DOJ Announces $22.8 Million Settlement with Importer for Underpayment of Customs Duties
The U.S. Department of Justice (DOJ) recently announced a $22.8 million settlement with a vitamin importer in relation to the importer’s alleged underpayment of customs duties on imports from China. According to the DOJ, International Vitamins Corporation (IVC), “defrauded the United States by misclassifying more than 30 of its products under the Harmonized Tariff Schedule (‘HTS’) in order to avoid paying customs duties.”
The DOJ also alleged that IVC failed to pay the back duties owed even after correcting its “longstanding” misclassifications, which according to the DOJ took place between 2015 and 2019. As part of its settlement, IVC admitted that during this time, “it utilized HTS classifications for 32 products it imported from . . . that carried duty-free rates, even though those products, if accurately classified, would have been subject to the payment of duties . . . [and] even after it retained a consultant in 2018 who informed IVC that it had been misclassifying . . . IVC did not implement the correct classifications for over nine months and never remitted duties that it had underpaid.”
DOJ Files Complaint Against Importer for Customs Duty Violations Under the False Claims Act
Notably, even though the case involved violations of the Harmonized Tariff Schedule, which exists under the United States’ import control laws, the DOJ filed its complaint against IVC under the False Claims Act. Specifically, the DOJ sought relief under Section 3729(a)(1)(G) of the False Claims Act, which states:
“[A]ny person who . . . knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government, is liable to the United States Government for a civil penalty . . . plus 3 times the amount of damages which the Government sustains because of the act of that person.”
As a result, the DOJ sought civil penalties and treble damages against IVC. The DOJ’s complaint alleges that IVC avoided “over ten million dollars” in duties, but does not reference a specific amount that the company underpaid from 2015 through 2019.
DOJ: Importer was Aware That Its HTS Codes Were Incorrect
According to the DOJ’s press release and complaint, IVC knew that its chosen HTS codes were incorrect for much of the period in question. For example, the DOJ alleged that IVC “made only minimal, at best, efforts to ensure that the codes it was using to enter thousands of shipments into the United States were accurate.” It also alleged that, “during [the relevant] period, IVC obtained information on multiple occasions indicating that its use of HTS codes with respect to vitamins and supplements was seriously flawed or outright incorrect.” As support for these allegations, the DOJ stated that:
- During the relevant period. U.S. Customs and Border Protection (CBP) “conducted periodic audits of individual shipments arriving into the United States for which IVC was the importer of record . . . [and i]f CBP found any problems with IVC’s classification under the HTS of a particular product, CBP would issue a Notice of Action requiring IVC to reclassify that product.”
- In August 2016, “CBP issued a Notice of Action to IVC regarding several shipments of vitamin tablets imported by IVC. IVC had classified those vitamin tablets under HTS Heading 2936, which was a duty-free classification, but CBP determined that the correct classification was HTS 2106.90.9998, which carried a 6.4% duty rate.” In September 2016 and June 2017, CPB issued additional Notice of Action letters for the same violation related to additional vitamin shipments from China.
- While IVC changed its HTS classifications for the specific products referenced in CPB’s Notice of Action Letters on a going-forward basis, it did not correct its past violations, and it “never conducted a systematic review of its other, similar products to determine whether they were also misclassified.”
In total, CPB and the DOJ determined that IVC misclassified 34 products as falling under the duty-free HTS Heading 2936. They further determined that, for 32 of these products, correct classification would have resulted in IVC paying higher duties on the products it imported over the five-year period in question.
The DOJ also found it significant that IVC retained a consulting firm to analyze its HTS classifications in 2018. The consulting firm’s findings aligned with those of the CPB in many respects. According to the DOJ, the consulting firm informed IVC that it had been misclassifying several imported products and that, “[i]n almost every instance, IVC had been utilizing codes that carried a duty-free classification, when it should have been using a code that carried a 6.4% duty rate.”
However, the DOJ alleged, “[r]ather than adopt the correct HTS classifications identified by its consultant, IVC ignored its consultant’s recommendations and continued to use its inaccurate classifications.” The DOJ also obtained internal records from IVC in which one executive told the company’s personnel to “focus on go forward” rather than examining and correcting the company’s past mistakes.” That same executive also allegedly told the company’s personnel to keep the consulting firm’s analysis “on the DL,” suggesting that the executive was aware that its responsive actions (or lack thereof) were inappropriate.
The DOJ also alleged that another company executive told company personnel that the consulting firm’s analysis was incorrect and should be destroyed. Ultimately, however, IVC ended up sharing the analysis with its customs broker nine months later, at which time IVC “finally” changed its HTS classifications based on its customs broker’s recommendation.
These facts formed the basis for the DOJ’s complaint; and, in the DOJ’s press release announcing its settlement with IVC, U.S. Attorney Damian Williams called the company’s actions “a fraudulent scheme to avoid customs duties owed to the United States by misclassifying many of its products as duty-free when importing them from China.”
Import/Export Compliance and False Claims Act Enforcement
This case highlights the intersection of import compliance and the DOJ’s enforcement authority under the False Claims Act. For companies that import products from overseas, choosing the correct Harmonized Tariff Schedule classification is just one of numerous aspects of compliance. To avoid scrutiny from CBP and the DOJ, importers must develop comprehensive and custom-tailored compliance programs, and they must implement the policies, procedures, and protocols required to effectively maintain compliance on an ongoing basis.
As this case shows, the DOJ’s enforcement authority under the False Claims Act is extremely broad. While most people think of the False Claims Act as a tool that the federal government uses to fight fraud under government programs (i.e., Medicare and Medicaid) and government contracts, its reach is far more substantial. Any false statement made to the federal government in an effort to secure payment or avoid liability can potentially trigger civil or criminal False Claims Act enforcement. This includes not only submitting false invoices or overbilling the government, but also making false statements in order to avoid paying amounts due.
In civil cases under the False Claims Act, importers and other entities can face civil files and treble damages (three times the amount of the government’s actual losses). The DOJ’s case against IVC was civil in nature, and the DOJ sought these penalties against IVC as noted above. However, if the DOJ decides to pursue criminal charges under the False Claims Act, then criminal fines and prison time for the company’s executives (and any other individual involved in the fraud) can be on the table.
CBP and DOJ Import Compliance and False Claims Act Investigations
The DOJ’s case against IVC also highlights the agency’s collaboration with CBP on matters involving important compliance and the DOJ’s enforcement authority under the False Claims Act. The DOJ’s press release quotes CBP’s Director of Field Operations as stating, “[CBP] provided the critical link to an ongoing investigation into an attempt to circumvent payment of proper duties. This case serves as a great example of collaborative law enforcement efforts to uncover and dismantle enterprises that seek to defraud the United States government for personal gain while causing economic harm to their competitors.” This type of collaboration is common; and, for importers, it means that a CBP investigation is never “just” a CBP matter.
Along with implementing comprehensive import compliance programs, importers should also have policies and procedures in place for responding to CBP Notice of Action letters and investigations. In many cases, a prompt and appropriate response can significantly mitigate the risks involved. While CBP inquiries can lead to DOJ prosecution, this does not have to be the case, and importers that respond appropriately will give themselves the best chance of avoiding additional scrutiny.
Contact the Federal Compliance and Defense Lawyers at Oberheiden P.C.
The federal compliance and defense lawyers at Oberheiden P.C. represent companies nationwide in import, export, False Claims Act, and other high-stakes federal matters. If you have questions or concerns about your company’s obligations or risks, we invite you to get in touch. Please call 888-680-1745 or contact us online to schedule an appointment today.