United States: Recent Civil And Criminal Actions Highlight Trade Compliance As A Risk Area That Should Not Be Ignored

Last Updated: May 14 2014
Article by Beata K. Spuhler and Douglas J. Heffner

Recent news highlights what can happen when companies are not compliant vis-à-vis their trade compliance programs, leading to potential civil and criminal actions. Such actions can cost millions of dollars in penalties, generate negative publicity and, in extreme cases, result in a loss of import or export privileges.

Civil Actions Under the False Claims Act

In a recently publicized import penalty case, OtterBox paid $4.3 million to settle a whistleblower suit under the qui tam provision of the False Claims Act (FCA)1 for failing to include within the value of imported product certain required assists (foreign engineering work and molds) separately paid to its foreign vendors between 2006 and 2011. The suit was brought by a former employee of the company who served as the supply chain director. She was fired from Otterbox in August 2010 and brought the suit in November 2011, alleging that her former employer deliberately ignored the requirement to report the value of assists to corresponding imported merchandise in order to pay less duty.

Interestingly, OtterBox unsuccessfully moved to dismiss the FCA claim on the basis that the company had filed a prior disclosure with U.S. Customs and Border Protection (CBP) prior to initiation of the whistleblower action, alleging that the FCA bars such suits for violations that are already the subject of a civil suit or administrative civil penalty proceeding. However, the FCA settlement proceeded despite the filing of the prior disclosure, indicating that while the use of this common mechanism can reduce penalties that may be imposed by CBP, there remains the possibility of an FCA action for the same violations.

In another, perhaps more egregious scenario, a group of related apparel importers, Dana Kay, Inc. and Siouni & Zar Corporation, recently settled a $10 million FCA claim brought by a private party. The importers admitted to using one invoice to pay its foreign vendors, while simultaneously presenting a different, lower value invoice when filing an entry with CBP from 2003 to 2012. The dual invoicing scheme resulted in the annual underpayment of $3 million in duties.

In a similar case, Bizlink Technology, an importer of computer cable assemblies, recently settled an FCA claim in the amount of $1.2 million for a double-invoicing scheme resulting in underpaid customs duties on imports from China. The false invoices with a lower value were used from 2006 through 2008. The claim was brought by a former employee of the company who worked in a managerial capacity.

Further, late last year, Basco Manufacturing, an Ohio-based company, paid $1.1 million to settle a FCA action brought by a private party concerning the transshipment and mislabeling of merchandise to avoid paying antidumping (AD) and countervailing (CV) duties on aluminum extrusions imported from China. The scheme, which included other importers as well, involved aluminum-extruded products that were manufactured in China and subject to AD and CV duties which were then shipped by Basco to Malaysia for repackaging prior to import into the United States. When imported, Basco reported the origin of the product as Malaysia, and failed to deposit the requisite AD and CV duties.

AD/CVD Evasion as a Focus Area

As a high risk priority trade issue for CBP, the United States is particularly focused on AD/CVD evasion. U.S. government reports indicate that some companies may attempt to circumvent AD/CVD by falsifying country of origin of the goods; falsifying the description of the goods; routing goods through a third country and declaring that country as the origin; or performing minor alterations in a third country and declaring that country as the origin. See, e.g., https://nemo.cbp.gov/ot/fy12_yearend.pdf

The heightened attempts to evade AD/CVD on imports into the United States could be a product of the significant duties being imposed by the Department of Commerce in AD/CVD proceedings, coupled with some importers failing to understand the complexities of AD/CVD proceedings. CBP has stepped-up its efforts to enforce AD/CVD laws, in coordination with ICE, to combat the AD/CVD evasion. In 2012, CBP was reported to have initiated 50 audits focused on discrepant AD/CVD claims valued at over $41 million, seized 57 shipments valued at $13 million, and imposed over $24 million in penalties for AD/CV evasion. The statistics for 2013 have not yet been published, but presumably paint a similar picture.

In a similar scheme to that which was the subject of the FCA action against Basco Manufacturing, in June 2013 five individuals and three companies were indicted for conspiracy to smuggle goods into the United States. Immigration and Customs Enforcement (ICE), the Department of Homeland Security (DHS) and CBP's Import Specialist Branch conducted the investigation. According to the indictment, the defendants willfully conspired to smuggle into the United States aluminum extrusions from China. The aluminum extrusions were transshipped to Malaysia and fraudulently invoiced as Malaysian-origin goods. The approximate revenue loss on failure to pay the AD/CVD duties was $26.7 million.

Examples of Recent Criminal Prosecutions Involving Trade Violations

In addition to the potential imposition of civil penalties, criminal prosecution of AD/CVD and other trade violations have become more prevalent, sending a clear message that the U.S. government treats such violations seriously. Below are examples of recent cases that have been prosecuted throughout the United States.

