Compliance and Enforcement Risk Areas for Government Contractors in 2020
Part 2: Customs and Duty Issues
Even as the coronavirus pandemic escalates, the government will continue to move forward with enforcement efforts that will affect government contractors in 2020. As described in part one of this series, government enforcement may slow, but it won’t stop.
Something else that will slow but not stop? International trade. The U.S. government is already facing pressure from different industry sectors to reduce or lift tariffs as part of the response to the recession being fueled by the coronavirus. It’s too early to tell how the government will respond to that pressure. But, recent enforcement actions at least suggest that the U.S. government is being, and will continue to be, aggressive in pursuing cases against companies it suspects of evading customs and duty taxes on imports.
What’s the risk if the U.S. government believes a company isn’t paying what it should in customs and duty taxes?
Beyond the risk of a Customs and Border Protection enforcement action—which is a serious risk in itself—the False Claims Act allows the U.S. government to bring a civil suit against a company based on allegations that the company avoided or decreased an obligation to pay the government, 31 U.S.C. § 3729(a)(1)(G). Most government contractors know the FCA well, because most FCA cases involve allegations that a government contractor made false statements to the U.S. government in connection with a contract, and the government is trying to reclaim money it already paid the contractor. But the FCA also allows the government to bring cases against companies that owed the government money—including in the form of customs obligations—and never paid that money. These lawsuits are referred to as “reverse False Claims Act cases.”
And FCA cases—including reverse FCA cases—allow the government to recover treble damages for each violation of the statute. Let’s say an importer were found liable under the FCA for making false statements on customs forms by misclassifying imports in a way that resulted in lower tariff rates for those imports. Then the penalty could be three times what the actual value of those imports were. In a recent case in the Northern District of Georgia, United States ex rel. Feldman v. American Dawn, Inc., a textile importer was accused of having done exactly that—intentionally misclassifying imports to pay lower tariffs. The importer settled by agreeing to pay approximately $2.3 million to resolve the case.
Are importers the only companies at risk?
No—the U.S. government may also pursue cases against companies that buy from importers. This happened last year in United States v. Byer, a case in the Southern District of New York brought against a California-based wholesaler that was purchasing and reselling clothing from a New York importer. According to settlement documents in the case, the New York importer, Queens Apparel—not Byer—had been deliberately undervaluing the clothing they were importing to avoid paying customs. Even though Byer itself had not falsified any import documents, the government cited evidence that Byer knew through its own internal review that Queens Apparel was undervaluing its imports, and even asked Queens Apparel to stop the practice—but it still continued placing work orders with Queens Apparel regardless. And at the end of the day, it was the wholesaler, Byer—not Queens Apparel, the importer—that was faced with a False Claims Act lawsuit.
And for companies that are doing business with the government, the risks are even greater. For example, the current administration has made eliminating counterfeit goods in the supply chain—especially goods ordered through e-commerce retail platforms—a priority. A recent executive order issued on February 3, 2020, made clear that individuals or companies who import, or even facilitate the importation of, goods into the United States in “material violation of federal law” should be referred to CBP for suspension or debarment proceedings. This was a clear warning to government contractors who depend on products from other countries to be vigilant about the sources of products they import and the importers they do business with.
How should companies respond?
As uncertain as everything seems right now, it’s not the time to cut corners in trade compliance, especially for companies that import goods into the United States or that rely on importers as part of their business. Identifying compliance issues and raising them with the appropriate personnel—which it appears the wholesaler in Byer actually did with its importer—is a useful start. But as that case also shows, it may not be enough to avoid FCA liability or other legal consequences. Trade and imports will continue to be a focus for the U.S. government in 2020, and government contractors especially will need to be vigilant about addressing compliance risks in this area.
March 26, 2020