Companies and importers are obligated to provide U.S. Customs and Border Protection (CBP) with accurate reporting information, which allows the government to assess duties properly on U.S. imports. Under the False Claims Act (FCA), any knowing failure to accurately report or pay the full amount of customs duties is a violation of the law. A company that knowingly evades customs duties risks liability under the FCA, potentially resulting in treble damages and penalties, as High Life LLC, a family-owned New York based company has discovered.
Last week, High Life LLC was accused of evading custom duties by underreporting the values of products it imported from Asia, violating the FCA. According to court documents, from January 21, 2016, through June 1, 2016, High Life LLC knowingly caused 67 customs entry forms to be presented to CBP that contained inaccurate valuations of the apparel, avoiding paying hundreds of thousands of dollars in customs duties owed on the imported goods.
The complaint alleges that after CBP detained numerous shipments of apparel sent by the vendor in December 2015 over fraudulent concerns, High Life changed its business model from purchasing the apparel which included the costs of importation including customs duties, to purchasing the merchandise which the price paid to the vendors did not include those costs. The complaint also alleges that during that transition period, High Life declared to CBP values that were based on the prices the foreign vendors purportedly paid to the factories for the merchandise, instead of using the prices High Life paid the vendors. The prices High Life used for customs reporting were determined after the orders for the apparel had been placed, after the pricing structure had been negotiated, and after the apparel was in production, which based on a bona fide transaction between the vendors and factories and were not achieved by "arm's length negotiations" free of "non-market influences.
The complaint alleges that High Life understood that it could only declare the First Sale Prices as the transaction values if they were prices for goods that were the subject of a bona fide sale between the vendors and the factories, that the goods were clearly destined for export to the United States. If High Life had paid duties to CBP based on the prices High Life had paid the vendors, instead of calculating the duties based on the purported First Sale Prices, High Life would have been required to pay significantly
higher customs duties which would have eroded High Life’s desired profit margins.
Importers that discover errors made in entry documents should consider filing a prior disclosure with Customs. Not only can a prior disclosure limit penalty liability for most importers, but a prior disclosure generally can also prevent an FCA claim. On the other hand, choosing to ignore an error and continue importing with the error creates the potential that a whistleblower could report the issue. Under FCA, a person who reports fraud against the government (a whistleblower) resulting in a qui tam lawsuit that recovers money owed to the government is entitled to an award of between 15% and 30% of the amount recovered.
If you have any questions concerning the calculation of imported goods or related to a potential error in the information reported to Customs, do not hesitate to contact an attorney at Barnes, Richardson & Colburn LLP.