Originally published by the Journal of Commerce in February 2018

Customs and Border Protection (“CBP”) and other federal enforcement agencies seizing goods or imposing penalties is not unexpected. However, there are other consequences triggered by the actions of private actors which present equal danger to importers. In particular,  there is the False Claims Act (“FCA”), otherwise known as a qui tam or whistleblower case.   The potential of a whistleblower case is not new.  In the 1990’s, the possibility came to light trade by way of a penalty case pursued by CBP against Hitachi America Ltd, and Hitachi, Ltd.  It started when a former employee of the American company reported information and gave documents to CBP detailing certain payments which should have been included in the dutiable value of the imported goods and was not.  For most, this highly publicized lawsuit was the first time whistleblowing and duty payments were joined in the same breath.  There have been a number of FCA cases recently, and the payments to settle them now are generally considerable. So, it is worth asking – are your import declarations accurate? If not, who knows about those mistakes?  How quickly are you getting them corrected?

These cases begin when a whistleblower, called a relator, brings information to a government agency asserting a party (often the former employer who fired the person) is misdeclaring (in our case) information related to the duty collected on its imported goods.  The government then has the option to step into the whistleblower’s shoes and pursue the case, or decline to do so.  It is commonplace for the relator to file a lawsuit, which is put under seal (kept from public knowledge) until the relevant agency makes its decision. If the case is pursued, the government agency becomes the plaintiff in the pending lawsuit or if none is filed, the Dept. of Justice pursues the matter by way of administrative action. If it declines, the relator pursues the case on his or her own.  Either way, if the case is successful, the whistleblower gets part of the recovery.

A “false claim” is defined in 31 U.S.C. § 3729(G) as: “… any person who 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, is liable to the United States Government for a civil penalty or not less than  $5,000 and not more than $10,000, as adjusted [for inflation] ; plus 3 times the amount of damages which the Government sustains because of the act of that person.” Person, of course, includes both individuals and companies.  These types of cases are referred to as reverse false claims because the assertion is money which should have been paid was not.

To be clear,  “knowing” and “knowingly” are defined to mean one has actual knowledge, or acts in deliberate ignorance or reckless disregard of the truth or falsity of the information. There is no requirement there is a specific intent to defraud.

For anyone who did not know or had forgotten about the Hitachi penalty case, the whistleblower issue came to light again in 2014 when a number of customs brokers and others received civil investigative demands from Justice regarding wooden bedroom furniture imports from China. The companies receiving the list was long, the companies asked about was longer, and the list of documents demanded was exhaustive!

The most recent case was publicized in January 2018, when Justice announced that Bassett Mirror Company agreed to pay $10.5 million to resolve allegations that it violated the FCA by knowingly making false statements on customs declarations to avoid paying antidumping duties on Chinese wooden bedroom furniture.  A similar case was settled in April 2016, when Z Gallerie LLC agreed to pay $15 million to settle allegations that it, too, misdescribed the type of furniture it was importing in order to avoid the antidumping duties due on Chinese wooden bedroom furniture imported.   Here, it was publicized the whistleblower would receive $2.4 million from the settlement!

In July 2016, China-based clothing manufacturers, Motives Far East and Motives China Limited, and their affiliated US importer, Motives, Incorporated, agreed to pay nearly $13.4 million for engaging in a double invoicing scheme, designed to defraud the United States out of millions of dollars in duty. The double invoicing scheme was described as one invoice which undervalued the goods and was presented as the basis for entry, and a second invoice called a “debit note” or “cost sheet” reflecting the higher, true cost of goods. Sound familiar?

In May 2017, Justice announced a settlement with Import Merchandising Concepts L.P., an executive and an agent who agreed to pay $275,000 to resolve allegations against them. The claim was again that Chinese wooden bedroom furniture was misclassified as non-bedroom furniture on the import documents.

More interesting is the 2014 case brought by Customs Fraud Investigations, LLC (“CFI”) against Victaulic Co. (“Victaulic”). Therein,  CFI sought damages and civil penalties. Victaulic is a producer of iron and steel pipe fittings manufactured in the U.S., China, Poland, and Mexico. CFI was described as conducting research and analysis related to potential customs fraud. CFI alleged that Victaulic failed to mark or mismarked its foreign-made pipe fittings with their country of origin and also falsified the related customs entry documents, so as to avoid paying the 10% marking penalty due on mismarked or unmarked foreign products.

In finding support for its allegations CFI relied on a commercial manifest reporting service to identify import shipments for Victaulic. Victaulic is a privately held company, so CFI had to resort to data available on the Internet, including sales on eBay, to estimate the value of the imports which it claimed were not properly marked.  Victaulic argued the information being provided was public.  The court spent some time considering the nature of the sources of CFI’s information against what is defined in the statute as public sources of information. It found the manifest reporting service to provide “public” information, but not eBay and other Internet sources.

The court next turned to whether the 10% marking penalty meets the definition in the FCA of monies that would be due to the government and ultimately held that monies which result only when the government exercises its discretion do not qualify for recovery under the FCA. Ultimately, when looking at all the facts asserted, the court determined CFI had failed to provide proof the pipes were mismarked or not otherwise legally marked and so the case was dismissed with prejudice. However, that decision was overturned earlier this year by an appellate court.

This latest decision about the CFI v. Victaulic claim is being touted as opening the door to many similar cases.  Companies would be smart to check with their Labor and Employment counsel to make sure to cover potential information about errors and wrongdoing in their personnel exit interviews. Of course, good policies and procedures seeking compliance from the outset are key, so how recently did you update your policies and procedures, and make sure your staff is properly trained?  How recently did you audit your transactions? False Claims Act cases are obviously not limited to duty collection. So, beware of the whistleblower!