Customs Duty Fraud
Improper avoidance of tariffs is actionable under the False Claims Act. Under-payment of customs duties entails false statements to U.S. Customs and Border Protection, and under 31 U.S.C. 3729(a)(1)(G), such statements are a violation of the False Claims Act, which can impose three times damages for any payments wrongfully withheld from the United States.
Customs duty fraud is a growing area of False Claims Act litigation, and as with a handful of other types of fraud, Greene LLP has helped lead the way. In January 2015, the firm announced resolution of a False Claims Act case it filed in 2012 concerning false statements of cost of goods. The $500,000 settlement resolved allegations that an importer of designer bags had represented to the government that each bag cost about $0.11 to manufacture in China, whereas the true cost of goods was around $0.33 per bag. Greene LLP's client won an unusually high share of the recovery -- 20% -- and also received a payment from the defendant company over his termination.
Misrepresenting cost of goods is not the only way to defraud the United States of customs duties, however. In one False Claims Act case, it was alleged that an importer had misrepresented the true country of origin of imported mushrooms. Other cases have concerned the proper duty rate to be applied to cost of goods, with some companies representing to the government that that what was imported had no duty rate attached at all.
Effective regulation of imports and exports is essential to the trading economy of the United States and its economic partners. The False Claims Act serves as a crucial check on entities seeking to avoid, decrease, or withhold payment of an obligation to pay money to the United States pursuant to an import or export’s appropriate shipping or customs obligation. The success of the False Claims Act in this and other areas depends largely on the acts of whistleblowers, who may receive significant awards for filing a case on the government's behalf.
The False Claims Act and whistleblowers have not yet flexed their full muscle when it comes to acting on customs duty fraud. Some in the government believe that less than 1% of import fraud is redressed. The application of the law is almost limitless, however; the statute subjects an individual 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.” In other words, the act prohibits false statements concerning the value, weight, type, country of origin, or other characteristic and made to reduce or otherwise avoid the full amount owed under an applicable tariff or duty. In addition to liability for affirmatively making a false statement, the act also applies to one who knowingly “conceals” or “improperly avoids or decreases” an obligation owed to the government.
The unique regulation of customs and duties has presented some interesting legal results, though the jurisdictional conflict does not appear to have had any effect on the ability of a qui tam relator (i.e. “whistleblower”) to bring a False Claims Act suit on behalf of the United States in a federal district court.
Generally speaking, a federal court’s exercise of jurisdiction over False Claims Act cases is fully consistent with 28 U.S.C. 1331 which grants district courts subject matter jurisdiction over “all civil actions arising under the Constitution, laws, or treaties of the United States.” Likewise, section 1345 of that title allows a similar exercise of jurisdiction over civil matters “commenced by the United States” unless congress expressly specifies otherwise. In customs matters, Congress has expressed an intention, pursuant to 28 U.S.C. 1582(3) to confer upon the Court of International Trade (CIT) “jurisdiction of any civil action which arises out of an import transaction and which is commenced by the United States” to, among other things, “recover customs duties.”
Although the distinction has raised some confusion, most False Claims Acts for customs and duties fraud may be brought in a federal district court, rather than the CIT. False Claims Act actions may be brought by the United States government alone, by a qui tam relator in a case in which the government has chosen to intervene, and by a qui tam relator where the government has declined to intervene. Although some courts have considered False Claims Act charges brought solely by the government and without the assistance of a qui tam relator to be actions “commenced by the United States” and thus within Section 1582(3)’s grant of jurisdiction to the CIT, the jurisdictional requirement does not appear to apply to actions brought by a qui tam relator. The distinction does appear odd as it has been well established that the United States government remains “the real party in interest” regardless of whether it initiates a False Claims Act suit, intervenes in one, and even where it declines to intervene in a case.
In April 2014, the U.S. Attorney’s Office for the District of Colorado, the Department of Homeland Security, and the U.S. Customs and Border Protection announced that OtterBox, a Colorado corporation that sells protective cases for smartphones and tablets, agreed to pay $4.3 million in a settlement to resolve allegations that it violated the False Claims Act and the Tariff Act of 1930 by deliberately underpaying customs duties it owed to the government. From 2006 and 2011, OtterBox manufactured its products overseas and imported them into the United States. As such, the company was responsible for paying customs duties owed on those imported products. The government alleged that OtterBox deliberately omitted the value of “assists” from the dutiable value OtterBox declared to Customs on entry documents for imported products. Additionally, the government contended that OtterBox made or caused to be made false statements in other documents submitted to Customs concerning the value of assists, and the customs duties OtterBox owed on the value of those assists, for products it imported between 2006 through 2011. This conduct led OtterBox to knowingly underpay customs duties it owed to the government. The U.S. Attorney in the case noted, “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.”