Written by Denise Barnes & Evelyn Suarez
This is the second of a two-part discussion of the False Claims Act, a law that is increasingly being used as an enforcement tool against customs fraud. This article discusses how best you can prepare your company to defend an FCA claim.
What is the False Claims Act?
All of the resolutions and cases noted in our first article involve the False Claims Act, which, thus far, has served as the key tool for civil customs fraud enforcement. For context, the FCA, originally enacted during the Civil War in 1863, is the U.S. Government’s primary tool for combating fraud against federal programs and funds. Often called “the Lincoln Law,” the FCA imposes liability on individuals or companies that knowingly submit false or misleading claims for payment from the Government or knowingly avoid payment obligations, such as customs duties or tariffs.
Notably, the qui tam or whistleblower provisions allow for private whistleblowers, known as relators, to bring lawsuits on behalf of the Government and share in any recovery, which serves as a powerful financial incentive for relators to initiate litigation. This is notable because, under the FCA, relators may file qui tam complaints under seal, prompting an investigation by the DOJ, and, in turn, companies and individuals are forced to defend such investigations even if the underlying claims lack merit. Violations can result in significant exposure for companies: the FCA allows the Government to obtain three times the Government’s losses, plus significant penalties for each false claim, sometimes resulting in substantial monetary penalties.
The FCA’s reach has expanded far beyond its wartime origins, encompassing fraud in healthcare, defense contracting, financial services, and, again, increasingly international trade and customs enforcement.
Reverse False Claims Liability
The basis for liability in these FCA-related customs enforcement cases is a theory called reverse FCA liability. Reverse FCA liability arises when a person or company knowingly avoids paying money owed to the Government. Under the reverse false claims provision of the FCA, 31 U.S.C. § 3729(a)(1)(G), liability can attach for either: (i) knowingly concealing, avoiding or decreasing an obligation to pay the Government; or (ii) knowingly creating or using (or causing another to create or use) a false record material to an obligation to pay the Government. The crux of a reverse false claim is whether the defendant owed an “obligation” to the Government. A defendant must have a clear, established duty to pay the government.
An “obligation” is defined as “an established duty, whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment.” Unlike a typical affirmative false claim, reverse FCA liability involves fraudulently keeping money that rightfully belongs to the Government, not just fraudulently obtaining it.
Of particular relevance here is that courts have held that an importer’s failure to pay duties on imported products, as required under the Tarriff Act of 1930, is sufficient to give rise to a reverse false claim since the FCA’s reverse claims provision imposes liability on those who knowingly conceal or knowingly and improperly avoid or decrease an obligation to pay or transmit money or property to the Government. See U.S. ex rel. Customs Fraud Investigations, LLC v. Victaulic Company, 839 F.3d 242, 254 (3d Cir. 2016).
Criminal Fraud Liability
As noted above, in addition to increased FCA exposure for customs-related allegations, companies also face heightened criminal exposure. The criminal basis for a customs fraud case typically involves violations of federal statutes that prohibit false statements, smuggling, and fraud against the United States in the context of importing goods. The key criminal statutes used in prosecuting customs fraud include:
- 18 U.S.C. § 542 – Entry of Goods by Means of False Statements, which prohibits knowingly making false statements or using fraudulent documents to enter or introduce goods in U.S. commerce, such as misclassification or declaring a lower value or incorrect country of origin to avoid duties;
- 18 U.S.C. § 1001 – False Statements, which prohibits knowingly making false statements in any matter within the jurisdiction of the U.S. Government, including customs declarations, such as the customs entry (CF 7501);
- 18 U.S.C. § 545 – Smuggling Goods into the United States, which prohibits smuggling and fraudulent or knowing importation of merchandise contrary to law. This provision also imposes liability on those who receive, conceal, buy, sell, or in any manner facilitate transportation, concealment or sale of such merchandise after importation if the party has knowledge that the goods are imported contrary to law;
- 18 U.S.C. § 1341 and 1343 – Mail and Wire Fraud, which prohibits schemes to defraud using the mail or electronic communications; and,
- 18 U.S.C. § 371 – Conspiracy to Defraud the United States, which prohibits two or more persons from conspiring to commit any offense against or to defraud the U.S., including evasion of customs duties.
