Customs Fraud, Anti-Dumping Laws, and False Claims Act Liability

On Behalf of | June 12, 2018 | Whistleblower Law

The Customs and Border Protection (“CBP”) administer customs laws and collects antidumping duties to prevent foreign companies from saturating U.S. markets with below-cost products. These laws require importers to carefully classify and disclose the goods imported to the United States. Because most disclosures are only subject to the “honor-system” importers may mislabel or misrepresent the quality and value of their goods, thereby committing fraud and potentially violating the False Claims Act.

The CBP, colloquially called “Customs”—is tasked with collecting tariff revenue, protecting the U.S. economy from illegal or smuggled goods, and processing imports at ports of entry. As part of its tariff collections, Customs enforces antidumping laws by closely tracking the character and value of foreign goods that enter U.S. borders. For example, Customs requires importers to complete a CBP Form 7501 (also called an “entry summary”) that has precise instructions for declaring the imported goods. 19 U.S.C. § 1484.[1] In addition to the Entry Summary, a commercial invoice that describes and values the imported merchandise must also accompany each shipment.[2] Customs requires the invoice to ensure duties and taxes are properly calculated.

The practice of misrepresenting or undervaluing goods may amount to fraud and possible violations of the False Claims Act. This is because importers who skirt customs laws risk violating the “reverse” provision of the False Claims Act, which imposes liability on any person who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”  31 U.S.C. § 3729(a)(1)(G).  The whistleblower, (also called the “Relator”) who discloses instances of fraud can recover a portion of any funds recovered.

The Defendants in United States of America v. Yingshun Garmets, Inc., et al., engaged in a “double invoice practice” where foreign clothing importers submitted fake invoices to Customs while domestic purchasers participated in furtherance of their scheme. According to Relator’s complaint, Yingshun, the importer of record, underreported the value of merchandise by 75% or more on phony commercial invoices submitted to Customs—with such false statements actionable under the False Claims Act.[3] In doing so, Yingshun used an invoice identical to that provided to its customer but grossly understated the merchandises’ value.

Additionally, the purchaser of the imports, Notations, Inc., faced third-party liability as a co-conspirator in the scheme. As described in the Relator’s complaint, Notations, Inc., a wholesaler of women’s apparel and co-defendant named in the complaint, bought Yingshun’s imports as “delivered duty-paid” rather than as the importer of record. Under the “delivered duty-paid” contracting arrangement, the seller or importer, (Yingshun) rather than the domestic buyer, (Notations, Inc.) is responsible for paying duties before tendering the bill of sale and for submitting the required forms and invoices to Customs once the goods reach the United States. Interestingly, in its prior dealings with other importers, Notations traditionally operated as the importer of record but recently transitioned to a new business model, transacting with companies like Yinshun that were willing to import and sell the goods as  “delivered duty-paid.” In the previous business model, Notations certified import disclosures to Customs and therefore risked direct liability for undervaluing imported merchandise. By purchasing the goods as “delivered duty paid,”  Notations sought to dodge liability for Yinghsun’s false disclosures, yet simultaneously reap the benefits from buying lower-cost merchandise. Ultimately, by holding Notations, Inc. partly responsible for Yinshun’s false claims, both the court and government signaled that it would not allow Notations to benefit from another’s fraud and also circumvent False Claims Act liability.

Soon after the Relator filed the complaint, United States intervened in the False Claims Act suit, and the U.S, Attorney for Southern District of New York’s Civil Frauds Unit prosecuted the case. The parties settled in late 2017 for around $1 million.

[1] 19 C.F.R. § 141.81.[2] C.F.R. § 141.86; 19 CFR 141.89 (a).[3] 31 U.S.C. § 3729(a)(1)(G).