Allegations of improper avoidance of customs and duty obligations by businesses have long presented a potential risk of False Claims Act (FCA) liability. For businesses that do not directly or indirectly receive government funding, but whose operations rely on international supply chains, that risk may have once seemed remote. While customs and duty fraud FCA investigations and enforcement seemed to have been eclipsed by matters involving, for example, healthcare and government contracting, the current administration's focus on international trade and tariffs—and recent FCA enforcement activity—should remind businesses at all stages of international supply chains of their potential risks.
DOJ Complaint for Customs Fraud in United States ex rel. Lee v. Barco Uniforms Inc., et al.
On April 11, 2025, the DOJ filed an intervenor complaint in United States ex rel. Lee v. Barco Uniforms Inc., et al., No. 2:16-CV-1805 in the U.S. District Court for the Eastern District of California. The complaint alleges that several companies conspired to knowingly avoid paying customs duties on apparel imported from China by misrepresenting the value of the imported goods. The allegations against the defendants assert that they violated the FCA by knowingly and improperly underpaying customs duties owed on apparel (for uniforms) imported from China. The defendants include not just the direct importers of goods, but also the importers' customer who purchased the apparel after it had been imported.
The DOJ has alleged that the supplier and its customer conspired to avoid customs duties owed on the apparel by the importing defendant's fraudulent undervaluing through use of false invoices. Customs duties for apparel imports are calculated based on the value of apparel as declared to United States Customs and Border Protection (CBP). By knowingly misrepresenting the value of the garments as lower than their actual value, the importer defendants allegedly paid fraudulently low customs duties.
Although the importer, not its customer, allegedly made the misrepresentations to the government, the government's allegations include claims against multiple defendants in this supply chain—the importer and its customer—for a "reverse false claim." The FCA imposes liability on a defendant who:
[K]nowingly makes, uses, or causes to be made or used, a false
record or statement material to an obligation to pay ... the
Government, ... or knowingly and improperly avoids or decreases an
obligation to pay or transmit money or property to the
Government.
31 U.S.C. § 3729(a)(1)(G)
A violation of the FCA requires knowingly (including recklessly) submitting a false claim—or causing a false claim to be submitted. The government alleges that the importer's customer conspired with and caused the importer to submit a false claim through the use of "cost sheets" that proposed underpayment of duties and included "patently underpaid customs duties," and that the defendants used two sets of invoices for transactions: one with the "real" price and one with an artificially low price that was designed to cause submission of false information to the CBP on Entry Summaries/Form 7501s.
Recent Prior Enforcement Actions by the DOJ for Customs Fraud
Companies should be reminded that, although perhaps not previously a primary focus of FCA enforcement, Barco is not a novel application of the FCA. In the last five years alone, the DOJ announced a number of FCA settlements involving allegations of avoidance of duties on imported goods:
- On March 25, 2025, the DOJ announced an $8.1 million settlement with a California-based importer of wood flooring and its owners. The settlement resolves allegations that the defendants violated the FCA by knowingly and improperly evading customs duties on imports of wood flooring from China.
- On January 30, 2023, the DOJ announced a $22.8 million settlement of a civil fraud case against a vitamin importer to resolve allegations of underpayment of customs duties owed on imported vitamins and nutritional supplements. The defendant imported vitamins and supplements from China and sold them in the United States. The DOJ claimed that the defendant misclassified these imported products in order to avoid paying customs duties, and failed to pay back duties owed to the United States after the defendant corrected its misclassifications.
- On September 25, 2020, the DOJ announced a $22 million settlement to resolve allegations that the defendants violated the FCA by knowingly making false statements on customs declarations to avoid paying duties owed on the companies' imports.
- On April 14, 2020, the DOJ announced a $5.2 million settlement to resolve allegations that the defendants violated the FCA by evading customs duties on furniture imported from China.
Takeaways
The Trump administration's renewed focus on tariffs creates enhanced FCA risk for companies seeking to mitigate the impact of these measures on their supply chains and operations. Businesses that may not have viewed FCA issues as a significant risk, but who rely (directly or indirectly) on goods imported from countries subject to tariffs, may face increased DOJ scrutiny.
The FCA's reach is broad: It does not require an intent to defraud, and it exposes those who "cause"—not just submit—false statements to the government to potential liability for anyone in the supply chain. That potential liability is significant: It provides for treble damages and per claim penalties. The FCA's whistleblower provisions incentivize employees and others allegedly possessing information about noncompliance to file complaints in order to receive a share of the government's recovery.
The government has robust investigative tools at its disposal, and investigations alone can be costly. As a result, companies should be proactive in preparing for this increased scrutiny. Companies should review their trade and import policies and procedures for compliance with applicable laws and ensure that they have effective compliance programs—and effective documentation of that compliance—in place. Companies should consult counsel experienced in FCA investigations and litigation where appropriate and when necessary.
For More Information
If you have any questions about this Alert, please contact Daniel R. Walworth, Christopher H. Casey, Geoffrey M. Goodale, Rolando R. Sanchez, Sara Smith, any of the attorneys in our White-Collar Criminal Defense, Corporate Investigations and Regulatory Compliance Group, any of the attorneys in our Fashion, Retail and Consumer Branded Products Industry Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
