Buyer Beware

by Janet Labuda

Over the last year, I have written a few blogs discussing the risk focus of U.S. Customs and Border Protection (CBP). After the 2009 special enforcement initiative called Operation Mirage, CBP developed statistical data to unequivocally state that the undervaluation of imported goods from China had risen to the level of significant risk in some product categories. Supported by the direction of the administration to level the trade playing field, addressing undervaluation will continue to be part of CBP’s comprehensive trade enforcement strategy.

While working for CBP, an in-house counsel remarked that you would know you are on the right enforcement track when case law supports your theory of risk.

An example of this recently surfaced. In a press release dated October 3, Immigration and Customs Enforcement reports that, as alleged in a False Claims Act complaint, the company Notations, acting as a wholesaler, repeatedly ignored warning signs that its business partner, which imported garments from China, was engaged in a scheme to underpay customs duties on the imported garments it sold to Notations. Pursuant to the settlement, Notations admitted and accepted responsibility for failing to act in response to indications of fraudulent conduct. The company agree to pay $1 million in damages, and agreed to implement measures designed to prevent future fraud by Notations or its business partners.

The importer of women’s apparel manufactured in China presented false and fraudulent invoices to CBP showing prices that were discounted by 75 percent or more to avoid customs duties. The wholesaler, Notations, which was the importer’s biggest customer, admitted that it aided this scheme by repeatedly ignoring warning signs that the importer’s irregular business practices were highly suggestive of fraud.

Notations has also agreed to implement a written compliance policy that will include measures to educate its employees on identifying red flags for fraud in import transactions, to monitor the conduct of its business partners who act as importers, and to report all potentially fraudulent conduct to CBP.

To be noted in this example, the court was successful in pursuing a case for a company which was not the importer of record and that is in a foreign location. This should be a warning to all companies. It is recommended that your written compliance plan include steps to monitor the players in your supply chain.