  • U.S. v. Blyth, et al. case no. 10-cr-00011, (Southern District of Alabama) – This case involved the circumvention of AD Case No. A-552-801 on farm-raised catfish from Vietnam. Defendants declared and mislabeled the imports as sole rather than catfish to evade payment of AD duties and were found guilty of conspiracy to defraud the government, Lacey Act False Labeling, smuggling goods into the United States, and adulteration or misbranding of food. The defendants were subject to fines and also sentenced to prison.
  • U.S. v. Apego Inc. et al., case number 1:12-cr-00350 (Northern District of Georgia) – In October 2012, federal prosecutors charged Georgia-based paper supplier Apego Inc. with falsifying entry records and bribing Taiwanese customs officials to avoid payment of more than $20 million in AD duties on loose-leaf notebooks and filler paper from China, subject to AD Case No. A-570-901. The Department of Justice is seeking criminal penalties and possible imprisonment of defendants, including Apego's former CFO.
  • U.S. v. Chavez, et al. case no. 12-cr-03137 (Southern District of California) – This case involved two defendants, Chavez and Nirwani, who imported Chinese-made textiles, foreign-made cigarettes and Mexican food products without paying appropriate customs duties. Both defendants were charged with and found guilty of multiple counts including: conspiracy to defraud the United States and commit offenses against the United States; entry of goods by means of false statements; and conspiracy to launder monetary instruments (criminal forfeiture). The defendants were sentenced to prison terms and ordered to pay restitution to the government, totaling over $3 million.
  • U.S. v. Tran, case no. 1:13-cr-00140 (Northern District of Illinois) – A broker of honey was sentenced last week to a brief prison term and house arrest for playing a role in a $180 million tariff evasion scheme involving imports of Chinese honey into the United States that were fraudulently reported to be of Malaysian and Vietnamese origin. The defendant also paid over $700,000 in fines and restitution for his part in the scheme. In the larger government crackdown on imports of Chinese honey, Honey Holding I, Ltd. and Groeb Farms, Inc. paid penalties of $1 million and $2 million, respectively, under deferred prosecution agreements with the government. Individuals were also charged for their roles in the scheme, including Honey Holding I's Director of Sales, who was sentenced to six months in prison and paid approximately $26,000 in fines. Jun Yang, a Texas honey broker, was sentenced to three years in prison and paid $250,000 in fines, as well as restitution of more than $2.6 million. Hung Yi Lin, who helped her clients falsify documentation on shipping containers, also was sentenced to three years in prison and paid more than $500,000 in restitution.

Implementing an Effective Risk Management Program to Avoid Penalties and Enforcement Action

Facing increased compliance risks and more diversified and complicated global supply chains, companies should establish a risk-management program to address these risks head on, including implementation of the following suggested practices and controls:

  • Develop a corporate compliance program built on supply chain integrity and reasonable, good-faith efforts to confirm the nature of the product being imported, its true country of origin, and accurate channels of sale and distribution (to avoid transshipped, incorrectly described and mislabeled imports).
  • Have dedicated staff responsible for trade compliance, with clear direction and corporate management support.
  • Have a clearly stated corporate policy against trade fraud (zero tolerance), which is adopted by formal resolution of the Board of Directors.
  • Promulgate import and export compliance standards and procedures designed to avoid potential violations, which apply to all directors, officers, executives, employees, and outside parties acting on behalf of or for the benefit of the company.
  • Identify possible risk factors and assess their potential existence for each procurement arrangement, including, but not limited to:
    • Conducting reasonable country-of-origin inquiries and obtaining formal Certificates of Origin as support for due diligence performed;
    • Implementing compliance systems to identify new AD/CVD cases and implement training for purchasing and compliance personnel concerning AD/CVD issues;
    • Ensuring proper use of Free Trade Agreements and preparation of correct certifications;
    • Implementing a post-entry audit process for reviewing values reported to CBP at the time of entry against payments made to vendors for the imported merchandise, as well as other financial records that could uncover assists and additions to value;
    • Reviewing shipping and commercial paperwork, markings, labels and container numbers;
    • Verifying the reputation and business practices of claimed sellers, agents, brokers and producers (including willingness to grant external audits);
    • Performing periodic training for all directors, officers, executives and employees and obtaining from each an annual certification of compliance with training requirements;
    • Implementing an effective system for receiving, reporting, handling, and addressing suspected illegal conduct and/or violations of compliance policies, standards and procedures, including concerns that involve external parties who act on behalf of the company; and
    • Taking appropriate disciplinary action to address misconduct or violations of the company's compliance program, including reasonable steps to prevent similar occurrences in the future.

Footnote

1. Under the qui tam provision of the FCA, private parties can file suit on behalf of the government when they have evidence that misrepresentations were made that resulted in a loss of revenue to. The private parties share in the recovery, along with the government. If it chooses to do so, the government may intervene in the case and file a complaint.

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
 
In association with
Related Topics
 
Related Articles
 
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 (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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