Business Torts Newsletter

Business Torts: Spring 2015

Whistleblowers Can Help Fight Customs Fraud By Bringing Qui Tam Lawsuits Under The False Claims Ac

Jonathan K. Tycko, Esq.

The United States collects more than $30 billion in customs duties each year, making duties the second largest source of revenue for the federal government after income taxes.  But the agency charged with collecting customs duties, Customs and Border Patrol (“CBP”), estimates that between fiscal years 2007 and 2012, approximately $2.2 billion in customs duties were uncollected because importers failed to comply with customs laws.  That’s an average of approximately $360 million per year.  In the most recently reported year, FY 2012, CBP estimated that importers failed to pay $484 million in duties.

Now imagine if there was a legal tool allowing a private citizen to sue to collect those uncollected duties for the government, and then keep up to 30% of what he or she recovered as a reward for having done so.  Well, such a tool exists.  The False Claims Act (the “FCA”)[1] authorizes “qui tam” lawsuits—meaning lawsuits brought by private citizens in the name of the government—to recover uncollected duties from an importer that “knowingly conceals or knowingly and improperly avoids or decreases an obligation” to pay customs duties.  In other words, a whistleblower can help the government fight unlawful conduct, help fellow taxpayers by collecting money for the Treasury, and be handsomely rewarded for having done so.  This article will briefly outline the nature and scope of the current problem with uncollected customs duties, will then explain how qui tam cases under the FCA can be used to address that problem, and will then note some of the challenges that qui tam whistleblowers can face.

I.          The Nature And Scope Of The Uncollected Duties Problem

CBP, which is part of the Department of Homeland Security, is responsible for enforcing customs laws.  CBP has multiple responsibilities, however, including maintaining the security of ports and border crossings, and does not devote sufficient resources to revenue collection.  The current customs system relies heavily on self-reporting.  When an importer brings goods into the country, the importer submits entry documents and pays estimated duties.  In the vast majority of cases, CBP simply accepts the importer’s representations on the entry documents, and does not confirm or challenge the importer’s estimated taxes.  CBP inspects less than 2% of containers entering through U.S. ports, and many of those inspections are focused on security or drug enforcement rather than revenue collection.  Although CBP has authority to impose penalties on importers who avoid duties, the collection rate on such penalties is only approximately 1.5%.  In short, the current system for enforcing customs laws is ripe for abuse by importers intent on evading payment of duties: they can lie to CBP with little risk of being caught or, if they are caught, having to actually pay penalties.

The types of evasions that might give rise to liability under the FCA include the following:

  • Misrepresenting country of origin on entry documents, often disguised through transshipment (moving goods from the country of origin through an intermediary country before shipment to the U.S.).  This is often done to avoid payment of anti-dumping duties or countervailing duties, which are product-specific, country-specific duties imposed to offset dumping or unfair subsidies by foreign governments. 
  • Misclassification of goods, meaning the use on entry documents of the wrong code from the Harmonized Tariff Schedule of the United States, which determines duty rates.
  • Intentional undervaluation of goods, often supported by forged invoices or other falsified documents, to reduce the “value” against which the duty rates are applied.
  • Smuggling, which is importation of goods into the U.S. without declaring those goods on entry documents.
  • Failure to properly mark goods with their country-of-origin, which creates liability for “marking duties.”[2]

II.        How The FCA Applies To Customs Fraud

The FCA typically applies to “false claims” for payment of money from the government.  For example, a hospital that knowingly seeks payment from Medicare for services it did not actually provide, or a defense contractor that knowingly seeks payment from the Army for defective goods, would be liable under the FCA.  But the FCA also includes a less-frequently invoked provision that covers so-called “reverse false claims.”  Under the reverse false claims provision, FCA liability extends to any “person” (which includes corporate entities) who “knowingly makes, uses, or causes to be made or used, a false record of statement material to an obligation to transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”[3]  The FCA defines “obligation” to include “an established duty, whether or not fixes arising . . . from statute or regulation.”  Because an importer has a legal duty to pay customs duties, the importer incurs FCA liability under the reverse-false-claims provision if it knowingly makes false statements that decreases the duties it pays (such as by misrepresenting country of origin to avoid antidumping duties, or knowingly underpaying estimated duties), or of it knowingly conceals its obligation to pay duties (such as by smuggling goods into the country).

