Takeaways
- The DOJ is increasingly using the False Claims Act to pursue customs fraud involving undervaluation, misclassification, and false country-of-origin declarations.
- Recent FCA settlements related to customs violations have exceeded $58 million, highlighting the financial and reputational risks to importers.
- Companies that ignore internal warnings or third-party red flags face heightened exposure under the FCA's "reverse false claims" provision.
The Department of Justice is increasingly using the False Claims Act to pursue alleged customs fraud involving underpayment or evasion of duties. These actions generally rely on the FCA's "reverse false claims" provision, which imposes FCA liability for concealing, avoiding, or decreasing obligations to pay the Government or creating false records that are material to an obligation to pay the Government. This uptick in enforcement is consistent with President Trump's strong suggestion that his administration would use FCA actions to ferret out fraud, waste, and abuse in Government programs like Medicare and Medicaid.
A few weeks ago, the DOJ announced an FCA complaint against Barco Uniforms Inc. and several related entities and individuals, alleging underpayment of customs duties. See DOJ press release announcing complaint against Barco Uniforms; United States ex rel. Lee v. Barco Uniforms Inc., et al., No. 2:16-cv-1805 (E.D. Cal.). The defendants allegedly "undervalu[ed] imported garments" by using a double-invoicing scheme and submitting "false entry summaries" to U.S. Customs and Border Protection. A third-party auditor warned Barco to "double-check" its duty calculations, but the company allegedly continued its practices."
In late March, the DOJ announced a settlement with Evolutions Flooring Inc. and its owners, paying $8.1 million to resolve allegations that they violated the FCA by evading customs duties on imports of multilayered wood flooring from China. The United States had alleged that Evolutions, at the direction of its owners, submitted false information to CBP regarding the identity of manufacturers and the country of origin. See DOJ press release announcing $8.1 million settlement with flooring importer.
These matters follow earlier resolutions:
- In January 2023, International Vitamins Corporation agreed to pay $22.8 million to resolve allegations that it "misclassified more than 30 of its products" imported from China to improperly claim duty-free treatment. Even after internal consultants confirmed the misclassifications, IVC allegedly "persisted in using its incorrect classifications" and "made no effort to pay back the duties" owed. See DOJ press release announcing $22.8 million settlement with vitamin importer.
- In September 2020, Linde GmbH and its U.S. subsidiary, Linde Engineering North America LLC, agreed to pay $22.2 million for "knowingly making false statements on customs declarations" concerning the "nature, classification, and valuation of imported merchandise" to avoid paying duties over a six-year period. See DOJ press release announcing $2.5 million settlement with apparel importer.
- In April 2020, Blue Furniture Solutions LLC and related individuals agreed to pay more than $5.2 million to settle claims that they evaded antidumping duties by mislabeling wooden bedroom furniture from China as "metal" or "non-bedroom" furniture. The individuals also pleaded guilty to criminal conspiracy charges to defraud the United States. See DOJ press release announcing $1.3 million settlement with furniture importer.
Importers must exercise "reasonable care" to ensure that all information provided to CBP is accurate and complete. See 19 U.S.C. § 1484(a)(1). Failure to do so may result in substantial financial penalties, False Claims Act liability (which includes treble damages, mandatory civil penalties for each false claim, and attorneys' fees), and potential criminal exposure. As in the Barco case, this risk is especially heightened if the Government or a private relator has evidence that the company was warned that the information provided is—or might be—incorrect; that sort of evidence can help to establish the company's scienter (the mental state required for FCA liability). And, as in all False Claims Act cases, whistleblowers are incentivized to pursue FCA cases, so seemingly internal company issues can easily find themselves in court.
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