New Tariff Environment Poses Big Risk and Opportunity Under FCA

Bottom Line

• The False Claims Act doesn’t require proof of a specific intent to defraud and could be a cause of action for tariff-related claims by government and private litigants.
• Counsel defending FCA investigations must be prepared to manage parallel civil, administrative, and perhaps criminal inquiries, perhaps at an increased pace under the Trump administration.
• Businesses that suspect rivals are dodging tariff rules should consider whether they are positioned to investigate and bring an FCA action themselves.

Every year, importers of goods to the United States file a total of more than 30 million customs forms, known as “entry summaries,” with US officials. These forms permit Customs and Border Protection to assess and collect tariffs on those goods. What some importers might not realize, however, is that each of these forms can be a source of civil and even criminal liability if the information they provide is not accurate.

President Donald Trump has imposed several tariffs under the International Emergency Economic Powers Act of 1977, which contains criminal enforcement provisions requiring proof of specific intent to violate the law and guilt beyond a reasonable doubt.

However, the False Claims Act—which doesn’t require proof of a specific intent to defraud—could be a more attractive cause of action for tariff-related claims by government and private litigants.

Companies can be liable under the FCA for “reckless disregard” of the truth or falsity of their statements on customs forms, meaning that under-paying tariffs because of lax internal controls could result in substantial exposure under the FCA.

The Trump administration pledged to use the FCA aggressively in pursuing tariff evaders. Attorney General Pam Bondi testified to the importance of the FCA and “the money it brings back to our country.” Michael Granston, deputy assistant attorney general for commercial litigation, and Jamie Yavelberg, director of the Fraud Section in the Civil Division, committed to robust FCA enforcement and identified customs and tariff evasion as a key enforcement area.

The prospect of the Department of Justice more aggressively using the FCA to curb tariff evasion introduces risks that companies should proactively address, but it also presents opportunities for compliant companies to secure a level playing field with their competitors.

Settlement Harbinger

A recent settlement illustrates the risks of non-compliance and opportunities to ensure competition on level playing field.

The DOJ on March 25 announced it had reached an $8.1 million agreement with California-based importer Evolutions Flooring and its owners, Mengya Lin and Jin Qian. The company allegedly misrepresented the country of origin of its imports as Malaysia—when the actual country of origin was China—to avoid paying higher customs duties.

In announcing the settlement, the DOJ emphasized it “will pursue those who seek an unfair advantage in US markets, including by evading the duties owed on goods imported into this country from China.” The settlement followed a five-year investigation initiated by US Customs and Border Protection.

Unlike in most FCA cases, the party who initiated the lawsuit in the Evolution case was not a whistleblower but, rather, a competitor—California-based flooring company Urban Global, which will receive $1.2 million of the $8.1 settlement.

FCA and Tariffs

By law, every US importer must make certain representations about the goods they bring into the country when they file CBP Form 7501. This form lists the date of the import, the importer of record, the entry type (including whether the entry contains any items subject to anti-dumping or countervailing duties), the manufacturer’s ID, the country of origin, and the appropriate subheading from the Harmonized Tariff Schedule of the United States that describes and classifies each item of merchandise.

Importers who misrepresent the country of origin or other facts could be subject to civil penalties under Section 1592 of the Tariff Act of 1930 and criminal liability under a range of statutes, including 18 U.S.C. § 541 (entry of goods falsely classified), 18 U.S.C. § 542 (entry of goods by means of false statements), and 18 U.S.C. § 545 (smuggling goods into the US).

What importers may not appreciate, however, is that false statements made on the entry documentation also could lead to liability under the FCA, including treble damages.

The FCA prohibits knowingly submitting false claims to the government or using false records in certain circumstances. Courts have interpreted the FCA to cover “reverse false claims”—instances in which a party makes false statements to reduce or avoid obligations to the government, including tariffs.

Some forms of tariff evasion that have led to FCA settlements in the past include:

Misreporting countries of origin. Toyo Ink SC Holdings Co. Ltd., a Japan-based company that provides printing inks, entered a $45 million settlement with the DOJ to resolve claims that it knowingly stated Japan and Mexico were the countries of origin, rather than China and India, which were the actual countries of origin.

Undervaluing goods. Precision Cable Assemblies, Inc., Global Engineered Products, Inc., and their principals agreed to a $10 million DOJ settlement to resolve allegations of failing to pay millions of dollars in customs duties on goods imported from China. The DOJ said the companies submitted falsified invoices to reduce the prices of the imported goods, which in turn reduced the calculation of the duties they owed on the goods.

Misclassifying goods. International Vitamins Corporation entered into a $22.8 million DOJ settlement for allegedly misclassifying more than 30 of its products under the Harmonized Tariff Schedule as duty-free. As part of the agreement, IVC admitted that, between 2015 and 2019, it used duty-free HTS classifications for more than 30 products it imported from China which, if accurately classified under the HTS, would have been subject to duties.