Similar to civil enforcement under the FCA, customs fraud can lead to criminal prosecution for misrepresenting information to CBP to evade duties or import restrictions. Such offenses may result in significant fines and lengthy prison terms, particularly when tied to conspiracy or fraud charges. As with most developing legal theories, the DOJ (whether civil or criminal) tends to intervene or pursue allegations where the Government does not face a lot of exposure, so that it avoids the creation of bad law. It is unclear what type of conduct would likely give rise to criminal prosecution versus civil. Often, the forum of prosecution can turn on the egregiousness of the conduct given the burden of proof in criminal cases or the referral source—with relators having a financial interest in filing a qui tam case.
Key Takeaways
Heightened enforcement. With the new Administration’s emphasis on tariffs to protect domestic industries, encourage investment in U.S. manufacturing and to reduce the deficit, companies and individuals can expect heightened enforcement efforts in this area. Again, recent civil resolutions illustrate how the DOJ is utilizing the FCA to target this key enforcement priority. The recent Complaint filed in United States ex rel. Lee v. Barco Uniforms Inc., et al., No. 2:16-CV-1805 (E.D. Cal) (“Barco Uniforms”) underscores this trend. And, DOJ’s and DHS’s recent announcement of the Trade Fraud Task Force makes clear the Government’s continued focus on customs fraud, and increasing exposure for companies and individuals that import goods into the U.S.
Compliance Focus. Companies should expect increased scrutiny related to any information submitted to CBP, that may impact the amounts paid to the Government. Thus, importers should pay particular attention to:
- Tariff Classification: With the increased tariffs, companies are reviewing their tariff classifications and finding mistakes, which inevitably leads to additional concerns about submitting corrected information and the potential implications of past mistakes. Misclassification raises a vulnerability for an FCA claim since it often affects to the duties owed.
- Customs Valuation: Once again with more tariffs, importers are increasingly seeking ways to reduce the declared value of merchandise. 19 U.S.C. §1401a sets forth the methods of appraisement as well as required additions and available deductions to customs value. CBP will look for costs that should be included in the price declared so care should be made to ensure all additions are declared. Importers should also make sure that their deductions are properly supported. There also appears to be an increased interest in the use of “first sale” in multi-tiered transactions. CBP is scrutinizing such transactions even more so with the additional duties so importers should ensure that their “first sale” meets the applicable requirements and is substantiated by documentation in the event CBP questions such basis for appraisement. In determining the appropriate customs valuation, companies should consult the applicable law and regulations as well as the CBP Valuation Encyclopedia and customs rulings.
- Country of origin: With complex value chains, it is often difficult to determine the country of origin. There are numerous rules of origin. For duty assessment and marking, as well as other purposes, the non-preference rule is a “substantial transformation,” which is not always easily determined and is somewhat subjective on the part of CBP. Companies can seek a ruling for protection. Preferential rules of origin are set forth in the particular free trade agreement and do not entail a “substantial transformation” but rather the rules of origin set forth in the particular agreement, including product specific rules. These rules can be complex.
- Free Trade Agreements: Care should be taken to ensure that claims for preferential duty treatment under free trade agreements like the U.S. Mexico Canada Agreement (USMCA) meet eligibility requirements, i.e., rules of origin, and can be substantiated through documentation.
- Recordkeeping: It is important to remember that under 19 U.S.C. § 1509, importers must maintain records for five years. Failure to do so can result in substantial penalties.
- What to do about past mistakes? The company might consider making a prior disclosure and voluntary tender of duties under 19 U.S.C. §1592(c)(4), which can substantially mitigate penalties. This is a business decision.
- Risk Identification: Regular internal audits should be undertaken. A company might consider the use of data analytics to uncover anomalies. The company might also consider a hotline or reporting mechanism.
- Training: Train employees, especially in customs, logistics, purchasing, accounting, on import compliance and potential exposure under the FCA for lapses in customs compliance.
- Transshipment: Given the increased attention related to tariffs by this Administration, companies should also anticipate enhanced monitoring for their imports, especially those coming from China, Mexico, and Canada. The Government is likely to be on alert for companies using transshipment schemes to avoid the payment of higher duties.
- Liability: Remember, FCA liability does not arise if an individual simply makes a mistake, but rather, the scienter element requires either an intent to engage in the conduct, burying one’s head in the sand (in the face of a substantial risk), or a reckless disregard for the falsity of the information provided. Pay attention to what’s going on with your imports.
In conclusion, the specter of your company facing an FCA claim is a real possibility, especially in times when competitors are looking for any commercial advantage. It is important for your company to be aware of this enforcement tool and negate exposure by beefing up your customs compliance program.