The FCA is a powerful tool for rooting out evasion of the customs laws for two primary reasons.  First, the FCA offers very robust remedies:  treble damages plus the possibility of very significant statutory penalties.[4]    Second, actions under the FCA can be brought either by the Government itself or, significantly, by private citizens acting as qui tam relators (the technical term for the whistleblower-plaintiff in a qui tam action).[5]  The FCA offers both protection and incentives to relators.  The FCA contains an anti-retaliation provision, which makes it unlawful to discharge, threaten, harass or otherwise discriminate against a whistleblower for bringing a qui tam lawsuit, and that creates a cause of action by a whistleblower to recover damages, back-pay, reinstatement, and attorneys’ fees.[6]  As for incentives, the FCA provides that the relator shall receive a share of between 15-30% of the amount recovered by or for the government by way of either judgment or settlement, plus the relator’s expenses incurred in pursuing the case, including attorney’s fees.[7]  The combination of treble damages and the relator’s share provision means that relators can obtain very large awards for bringing qui tam cases, and those large awards can incentive whistleblowers with information about customs laws violations to come forward with that information via FCA qui tam lawsuits.

In recent years, a number of qui tam lawsuits, alleging customs laws violations, have resulted in significant settlements.  These have included the following:

  • U.S. ex rel. Dickson v. Toyo Ink Manufacturing Co., Ltd., et al., No. 09-CV-438 (W.D.N.C.)—alleged evasion of antidumping/countervailing (“AD/CV”) duties on printing inks from China and Indian—settled in 2012 for $45 million.
  • United States ex rel. Valenti v. Tai Shan Golden Gain Aluminum Products Ltd., et al., Case No. 11-cv-368 (M.D. Fla.)—alleged evasions of AD/CV duties on aluminum extrusions from China—various defendants settled in 2015 for total of $4.1 million.
  • U.S. ex rel. Krigstein v. Siouni and Zarr Corp., 11-CV-4247 (S.D.N.Y.)—alleged understatement of value of imported clothing—settled in 2014 for $10 million.
  • U.S. ex rel. Jiménez v. Otter Products, LLC d/b/a OtterBox, 11-CV-02937 (D. Colo.)—alleged omissions of the value of the “assists” provided to foreign manufacturer of its products from the value reported on entry documents—settled in 2014 for $4.3 million.
  • U.S. ex rel. Karlin v. Noble Jewelry, 08-CV-7826 (S.D.N.Y.)—alleged understatement of value of imported jewelry—settled in 2011 for $3.85 million.

These settlements resulted in large relator’s share awards to the quit tam relators.  The relator in the Jiménez case reported received $830,000.  The relator in the Krigstein case reportedly received $2 million.  And the relator in the Dickson case reportedly received more than $7,875,000.

III.       Challenges Facing Qui Tam Relators In Customs Cases

When a whistleblower files a qui tam lawsuit, that complaint must be filed under seal, and only the Department of Justice (“DOJ”) is served.  The defendant does not know about the lawsuit at that point.  The relator also must provide DOJ with a “disclosure statement,” which is essentially a memorandum from the relator’s counsel to DOJ, explaining the case and providing DOJ with the evidence that relator has been able to amass in support of the case.  DOJ then opens an investigation, typically working with investigators or attorneys at the affected agency (in the case of customs issues, Homeland Security).  These investigations can take many months, or even years, to complete.  At the conclusion of the investigation, DOJ makes a decision on whether to “intervene” or “decline.”[8]  Intervention means that DOJ takes over the primary role in litigating the case.  Declination means that DOJ does not become directly involved in the litigation, and the relator is left to decide whether to pursue the litigation on his or her own.  Once DOJ makes that decision, the complaint typically is unsealed and served on the defendant, and the case goes into active litigation. 

A relator’s initial challenge is to convince DOJ to intervene in the case.  Intervened cases often have a much better chance of ultimate success because of the investigatory resources and access to government information and witnesses that DOJ brings to the table.  In fact, in the majority of intervened cases, the defendant settles quickly after DOJ indicates an intention to intervene.  But DOJ will only intervene if it concludes that the government has a strong case, supported by good evidence, and that the case will likely result in substantial monetary recovery for the government.  (DOJ may, however, decline for many reasons, even if the case is strong; therefore, declination does not necessarily mean that the case is not worth pursuing.)  Thus, when preparing a complaint and disclosure statement, the goal of the relator and his or her attorney is to demonstrate to DOJ that the case is winnable, and that the government should devote its resources to investigating and pursuing the case.

