Originally published by the Journal of Commerce in May 2016
Only three (3) years ago, when Tom Winkowski was Acting Commissioner of Customs and Border Protection (“CBP”) and John Morton the Director of Immigration and Customs Enforcement (“ICE”), both of them acknowledged publicly how their respective agencies had lost such significant depths of knowledge and experience due to staff retirements that both agencies were hampered in bringing successful trade fraud cases.
ICE sought to raise its knowledge and skills by establishing the National Intellectual Property Rights Center. As the name implies, the Center was originally focused on interdiction of counterfeit product and related crimes. However, it has expanded to include investigations about many other federal crimes and serves as the criminal investigative arm of CBP.
CBP took a different approach and created its Centers of Excellent and Expertise (“CEE). These virtual centers are intended, among other goals, to allow institutional knowledge to remain available by having multi-disciplinary staff in various geographic locations with widely different levels of experience and knowledge working together within the agency focused on specific industries. Add to that mix the recently announced Trade Enforcement Task Force within CBP’s Office of Trade, and what do we get? That remains to be seen!
The Trade Enforcement Task Force was recently announced as having a focus on antidumping and countervailing duty (“ADD”) evasion and intellectual property rights (“IPR”) enforcement. CBP and ICE have long coordinated when it comes to IPR cases, which is why it takes so long to get an answer about even routine detentions. Additionally, both ADD and IPR have long been on CBP’s priority trade issues list, a list that has gotten longer or shorter, depending on the times. Right now, it consists of: 1) Antidumping and Countervailing Duty; 2) Import Safety; 3) Intellectual Property Rights; 4) Textiles/Wearing Apparel; and 5) Trade Agreements. What all of these topics have in common is the need for robust compliance programs. Two recent cases clearly reinforce this point.
Back in 2013 and 2014, a large number of customs brokers received Civil Investigative Demands (“CID”) from the Department of Justice (“DOJ”). It was clear from the language in them, an action had been brought alleging fraud when it came to importing wooden bedroom furniture from China. The typical list of documents requested ran to about thirty (30) very broad categories, covered a large period of time, and often sought records about hundreds, if not thousands, of shipments. These CIDs included demands for copies of emails, plus employee names and importer/supplier contact details. In December 2015, DOJ announced the settlement of one of those cases. DOJ was collecting $15 million in a settlement with University Furnishings, LC and Freedom Furniture Group, Inc.
That case arose because a domestic competitor spent a lot of time, energy and money pulling together details about how the American importers and their suppliers conspired to evade the antidumping duty on wooden bedroom furniture from China. They did so the old-fashioned way – they misdescribed the goods. The suppliers were quite open about how do to it and, stupidly, they were quite blatant – if you knew what to look for. For example, they called two drawer bedroom cabinets two drawer lateral files! The old transshipment trick was also employed. Make the goods in China but mark them Made in Vietnam!
Taking the information it developed, the domestic company shared the details of its investigation with DOJ and CBP. It then filed a qui tam or whistleblower lawsuit. DOJ and CBP accepted the case and obtained the $15 million settlement. As a result of its efforts, the domestic company – J Squared Inc. dba University Loft Co. – will receive $2.25 million from the settlement and another $1.3 million from settlement of a separate civil lawsuit it filed. Not discussed in all the press reports is the key question for traders and all those who find out their competitors are not playing by the rules. For the most part, the American buyers were school districts. Now that the American importers’ actions have been fully acknowledged, will their customers drop them?
Further, in light of the Yates and Weissman memos that we have written about previously, DOJ is not supposed to settle with companies without considering who was responsible for the violations, should we be looking for more fall-out from this case?
A more recent case is the one announced at the end of last month. In that one, criminal charges were brought by DOJ against UBF Group, Inc. doing business as Nu-Health Products Co. and its owners and former officers, Lynn Leung and Daniel Fu. This case, too, went beyond traditional trade fraud which involves undervaluation and misclassification, but also included violations of the Food & Drug Administration laws, the federal Marine Mammal Protection Act and, add to that, false Chinese export documents. The duty difference was announced to be $119,000, but it all started with FDA and MMPA violations. Here, too, a certain level of sophistication was missing.
The manner in which the scheme was executed involved the typical prepare purchase orders with one description and value, and shipment documents with a different description and half the value. The false descriptions included fish oil, aloe vera, gingko biloba and multivitamins, exactly the types of products which would attract FDA attention. Further, employees were directed to communicate with the suppliers and so had direct knowledge of the scheme and how it was being carried out. You know they were pressed to implicate the owners under threat of they themselves being prosecuted! Another factor was the invoices submitted to CBP totaled about $1.4 million but the overseas payments totaled about $2.5 million! One might wonder how this came out? Most companies forget CBP is part of the Financial Crimes Network and so routinely has access to data about funds coming into and going out of the U.S.
The goods were shipped from China by an exporter who did not have the proper Chinese wildlife export license. Harp Seal are considered a threatened species and so may only be imported for public display, scientific research or enhancing the survival of the species. Some of the other items are barred by FDA rules and regulations.
What is noteworthy about these cases is they go well beyond the historical definition of trade fraud, that is under valuation and misclassification of goods. Instead what we see on an ever increasing basis is traders are found to violate laws enforced by other agencies, who do so by falsifying their shipment document. In the UBF case, the parties settled with a plea to two counts. One was for making and submitting a false record for wildlife imported, and the second for entry of goods falsely classified. The individuals lost their company and probably just about everything else, must pay significant fines, and were fortunate to be sentenced to probation rather than jail time.
While there is no question that CBP must and should go after cheaters, what we have not heard publicly discussed or in the press in several years (many more than just the three years mentioned above) is the efforts of CBP to pursue traditional trade fraud cases, those involving old-fashioned issues – misclassification and value, without other agency violations. It is important to keep in mind such enforcement actions do not need to be criminal cases to get the attention of the trade community. Serious civil cases are sufficient. Admittedly there are limits to what CBP is permitted to publicize about its penalty cases, as should be the case, but in the absence of regular reminders about the consequences of lax practices, companies get complacent. The lack of these types of public reminders makes it ever more difficult for trade compliance professionals to have the ammunition necessary to get the attention of their management to enhance compliance programs.
One of the stated reasons for the establishment of the CEEs was to provide CBP with a means to better understand industry practices but also to gain better knowledge about how the thousands of small and medium sized enterprises (“SME”) operate. Large and publicly traded companies have other regulatory controls and public pressures on them which lead to robust compliance programs. It is the SMEs that typically have more limited resources and focus elsewhere. It’s not that they necessarily intend to violate the law, but without those serious reminders, they become complacent. Where is the periodic reminder of the serious costs of non-compliance?