United States: A Peek Around The Curtain: A "Reverse" False Claims Act Settlement For Avoiding Customs Charges

On November 14, 2013, the U.S. Department of Justice announced a False Claims Act settlement with Basco Manufacturing Company, a maker of shower enclosures, for $1.1 million related to misstatements on U.S. Customs and Border Protection (CBP) entry forms.  The alleged misstatements were intended to allow the company to avoid antidumping duties (ADD) and countervailing duties (CVD) on aluminum extrusions used in its products that were actually from China, but transshipped through Malaysia in an attempt to avoid the duties.  The settlement against Basco does not resolve the entire matter, as Basco was one company of many involved in an alleged conspiracy to conceal the Chinese origin of the aluminum extrusions at issue.  Aspects of the settlement highlight certain risks posed by the False Claims Act that compound general U.S. enforcement of trade laws, and a reminder that diversion for inbound products to the United States may be a significant compliance issue of which companies should  be aware.


1. ADD and CVD

Antidumping and countervailing duties are imposed on products from countries found to have been engaging in unfair trade practices by the U.S. Department of Commerce and U.S. International Trade Commission.  ADD apply where a company is found to dump its goods on the U.S. market below fair value.  CVD apply where a company is found to have received unfair government subsidies.  ADD and CVD can be substantial, with duty rates of over 100 percent in addition to the tariffs charged on the goods at issue.

Because of the high margins of ADD and CVD, in some instances importers have sought to avoid ADD and CVD by transshipping goods through third countries, concealing their country of origin by presenting documents showing the country of transshipment as the country of origin, even where the goods did not qualify for that status.

2. The False Claims Act

The False Claims Act (FCA), 31 U.S.C. §§ 3729-33, has been around for over 150 years, and provides that the Government can recover treble damages plus penalties against contractors for the knowing submission of a false claim for payment.  While the statute allows the Government to sue contractors directly, these claims are often initiated by private parties as a qui tam action seeking to benefit from the statute's whistleblower rewards (up to 30% of the proceeds, depending on whether the Government intervenes in the suit).  In FY 2012 alone, 647 qui tam suits were filed under the FCA, not only by disgruntled employees seeking a financial windfall, but also by business competitors seeking an edge in the marketplace.

Despite the law's lengthy history, only recently has the Government begun to use the FCA to sue for compliance lapses relating to international trade regulations.  The Government has taken the position, successfully, that a contractor's failure to identify correctly a product's country of origin, and thereby avoid paying antidumping and countervailing duties, constitutes a false claim under the FCA.  These types of cases, in which the false statement is used to avoid a liability and not secure an affirmative payment from the Government, are colloquially described as "reverse false claims." In December 2012, Japanese-based printing ink manufacturer Toyo Ink SC Holdings Co. Ltd. agreed to a $45 million settlement of FCA allegations levied against it by DOJ under this theory of liability.  Given its success, DOJ has continued to pursue these actions, either directly or by intervening in qui tam actions, as an additional method to enforce international trade regulations.

3. The Allegations

The alleged conspiracy in this matter involved a group of U.S. companies involved in manufacturing shower enclosures that had purchased aluminum extrusions from a company in China.  When antidumping and countervailing duties went into effect against aluminum extrusions from China in 2010, the Chinese company allegedly began to transship its products through Malaysia, no longer listing the country of origin on documents related to the products.  The International Sales Director for the Chinese supplier allegedly informed its customers of details related to how the shipments would change, and in some instances charged those customers a 12 percent surcharge to cover the cost of transshipping the products through Malaysia.

The Complaint was filed by a Relator on behalf of the United States.  That Relator is the owner and CEO of a company that aids U.S. companies in finding sources of aluminum extrusions and other products abroad.


The use of the False Claims Act to prosecute customs fraud is not novel, but this case highlights a few flashpoints for the government's use of the statute in the area of customs enforcement.

The government has means to prosecute customs violations other than through the FCA whistleblower provisions.  For example, CBP can investigate country of origin fraud independently through details such as the fact, alleged in the Basco case, that the Chinese company had no manufacturing operations in Malaysia at the time it was purporting to import Malaysian-origin products.  However, the whistleblower provisions of the FCA create significant additional means through which the Department of Justice can uncover and investigate customs inaccuracies.  The fact that the Relator in this matter was a U.S. entity involved in the business makes clear that whistleblowing may be attractive not only because of the potential monetary reward from the government, but also to gain a business advantage (or, alternately, remove an ostensibly unfair advantage).

The settlement also highlights how the government may use a common party to investigate the operations of several companies (or entire industries).  Here, the operations of one Chinese supplier to transship through Malaysia had ramifications for all of its U.S. customers – although the customers were allegedly aware of and either explicitly or implicitly agreed to the new operations.  The matter brings to mind recent investigations brought by the U.S. Department of Justice and Securities and Exchange Commission involving the Foreign Corrupt Practices Act (FCPA), where the government has branched out from investigations of a single company to identify problems with similarly situated companies in the same industry.  There, the government tends to learn from patterns of fraud it finds in one case and make inquiries with other companies based on that information.  It seems feasible given the targeted nature of ADD and CVD that CBP could apply the same tactic to investigating potential diversion of aluminum extrusions from China.

Although this case involved an alleged conspiracy willfully to avoid customs duties, it also highlights potential risk areas for companies that do not have targeted import compliance programs.  As has been the case in the FCPA, U.S. companies may receive government inquiries for being involved with third parties conducting illicit activities.  For those companies, proving the absence of intent can be a challenge.

It is therefore a good idea for companies proactively to identify potential risk areas for ADD and CVD evasion and take measures to manage that risk.  Knowing the details of major suppliers' operations is a key aspect of this practice, as is affirmatively identifying those goods that are used by the company that are subject to ADD and CVD.  Where goods might be subject to transshipment, companies should perform reasonable diligence on the goods.  Having reasonable compliance mechanisms in place can help companies to manage their supply chain and avoid later unpleasant surprises.


The Basco settlement, while small relative to some recent FCA cases, highlights some of the important issues facing companies in customs compliance that are compounded by the U.S. government's use of the False Claims Act in this area.  By being aware of the risks of inbound diversion and country of origin falsification, companies can position themselves to take appropriate measures and avoid extensive investigations and costly penalties.

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.

Events from this Firm
30 Jan 2018, Webinar, Los Angeles, United States

Augmented by guest lecturers from government and the private sector, this webinar series will combine teaching of the key rules with war stories from the front lines and practical advice from experienced practitioners.

30 Jan 2018, Webinar, Los Angeles, United States

Liisa Thomas will present “Preparing for a Breach When It Happens” at the Data Privacy & Security Summit 2018 in Washington DC.

1 Feb 2018, Seminar, California, United States

The annual PIHRA Legal Update Seminars provides you with the latest California employment law related updates, compliance and regulatory issues, and the opportunity to network with legal practitioners and HR professionals.

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
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.


    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.


    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.


    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.


    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.


    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.


    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 .


    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