On 28 July 2021, the U.S. Dept. of Justice announced a settlement in a customs fraud case[1]. The announced settlement of US$6 million includes underpaid duties and penalties against the importer of Chinese apparel and his two related companies. This settlement also includes a 20% reward—or more than US$1.2 million[2]—to the whistleblower (also referred to as the “relator”) in this case.
As with many actions under the Federal False Claims Act, this case was initiated by a former employee, alleging that the defendants committed customs fraud by submitting invoices to the U.S. Customs and Border Protection (“CBP”) that understated the true value of the clothing that they imported into the United States in order to avoid paying millions of dollars in U.S. customs duties. The United States investigated the whistleblower’s allegations of customs fraud and joined in the lawsuit. All the defendants admitted the allegations against them as part of the civil settlement. Joseph Bailey also pleaded guilty to related criminal charges and was sentenced to 6 months in federal prison.
Under the Federal False Claims Act, whistleblowers (also called “relators”) may qualify to receive a reward for reporting fraud against the U.S. government. These rewards may range between 15% and 30% of the money the government recovers. The so-called relators share may vary depending upon many factors, including the amount of assistance provided to the U.S. Government in its investigation. In this case, citing the whistleblower’s extensive assistance to the government in its investigation, the relator was awarded 20% of the settled duty and penalties owed by Mr. Bailey and his related companies.
It is important to note that many whistleblowers are not citizens and not residents of the United States. In fact, foreign whistleblowers are often times in the best position to report fraud in violation of U.S. laws or fraud against the U.S. government. Such fraud may include:
- Customs fraud, such as underpayment of US customs duties through undervaluation, fraudulent country of origin claims, or fraudulent misclassification;
- evasion of U.S. taxes;
- fraudulent financial reports of companies subject to U.S. regulation;
- investor fraud involving companies subject to U.S. regulation; or
- fraudulent invoices for goods and services provided to the U.S. government.
Foreign nationals who have information about fraudulent activity that is covered by U.S. whistleblower programs can bring claims under U.S. whistleblower laws and potentially receive monetary rewards.
The companies involved in the fraudulent activities do not need to be headquartered in or located within the United States. The fraudulent scheme or activity does not need to have occurred in the United States. Such fraud occurring outside the U.S. and perpetrated by foreign corporations may still be within the jurisdiction of U.S. regulators such as the Securities and Exchange Commission where the company is traded on a U.S. exchange, for example.
If you have information relating to customs fraud or that may otherwise violate U.S. law, I would encourage you to seek a qualified attorney as early as possible. Such counsel can assist in evaluating your claim, help to determine whether or not it may be barred or otherwise not viable, and most importantly, help to maintain your confidentiality to the maximum extent possible.
Please contact William Marshall with any questions at william@marshall-legal.com.
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Please see below, a summary of the customs fraud scheme involved in the settled case discussed above, which comes from the U.S. Dept. of Justice’s recent press release:
The Government’s complaint alleges customs fraud in order to avoid the payment of duties, from 2004 through 2015 (the “Covered Period”), STARGATE, RIVSTAR, and BAILEY engaged in two types of “double invoicing” schemes to fraudulently underpay customs duties owed to the United States in connection with the garments that they brought into the country. Under the first scheme, the exporter would provide one invoice that reflected the amount Defendants actually paid the exporter for the goods, and a second invoice that fraudulently reflected a fabricated lower amount that was submitted to CBP. These two invoices were virtually identical (e.g., same invoice number, description of goods, quantity of goods), except that they included different prices for the same shipments of goods. Under the second scheme, the exporter also would provide two invoices, which together reflected the actual price paid for the shipment. However, Defendants would only submit one of the invoices to CBP. The other invoice, which purported to be for “samples,” “accessories,” “commissions,” or “testing costs,” reflected an additional payment made by Defendants for the same goods described in the first invoice and was not submitted to CBP. The purpose of each of these two schemes was the same – to fraudulently under-report the value of the goods in order to pay less duties.
As part of the settlement, BAILEY, STARGATE, and RIVSTAR admit, acknowledge, and accept responsibility for the following conduct:
Customs fraud resulting from STARGATE Conduct:
- During the Covered Period, Stargate’s primary supplier was Taizhou Jiali Garments Co. Ltd. and its affiliated manufacturers (collectively, “Taizhou”), which are all located in China. At the direction of BAILEY, STARGATE engaged in two different fraudulent schemes that involved the preparation and use of false and inaccurate invoices to underreport the actual value of goods imported from Taizhou in order to avoid paying the customs duties due. BAILEY knew that this conduct was wrong and in violation of customs laws.
- As part of the first scheme, from 2007 through 2010, at BAILEY’S direction, Taizhou provided STARGATE with two sets of invoices for each shipment of goods. One invoice, referred to in email communications as the “pay by” invoice, reflected the actual price paid by STARGATE for the goods. The second invoice reflected a fake, lower price for the goods and was the invoice that STARGATE presented to CBP through its customs broker. Stargate, at the direction of Bailey, routinely declared this false, lower value on CBP entry forms in order to pay lower customs duties on goods imported from Taizhou.
