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.