Customs Fraud Whistleblower Cases on the Rise
The recent settlements of various False Claims Act (“FCA”) cases involving customs fraud bode well for increased enforcement and prosecution of U.S. customs laws. This month alone, two cases were settled alleging that importers had undervalued imported goods as part of a scheme to fraudulently evade customs duties owed to the U.S. Government. Because the amount of customs duties an importer owes is calculated by multiplying the value of the imported merchandise by the applicable tariff rate, undervaluing imported goods directly reduces the amount of duties an importer will pay. Both cases were brought by former employees, who will receive substantial rewards for blowing the whistle on their employers. Under the FCA, a whistleblower who brings a so-called “qui tam” lawsuit, and recovers money owed to the government, is entitled to an award of between 15% and 30% of the amount recovered. These awards are intended to act as a strong incentive to encourage those with knowledge of fraud on the U.S. Government to come forward.
The first case, which settled this month for $10 million, was brought against manufacturer Dana Kay, Siouni & Zar, and their affiliates, whose clothes are sold under a variety of labels in well-known American stores such as J.C. Penny’s, Belk’s, Nordstrom’s, Lord & Taylor, Ann Taylor, and Dress Barn. The defendants allegedly accomplished their fraudulent scheme by utilizing two different sets of invoices for paying its overseas manufacturers, only one of which was submitted to the U.S. Customs and Border Protection (“CBP”), the agency charged with enforcing customs laws. The complaint further alleged that the defendants concealed greater amounts of duties owed as the cost of overseas labor increased, a practice that puts U.S. manufacturers at a competitive disadvantage and places U.S. jobs at risk. The employee who blew the whistle on this fraud, and brought a qui tam case under the False Claims Act, will receive a reward of $2.3 million.
The second case, which settled for $4.3 million, was brought against OtterBox, which manufactures protective cases for electronics, such as smartphones and tablets. The whistleblower, a former employee of OtterBox (who will receive an award of $830,000 as his share of the recovery for the government), alleged that the company failed to pay customs duties on certain fixed production costs, including related engineering work and the costs of designing and manufacturing product molds. By fraudulently omitting these costs from the value of its imported merchandise, OtterBox was allegedly able to evade significant customs duties. In a press release announcing the settlement issued by the Department of Justice (“DOJ”) (which initially declined to intervene in the case), United States Attorney John Walsh stated, “Customs duties are a significant source of revenue for the United States, and this settlement demonstrates that the Department of Justice will zealously enforce their lawful collection.”
Although customs duties have been cited as the second largest source of federal revenue collected by the U.S. Government after taxes, customs fraud is rampant in the United States due to inadequate enforcement and penalties. Such fraud, in fact, is considered industry practice by many, with insiders viewing the CBP as not having the manpower or resources to police customs fraud. CPB inspects only 2% of the imported goods that pass through this country’s borders, and its priorities are security and anti-terrorism. Moreover, the penalties CBP has traditionally imposed are often seen as insufficient to serve as an adequate deterrence.
Because the False Claim Act provides for treble damages and statutory penalties, it can serve as a powerful enforcement mechanism for rooting out this fraud and ensuring compliance with customs laws. Although the DOJ has not aggressively utilized the FCA to prosecute customs fraud in the past, this may be changing. Recent cases, including the two discussed above, evidence an increased interest by the federal government in pursuing these types of cases, which should be welcomed by American manufacturers and workers. As Senator Olympia Snowe explained when discussing the problems that result from customs violations: “When unscrupulous foreign exporters invent schemes to avoid paying duties it puts workers . . . throughout the nation at a severe disadvantage[,] bilks our government out of millions of dollars in uncollected fees[, and] contribute[s] to the silencing of our manufacturing industry, adding to rampant job loss and high unemployment around the nation.”