- Beginning around 2010 and continuing through at least 2015, BAILEY and STARGATE engaged in a second scheme. At BAILEY’S direction, Taizhou provided two separate sets of invoices for a given shipment that together reflected the true price Stargate actually paid for the goods. The first invoice, typically entitled the “commercial invoice,” described the goods purchased, and was submitted to CBP by STARGATE’s customs broker. The second invoice purported to reflect amounts paid by Stargate for “sample” goods and was not submitted to CBP. The “sample” invoice was not, in fact, for samples actually purchased by STARGATE. Rather, STARGATE used the “sample” invoice to make an additional payment to Taizhou for the goods purchased by STARGATE that were described in the “commercial invoice,” while hiding the full value of those goods from CBP. STARGATE, at the direction of BAILEY, routinely declared only the values recorded on the “commercial invoices,” which were less than the full price paid for the goods, on CBP entry forms in order to pay lower customs duties on goods imported from Taizhou.
- During the Covered Period, STARGATE also imported goods that it purchased from Tex-Prime International, Ltd., and its affiliated manufacturers (collectively “Tex-Prime”), which are located in China. Beginning in at least 2004 and continuing through 2014, STARGATE, at the direction of BAILEY, also engaged in two different fraudulent schemes that involved the preparation and use of false and inaccurate invoices to underreport the actual value of goods imported from Tex-Prime in order to avoid paying the customs duties due.
- The first scheme involved Tex-Prime providing two nearly identical invoices for each shipment that differed only in the stated price. The first invoice reflected the amount that STARGATE actually paid for the imported goods. The second invoice (frequently identified by a “C” suffix following the invoice number, or the term “Custom” following the invoice number in the file name), reflected a false and inaccurate lower price and was the invoice that STARGATE submitted to CBP through STARGATE’s customs broker. STARGATE, at the direction of BAILEY, routinely declared the values recorded on this second, false invoice on CBP entry forms in order to pay lower customs duties on goods imported from Tex-Prime.
- The second scheme also involved Tex-Prime providing two invoices. In this scheme, the two invoices together reflected the actual price paid by STARGATE for the shipment. The first invoice, entitled a “commercial invoice,” described the goods purchased and was submitted to CBP by STARGATE’s customs broker. The second invoice, entitled a “statement,” purported to be an invoice for accessories charges, commissions, testing charges, or samples. This second invoice was not submitted to CBP and in reality reflected an additional payment made by STARGATE to Tex-Prime for the same shipment. STARGATE, at the direction of BAILEY, routinely declared only the values recorded on the “commercial invoices,” which were less than the full price paid for the goods, on CBP entry forms in order to pay lower customs duties on goods imported from Tex-Prime.
Through the practices described above, STARGATE misrepresented the value of the goods it purchased and imported into the United States. STARGATE and BAILEY were aware at all times that the reported information was incorrect and grossly understated the actual value of the imported goods, but continued to make the incorrect entries in order to reduce the amount of duties owed. As a result of their conduct, STARGATE and BAILEY underpaid customs duties that were due and owing to the United States.
customs fraud resulting from RIVSTAR Conduct:
- During the Covered Period, RIVSTAR imported goods purchased from Pacific Potential Trading Co., Ltd., and its affiliated entities (together, “Pacific Potential”), as well as from Dongguan Bestsign and Trading Co., Ltd., and its affiliated entities (together, “Bestsign”), all of which are located in China.
- During the Covered Period, at RIVSTAR’s request and BAILEY’s direction, Pacific Potential and Bestsign provided two sets of invoices for each shipment imported into the United States by RIVSTAR. The first invoice described the goods imported and was submitted to CBP by RIVSTAR’s customs broker. The price reflected on the invoices declared to Customs did not reflect the full price RIVSTAR paid for the merchandise. The second invoice purported to be for “testing costs” relating to the imported goods and was not submitted to CBP. Together, the two invoices reflected the true total price that RIVSTAR paid for the goods; RIVSTAR, however, did not declare the amount reflected on the invoice for “testing costs” to CBP. For the most part, the amounts reflected on the invoice for “testing costs” were not for actual testing, but instead reflected an additional payment made by RIVSTAR to Pacific Potential and Bestsign for the same shipment that was not declared to CBP. To the extent that any such payments actually related to testing costs, such charges were still dutiable and should have been declared to CBP.
- Through these practices, RIVSTAR at BAILEY’s direction misrepresented the value of the goods it purchased and imported into the United States. RIVSTAR and BAILEY were aware at all times that the reported information was incorrect and grossly understated the actual value of the imported goods, but continued to make the incorrect entries in order to reduce the amount of duties owed. As a result of their conduct, RIVSTAR and BAILEY underpaid customs duties that were due and owing to the United States.
The conduct in this matter was first brought to the attention of federal law enforcement by a whistleblower who filed a lawsuit under the False Claims Act.
(See, Department of Justice, U.S. Attorney’s Office, Southern District of New York press release (28 July 2021) available at https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-settles-civil-fraud-lawsuit-against-clothing-companies-and-their )
[1] United States of America ex rel. John Doe, Plaintiffs, v. Stargate Apparel, Inc., Rivstar Apparel, Inc. and Joseph Bailey,. Defendants, Index No. 1:14-cv-08991-JPO (S.D.N.Y.).
[2] See, statement by Tim McInnis, counsel for relator in the instant case. Mr. McInnis’s announcement of his successful settlement in this case is available at https://whistleblowerlegal.com/2021/07/31/us-customs-duty-whistleblower-lawsuit-settles-for-6-million/