million settlement with Toyo Ink, an importer of pigment used in ink manufacturing. In that case, the colorant CVP-23 was subject to antidumping and/or countervailing duties when sourced from India and China, but Toyo was charged with knowingly misrepresenting the country of origin of its CVP-23 in import declarations as either Japan or Mexico in order to avoid paying antidumping or countervailing duties. In that settlement, the whistleblower was a Toyo competitor and received a share of the settlement estimated at nearly $8 million.

Controlling the Risks

An importer of record is always responsible for the contents of its import declarations and liable for any erroneous statements or omissions made to the government. However, an FCA lawsuit represents an additional type of risk. Unfortunately, a reasonable disagreement within the company (or with a competitor) about the correct way to declare an article could metastasize into an FCA allegation by a whistleblower of intentional false statements by the company. One option to reduce this risk is to consider requesting a ruling from CBP. CBP provides written, binding rulings if a company is uncertain of the correct classification, valuation, or country of origin of their imports. These binding rulings can be very useful in ascertaining the correct way to declare imports, and definitively resolving internal questions or discussions. In requesting such a ruling, especially where the company has a strong interest in the correct outcome, the best approach is not just to ask CBP’s opinion, but to file the request and include a detailed argument supporting the outcome sought by the company. The requesting company also should reach out to and discuss the ruling with the reviewing officials at CBP, to make sure it is on track, and that the answer will not come as a surprise. Once issued, the published ruling will demonstrate to employees and competitors that the company is properly declaring its goods.

Even in the absence of a ruling from CBP, companies should create a compliance file containing copies of the CBP laws and regulations that support the manner in which the company choses to declare its merchandise. In addition, companies should consider a memorandum or analysis from a customs attorney, so the file can show that the regulations were properly applied to the company’s specific situation and merchandise. Such a file is highly useful in demonstrating that the choices in the import declaration were made thoughtfully, and with a reasonable basis in US law. Even if CBP ultimately disagrees with the choices made, such proof of forethought can be highly useful to reduce or eliminate any penalty that CBP might consider. Moreover, the cases above suggest that such a file can have another important value: reassuring potential whistleblowers that the company is making good faith efforts to comply with the import laws on how much duty is to be paid.