In today’s protectionist environment, importers are facing heightened legal risks and a potential False Claims Act (“FCA”) violation when providing information to Customs and Border Patrol (“CBP”).  Earlier this month, the United States Attorney’s Office for the Southern District of New York filed a civil fraud lawsuit against Manhattan-based children’s apparel companies Stargate Apparel, Inc. (“Stargate”), Rivstar Apparel, Inc. (“Rivstar”), and their CEO, Joseph Bailey.  The Complaint, filed under seal, had alleged that Bailey, Rivstar, and Stargate violated the FCA when they submitted invoices to CBP understating the true value of imported goods.

The alleged fraud was first brought to light by a whistleblower who filed a complaint under the FCA. It alleged that from 2007 to 2015, Stargate engaged in a double-invoicing scheme with a manufacturer in China.  And that the manufacturer provided Stargate with two invoices for the each shipment of goods.  One invoice, referred to as the “pay by” invoice, was for a much higher amount and reflected the actual price Stargate paid the manufacturer for the goods.  The second invoice was for a much lower price.  Stargate presented only this second invoice to CBP and thus was able to pay a fraudulently lower amount of customs duties.

A second variation of this fraud scheme involved invoices for “sample” goods.  The Chinese manufacturer would send two invoices for one shipment, one marked commercial invoice and one marked sample invoice.  Together, the two invoices reflected the real price Stargate paid to the manufacturer, but Stargate only paid customs duties on the commercial invoice and not on the sample invoice because sample goods are not subject to customs duties.  According to the Complaint, none of the goods Stargate received from the manufacturer were actually sample goods.

The allegations claim that Bailey, Stargate, and Rivstar engaged in similar schemes with additional manufacturers. Through these schemes, the Complaint alleges that they undervalued imports by tens of millions of dollars and cost the U.S. government over $ 1 million in duty revenue. Bailey and his companies now face civil penalties and treble damages, and Bailey faces an additional criminal charge of conspiracy to commit wire fraud.

Importer FCA cases just like this one have been on the rise in recent years.  The Trump administration’s focus on trade policy will likely only lead to continued scrutiny in this area.  Additionally, the recent Supreme Court ruling in U.S. ex rel Hunt v. Cochise Consultancy, No. 18-315 (2019), has allowed whistleblowers to take advantage of a longer statute of limitations period previously only available to the government under 31 U.S.C. § 3731(b)(2).  Thus, where the government does not learn of the FCA violation, a lawsuit can be filed up to 10 years after the date the false statement was made.  This expanded statute of limitations may also contribute to the increase in importer FCA cases.

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Photo of Jason Crawford Jason Crawford

When facing government investigations or high stakes litigation, clients trust Jason Crawford to evaluate allegations, identify risks, and formulate strategies to achieve the appropriate resolution. Jason advises and advocates for government contractors and companies from regulated industries in matters involving civil, criminal, and…

When facing government investigations or high stakes litigation, clients trust Jason Crawford to evaluate allegations, identify risks, and formulate strategies to achieve the appropriate resolution. Jason advises and advocates for government contractors and companies from regulated industries in matters involving civil, criminal, and administrative enforcement, with a particular focus on the False Claims Act (FCA).

As a litigator, Jason has defended government contractors, drug manufacturers, grant recipients, health care companies, importers, and construction companies sued under the FCA by whistleblowers and the Department of Justice (DOJ) in federal courts throughout the country. He also helps clients conduct complex internal investigations and respond strategically to Office of Inspectors General inquiries, grand jury investigations, search warrants, and civil investigative demands.

Jason previously served as a DOJ Trial Attorney in the Civil Division, Fraud Section where he investigated and litigated FCA cases involving government contractors, importers, and health care companies. He also previously worked with the U.S. Attorney’s Office for the District of Columbia where he prosecuted federal criminal cases.

A recognized thought leader on FCA developments, Jason has written and presented extensively on the fraud statute, and he is a co-host of the Let’s Talk FCA podcast.

Photo of Frances P. Hadfield Frances P. Hadfield

Frances P. Hadfield is a counsel in Crowell & Moring’s International Trade Group in the firm’s New York office. Her practice focuses on forced labor and withhold release orders (WRO), import regulatory compliance, and customs litigation. She regularly advises corporations on matters involving…

Frances P. Hadfield is a counsel in Crowell & Moring’s International Trade Group in the firm’s New York office. Her practice focuses on forced labor and withhold release orders (WRO), import regulatory compliance, and customs litigation. She regularly advises corporations on matters involving customs compliance, audits, customs enforcement, as well as import penalties.

Frances represents clients before the U.S. Court of International Trade and the U.S. Court of Appeals for the Federal Circuit, as well as in proceedings at the administrative level. She advises corporations on both substantive federal and state regulatory issues that involve U.S. Customs and Border Protection, the Federal Trade Commission, Food and Drug Administration, and U.S. Fish & Wildlife in matters pertaining to product admissibility, audits, classification, import restrictions, investigations, marking, licenses, origin, penalties, and tariff preference programs.