Kirby McInerney | <em >Qui Tam </em >Whistleblowers, Government Target Commercial Customers over Suppliers’ Import Duty Evasion
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Qui Tam Whistleblowers, Government Target Commercial Customers over Suppliers’ Import Duty Evasion

02/06/2020

Downstream buyers allegedly turned a blind eye to suppliers’ import fraud while receiving goods at below-market prices.  Whistleblowers reap rewards.


By Mark A. Strauss

The increased use of the False Claims Act to combat duty evasion has alarmed importers.  Liability under the FCA can be significant – three times damages plus penalties for each false entry document – which is far more severe than the penalties generally awarded in administrative proceedings before US Customs & Border Protection.  The FCA’s qui tam provisions also incentivize whistleblowers to come forward and expose import fraud by providing awards of up to 30% of the amount recovered.  Current and former employees and competitors of importers have filed whistleblower cases and received millions of dollars in awards.

Now parties downstream in the supply chain – including wholesalers, large retailers, and other commercial buyers of imported goods – are also facing FCA liability, not just importers.  Moreover, this is occurring despite that, under the Tariff Act, the “importer of record” is the party ordinarily responsible for the filing of accurate customs entry documents and the payment of appropriate duties.  And whistleblowers are reaping the benefit of this emerging trend.
 

Whistleblower awarded 17% of recovery against wholesaler


Last month, federal prosecutors in New York awarded whistleblower Xing Wei 17% of a $1 million FCA settlement with Pennsylvania womenswear wholesaler, Notations, Inc.  Notations had purchased underdeclared goods manufactured in China under a “Delivered Duty Paid” or “DDP” type arrangement with its supplier.  This meant that the supplier was responsible for customs entry and duties payment while Notations paid an all-in purchase price.

Nevertheless, the Department of Justice, which teamed up with US Customs & Border Protection to prosecute the case, alleged that Notations knew of, but nevertheless turned a blind eye to, the supplier’s practice of filing falsely understated import declarations to reduce its duty obligations.  Notations also allegedly aided the scheme by providing the supplier with “assists” (in the form of fabric) knowing their value was not being declared as required, resulting in additional duty underpayment.  Additionally, Notations allegedly helped the importer create a fictitious audit trail by issuing its purchase orders to a subsidiary of the supplier, which was named as the importer of record, in order to support the untrue claim that the subsidiary was a third-party, unrelated middleman.  Notations also allegedly received financial inducements from the supplier including below-market prices, “excessive” chargebacks, and $200,000 in cash deposited into an offshore Notations account.

Paying its $1 million settlement, Notations admitted responsibility for having continued to do business with the supplier despite “multiple warning signs” that it was committing import fraud and agreed to boost its compliance efforts.
 

Downstream buyer knew of fraud but made no effort to alert CBP


In May 2019, federal prosecutors similarly awarded whistleblower Michael Kirgstein 15% of a $325,000 FCA settlement with San Francisco apparel firm Byer California, Inc.  Like Notations, Byer allegedly continued doing business with its DDP supplier despite knowing that the latter was committing customs fraud.  In fact, Byer calculated that the values the supplier was declaring to CBP were less than the cost of materials.  Yet because the supplier was able to offer Byer “more attractive pricing” than competitors, Byer continued to issue it purchase orders and made no effort to alert CBP to the wrongdoing.  Byer even continued issuing the supplier purchase orders after its owner offered Byer’s import compliance specialist a bribe consisting of a “thick envelope filled with one-hundred-dollar bills.”


Broad scope of FCA liability


How is it possible that such downstream purchasers – and not just the importer of record – are being targeted under the FCA for duty evasion?  The scope of the FCA is broad, imposing liability not just on people who knowingly make false claims, but also on any person who “knowlingly 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.”  It is thus not required that the defendant had direct contact with the relevant federal agency, here CBP.  A party that indirectly participates in or aides a scheme to defraud the government – by, for example, issuing purchase orders with knowledge that the supplier is evading import duties – can be subject to liability.  Indeed, Acting US Attorney for the Southern District of New York Joon H. Kim stated that the Notations settlement showed that, under the FCA, “companies purchasing imported goods cannot turn a blind eye to fraud committed by their business partners. We will be vigilant in holding accountable all parties who engage in or contribute to fraudulent conduct.”

The practice of targeting downstream commercial purchasers in FCA duty evasion cases is apparently attractive to federal prosecutors because it reduces collection risk.  Foreign importers frequently have few if any assets in the US – typically just a US subsidiary that is an undercapitalized shell and any goods awaiting customs clearance – available to pay judgments.  This puts better-capitalized, downstream parties like Notations and Byer squarely in the crosshairs of FCA enforcement.  It also increases the size and likelihood of whistleblower awards.  Because of this, it is imperative that potential import fraud whistleblowers engage experienced counsel to help evaluate whether it is possible to name downstream parties in any FCA lawsuit.
 

Civil War Era Anti-Fraud Statute


Originally enacted during the Civil War to combat fraud by suppliers of the Union Army, the FCA imposes substantial liability on parties that knowingly overcharge or underpay federal agencies.  The FCA’s qui tam whistleblower provision enables individuals with knowledge of violations to initiate lawsuits on the government’s behalf.  Whistleblowers generally receive awards of 15 percent to 30 percent of any recovery.  For fiscal year 2019, the government reported that settlements and judgments in FCA suits topped $3 billion.  Over $2.1 billion of that amount came from whistleblower lawsuits filed under the qui tam provisions of the FCA.

Mark A. Strauss is a partner who represents whistleblowers in qui tam lawsuits under the False Claims Act.