Blue Furniture Solutions, its successor XMillenium, and two of the companies’ former executives agreed to pay $5.2 million to settle DOJ allegations that it misclassified wooden bedroom furniture as “metal” and “non-bedroom” furniture on CBP documents to avoid paying anti-dumping and countervailing duties. They also allegedly manipulated images of their products in packing lists and invoices and directed Chinese manufacturers to ship furniture in mislabeled boxes and falsify invoices to avoid detection by US authorities.

Litigation-Enforcement Hybrid

Unlike most other customs-related statues, the FCA allows private parties, known as a “relator,” to sue on the government’s behalf and claim a share of any recovery.

The size of a relator’s payout depends on whether the government takes over the case or lets it proceed independently. If the government stays out, the relator is guaranteed at least 25% of the settlement or judgment—often amounting to millions of dollars in high-stakes cases. Even if the government intervenes and reduces the relator’s workload, a successful outcome still sends at least 15% of the recovery to the relator.

The Evolutions Flooring settlement shows how competitors can step into the relator role, gaining a share in the proceeds, but also helping to ensure a level playing field going forward.

Prosecuting or defending potential FCA claims presents an unusual civil litigation-white collar enforcement hybrid. Civil litigators will recognize familiar features: relator complaints filed under seal, discovery disputes, depositions, and motions filed.

But trade-related FCA cases also involve hallmarks of criminal or regulatory investigations: multi-agency coordination (often with CBP and other agencies), forensic audits, and complex document reviews and witness interviews.

Civil FCA cases and investigations sometimes lead to DOJ criminal referrals and prosecution under violations of 18 U.S.C. 1001, among other statutes. IEEPA, the statute on which the president has relied to enact some of the recent tariffs, contains its own criminal enforcement provisions, meaning that FCA cases that begin as qui tam actions could lead to criminal investigations and charges under numerous other laws.

In the Evolutions Flooring case, the CBP spent years developing the case, including conducting factory visits abroad and detailed shipment tracing. By the time DOJ intervened, much of the investigative groundwork had been laid.

Counsel defending against such claims must be prepared to manage parallel civil, administrative, and sometimes criminal inquiries. Given the speed at which the new administration is pursuing its policy agenda, these investigations could move much more quickly than in the past.

Leveling the Field

The Evolutions Flooring settlement demonstrates how the FCA’s qui tam framework empowers businesses to hold competitors accountable for tariff compliance while offering a chance to profit from any resulting recoveries.

Businesses that suspect rivals are misrepresenting the country of origin, misclassifying products, or underreporting value should consider whether they are positioned to investigate and bring an FCA qui tam action themselves.

Some of the warning signs that may exist when a competitor company is evading tariffs and therefore potentially committing FCA violations include:

• A company’s lack of physical presence or operations in a location represented as a “country of origin”
• Valuing of products on customs forms at below-market prices
• Transshipment of goods originating in high-tariff countries through lower-tariff countries to conceal true country of origin
• Mislabeling or mis-describing goods on packing lists or invoices
• Under-reporting import quantities
  

Bolstering Tariff Compliance

Apart from being ready to go “on offense,” the prospect of substantial liability should prompt businesses to be proactive in ensuring their own compliance with increasingly complex US tariff rules and regulations.

Because the FCA doesn’t require proof of a specific intent to defraud, companies can have substantial FCA exposure from inadequate compliance programs. Affected companies should:

Stay up to date on the latest tariffs. Companies should work with their customs brokers and trade lawyers to ensure they are paying their products’ current duty rates in this fast-changing environment.

Refocus compliance and audit functions. Training and routine audits can identify compliance gaps for adhering to custom duties.

Encourage internal escalation and whistleblowing. Fostering a culture of compliance helps ensure that employees report potential misunderstandings and violations internally.

Know your supply chain. Companies that maintain visibility into how they and their business partners source and transport items ranging from raw materials to marketable products will better identify risks arising from US tariffs and related customs compliance obligations.

Promptly investigate and remediate suspected or actual violations. Potential FCA damages and statutory penalties can increase rapidly, but companies could benefit from self-disclosure credit in FCA cases.

As the new administration pursues a tougher trade agenda, the FCA is likely to become a frontline tool in tariff enforcement. That means added risk for noncompliant importers—and new opportunities for US businesses seeking to enforce and play by the rules.

For in-house legal departments and compliance professionals, this is an opportune time to assess your exposure, shore up internal practices, and consider whether the FCA might offer a new strategic avenue to protect your competitive position.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Thomas White is a partner and Andrew DeFilippis is special counsel with Sullivan & Cromwell LLP.

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