Some of the challenges that qui tam relators face in customs cases are unique to customs cases, and others are generic to all qui tam cases.  The most significant customs-unique challenge is the problem of identifying potential defendants.  Under customs laws, the so-called “importer of record” is the entity liable for customs duties.  But the “importer of record” does not need to be a U.S. based entity; indeed, the foreign manufacturer of the goods can act as the “importer or record” even if it has no assets or other presence in the United States.  This means that, in at least some cases, the company that is most directly engaged in the fraud may be a difficult litigation target, both because the evidence of that fraud may be in a foreign country, and also because any eventual judgment against that company may be difficult to enforce.  One solution, at least in some cases, may be to identify the U.S. based purchaser of the imported goods; if that U.S. based company had some involvement in the unlawful conduct—encouraging, planning or otherwise participating in that conduct—then the U.S. based company may also have FCA liability, either for “causing” the violation, or for “conspiring” in the violation.[9] 

In all FCA cases, the qui tam relator must allege, and ultimately prove, that the defendant acted with scienter.  The FCA is not intended to punish innocent mistakes or honest misinterpretations of the law.  But the FCA also does not require specific intent, in the criminal law sense.  Rather, the scienter standard is “knowing,” a term defined by the statute to include both recklessness and “deliberate ignorance of the truth or falsity.”[10]  In other words, although it is the plaintiff’s burden to show that the defendant acted “knowingly,” it is enough to show that the defendant should have known that it was violating the law.

Another potential hurdle that often arises in qui tam cases is the “public disclosure bar.”  As a general matter, the FCA is intended to incentive and reward whistleblowers who come forward with information that is not already known by, or obvious to, the federal government.  Thus, under the public disclosure bar, a qui tam case can be dismissed if it is based upon information that was previously disclosed in certain specified ways: through Federal judicial or administrative proceedings, in certain types of government reports, or in the news media.[11]  The exact contours or the public disclosure bar are quite complex and subject to a large body of case law.  The basic thrust, however, is that a relator cannot read about a fraud, and then hope to bring a successful qui tam case alleging that same fraud.  What is means to lawyers representing potential qui tam relators is that they must investigate, before bringing suit, whether the fraud alleged by the client has already been disclosed in one of the ways delineated in the public disclosure bar provision of the FCA.

A number of other hurdles can derail qui tam lawsuits: statute of limitations, the “first-to-file” rule, or the relator’s personal involvement in planning the fraud.  An attorney considering bringing a qui tam lawsuit—in the customs context or any other—would be well-advised to become familiar with these various potential procedural hurdles, and determine whether they could apply, before bringing what can be a long and expensive piece of litigation.

IV.       Conclusion

The knowing evasion of customs duties in a major problem, and one that the government is not currently able to handle on its own.  The False Claims Act offers one solution to that problem.  By incentivizing and protecting whistleblowers, and by providing for the filing of qui tam lawsuits by private citizens, that statute can help plug the current gap in customs enforcement.

Jonathan K. Tycko is a partner at Tycko & Zavareei LLP, a Washington, D.C.-based law firm with a national practice focused on whistleblower litigation, class actions, and other complex plaintiff-side litigation.  Mr. Tycko has represented numerous whistleblower in qui tam cases under the False Claims Act, as well as in matters involving both securities laws and tax laws violations before the SEC Office of the Whistleblower and the IRS Whistleblower Office.  He can be reached at (202) 973-0900 or jtycko@tzlegal.com.


[1] 31 U.S.C. §§ 3729 et seq.
[2] See 19 U.S.C. § 1304(i) (imposing 10% duty on goods that are not properly marked with country-of-origin).
[3] 31 U.S.C. § 3729(a)(1)(G).
[4] 31 U.S.C. § 3729(a)(1) (penalties of up to $11,000 per violation, plus “3 times the amount of damages which the Government sustains because of the act of that person”).
[5] The procedures for qui tam actions under the FCA are outlined in 31 U.S.C. § 3730.
[6] 31 U.S.C. § 3730(h).
[7] 31 U.S.C. § 3730(d).
[8]  See 31 U.S.C. § 3730(b) (describing procedure for initial filing of qui tam complaint, and government’s intervention decision), 31 U.S.C. § 3731(c) (describing government right to file its own complaint upon intervention), and 31 U.S.C. § 3733 (describing some of the investigatory powers that DOJ may exercise during investigation).
[9] 31 U.S.C. §§ 3729(a)(1)(B) (“causing” liability) and 3729(a)(1)(C) (conspiracy liability).
[10] 31 U.S.C. § 3729(b)(1).
[11] 31 U.S.C. § 3730(e)(4).