Originally published by the Journal of Commerce in August 2012
Last month, the L.A. County Bar’s Customs Law Committee had a meeting with the local U.S. Attorney. Perhaps the most interesting point which resulted was agreement among all parties that not enough prosecutions are taking place regarding purely import/export trade fraud cases. While this might, at first, seem an odd thing for lawyers to be saying, there really is some logic to it – and it’s not a matter of creating more work for the lawyers.
To get the attention of an industry, people need to be regularly reminded there are serious consequences when the laws or regulations are violated. If those consequences are not reinforced, internal controls and due diligence become more and more lax, generally unintentionally, but every once in a while, somebody does it on purpose. It’s really no different than what happens at home. If you let a small child misbehave, over time, that bad behavior becomes more pronounced and difficult to correct. Similarly, if the clerk administering the petty cash gets away with stealing $50 this week, in the not too distant future, that amount becomes $100, $250 and so on.
In the purely import/export arena, there have been only a handful of cases in the recent past which involved criminal prosecutions for purely trade-related violations. The most recent one that comes to mind involved an importer who undervalued goods. The loss of revenue was less than $500,000 but the owner of the company ended up in jail. How often have you heard of that happening lately?
There is the very recent accusation by New York state authorities against Standard Chartered Bank over a practice called “wire stripping” which is asserted to have allowed Iranian money to be laundered through American banks. Wire stripping is a process whereby information about the source or routing of the wire is removed so there is nothing identifying the instructions and funds as having come from a sanctioned country. The authorities claim the bank took this action because it wanted to collect millions of dollars in fees. There is also an assertion one of the bank executives wrote an email questioning why the Americans thought they could tell the rest of the world with whom to deal! Supposedly the FBI is investigating, but you have to wonder – where is OFAC in all of this?
Another illustration of the types of cases being brought are the anti-trust settlements with the airlines and air freight forwarders in the U.S., Japan and Europe. These were also the outcome of international trade activities, but were not prosecuted for purely import or export violations.
In the export arena, we have seen a few notable criminal convictions. The one that got the most press involved Professor J. Reece Roth who was convicted of conspiring with Atmospheric Glow Technologies, Inc. (AGT), of unlawfully exporting defense articles to China and wire fraud for defrauding the University of Tennessee as he concealed his actions from his then employer despite several opportunities to be forthright.
Roth’s problems arose in conjunction with a contract AGT won with the U.S. Air Force. AGT was a University spin-off. The Air Force contract involved developing a plasma actuator that was intended to reduce the drag on the wings of drones. Under the terms of the contract, Roth was prohibited from sharing sensitive data with foreign nationals. Despite clear warnings, Roth took his laptop containing project plans to China with him. While there, he asked a colleague to send him an email with data about the project to the email account of a Chinese colleague. Upon receipt, Roth shared the contents with that Chinese colleague. Further deemed export violations arose because Roth had two foreign students working with him on the project – one Chinese and one Iranian – without government knowledge or approval. The court imposed a 48 month sentence.
Now we hear about Chi Tong Kuok who pled guilty in San Diego to conspiracy to violate the export laws for attempting to buy sophisticated military equipment (e.g., communications, equipment and GPS gear used by the U.S. military) and send it to China. Kuok was originally found guilty of money laundering and smuggling. That conviction was overturned and a new trial ordered. Kuok wanted to mount a duress defense, meaning he was forced into his attempts by the Chinese government by way of threats to himself and his family. Under the plea deal, Kuok will face no more than 46 months in jail. He has already been in custody for three years. So, he likely settled as the fastest way to get out of jail. If the judge rejects the settlement, the guilty plea may be withdrawn and the trial proceeds.
There are any number of convictions for selling counterfeit goods, but then we have the one recent enforcement action involving import issues brought under the False Claims Act. These sorts of suits are generally called qui tam actions. They arise when a whistleblower provides the government with evidence of fraud against government contracts and programs. As often happens, the government takes a long time to act, so typically the whistle blower sues, in a sense on behalf of the government, in order to recover the stolen funds. As in most whistleblower contexts, if the lawsuit is successful, the whistleblower receives a portion of the recovery. In this case, the violation was misclassifying auto parts manufactured in China. The settlement was $6.3 million of which about $4 million was paid from assets which were seized. The related criminal proceedings led to one company pleading to a charge of entry of goods by means of false statements. The sentence was a probation of two years and a $25,000 fine.
What did the parties do? They misclassified the goods entering them as free of duty, but charging customers the correct 2.5%, thereby pocketing the difference. A total of 706 entries are said to be involved where the manifolds were entered as unfinished, when they were actually finished. The duty calculated as evaded was $2,549,000. The matter came to the government’s attention when a whistle blower filed the claim. The person was named in the HIS/ICE press release and if LinkedIn is to be believed, he was a Sales and Account Manager at the company!
What does the government need to do? We have to admit the seizure of goods is an effective tool, but this happens to individual shipments about which no publicity is permitted due to the Trade Secrets Act. So, while some in industry know about for example the importer of record issue related to fabric and garments, there have been no prosecutions. So perhaps hapless folks in the U.S. doing a friend or relative in China a favor have no idea what they are getting into when they agree to become importer of record. Imagine how they dynamics might change if one or two people ended up in jail for getting into these schemes?
A few years ago, one of the Ports publicized the penalty settlement with a company for NAFTA violations. On the one hand, the news was helpful in reminding companies about the importance of compliance. On the other hand, the fact the settlement was announced sent shockwaves through industry. If DDTC, OFAC and BIS can announce their settlements, you have to wonder why CBP cannot?
Whether one looks at the auto parts case or the recent DDTC settlement with United Technologies or any of the many recent Foreign Corrupt Practice Act case resolutions, these situations are proof again, people matter. You can have the best compliance program in the world. If it is not followed, things will happen and generally they are bad things. When was the last time your company performed a due diligence check-up?