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

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.

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