United States: Whistleblower Claims Up The Ante: The Risks Of Improper Customs Declarations Can Surpass Typical Penalty Actions

Last Updated: October 17 2013
Article by Joan Koenig and Beata K. Spuhler

One of the most difficult compliance issues importers face is the identification and reporting of all required additions to the value of imported merchandise as dictated under the customs valuation statute, 19 U.S.C. § 1401a.

For example, royalty payments, non-recurring engineering fees, foreign research and development spend, retroactive transfer price adjustments, etc. can all potentially impact the value of imported goods, but they can be difficult to identify and properly assign to imported entries without a robust import compliance program. This area of import compliance has long been a focus of United States Customs and Border Protection (CBP), both generally and as part of a Focused Assessment (FA) audit. Consequently, it has also been a major source of voluntary prior disclosures filed by importers with CBP to mitigate potential civil penalties. Further, the prominence of Whistleblower suits has increased the potential risks that importers face if due attention is not given to such issues within a trade compliance program, particularly if concerns are brought to the attention of management and are not sufficiently investigated and corrected with CBP.

The False Claims Act (FCA) allows private individuals to file an action against those believed to have defrauded the U.S. Government of revenue, informally referred to as "whistleblowing." Individuals who file a successful claim, one in which the government recovers revenue, may be entitled to receive a portion of any recovered damages. Whistleblower payments usually range from 15% to 25% of the recovery, although the payment can be higher and can also include the repayment of attorneys' fees. Estimates hold that the Department of Justice is currently investigating more than 1,200 FCA complaints that have been filed but are currently sealed, with a potential recovery as high as $3-$4 billion dollars, providing a clear incentive for individuals with specific knowledge of misrepresentations to bring information to the government's attention. The Securities and Exchange Commission (SEC) recently awarded more than $14 million to an unidentified whistleblower who provided information that led to an SEC enforcement action. See previous Drinker Biddle Client Alert.

One FCA trade compliance case that was recently unsealed involves a former employee of OtterBox, the manufacturer and importer of high quality cell phone cases. The suit alleges that the company knowingly failed to declare required additions to the value of imported merchandise, including payments for foreign engineering work and tooling used to produce the cases subsequently imported into the U.S. The resulting under-valuation of the imported merchandise resulted in OtterBox's alleged failure to deposit the correct duties and fees owed, providing a basis for the FCA suit.

One defense raised by the company is particularly important for all importers to note. That is, OtterBox claims it filed a voluntary prior disclosure1 that pre-dated the filing of the FCA case, in which it corrected the valuation errors at issue. If this is correct, the company may have a defense that the government was not denied revenue, eliminating the basis for the FCA case. That is, if there is no revenue owed to the government, there is no potential recovery for the government or the whistleblower.

The risk of Whistleblower cases is not limited to employees. In December 2012, Toyo Ink settled an FCA trade compliance case for $45 million, plus interest. That case alleged that Toyo Ink intentionally presented to CBP documents containing false country-of-origin information to avoid paying antidumping duty deposits that were due at the time of entry. The case was brought by the CEO of Toyo's U.S. competitor, who was also the petitioner in the antidumping case that Toyo was alleged to be evading. Upon the settlement of the FCA case, Toyo's competitor received more than $7.8 million from the government's recovery.

More than ever, importers are well-advised to periodically "kick the tires" on their import valuation processes and take a good look at options for reducing their risks, not only to prevent unfavorable actions by CBP, but also to minimize the possibility of FCA claims. This may include performing periodic internal or external risk assessments, establishing a post-entry audit program, and determining which corrective actions to utilize if errors are identified (e.g., participation within CBP's Reconciliation Prototype program, Post Entry Amendments). These actions should be taken not only with regard to import valuation concerns, but also in connection with tariff classification, duty preference program compliance issues, and antidumping and countervailing duty order compliance, all of which can result in loss of revenue to CBP if the information declared is incorrect at the time of entry (e.g., misclassifications, unsupported duty preference claims, or failure to deposit antidumping duties).

As with all areas of trade compliance, both import and export, one of the most effective ways to reduce exposure and manage risk is to have a robust trade compliance program and audit process designed to identify potential violations before or shortly after they occur, with dedicated personnel and in-house or outside experts responsible for maintaining compliance. If identified, violations can typically be corrected, reducing or eliminating a company's exposure to civil penalties. Further, the existence of a robust trade compliance program can be a critical mitigating factor in any penalty action brought by the government.

Footnote

1. A prior disclosure can be filed under 19 U.S.C. § 1592(c)(4) to voluntarily disclose to CBP material false statements or omissions that pertain to past imports, along with a tender of any duties and fees owed. A properly filed disclosure submitted prior to the importer's knowledge of the commencement of a formal investigation will mitigate potential civil penalties that CBP could otherwise impose if it were to identify the errors on its own, limiting any penalties to the interest on any loss of revenue owed to CBP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Joan Koenig
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions