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.


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.

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