What Whistleblowers in Import and Manufacturing Should Know

by Quintin C. Cerione and Rrita Osmani

What is import fraud, and how does it occur in manufacturing and supply chains?

Import fraud (also referred to as “customs fraud”), which has fallen under the spotlight of the Department of Justice, is any attempt to evade duties, taxes, or trade regulations. This is commonly achieved through deceptive or falsified import documentation.  In the manufacturing and supply chains sector, this can be done in several ways: such as undervaluing goods, misrepresenting the goods’ country of origin, or misclassifying goods under incorrect Harmonized Tariff Codes to avoid paying higher tariffs.   By deliberately falsifying information regarding the goods and avoiding making obligated payments to the U.S. government, companies increase their profit and undermine fair-trade practices.

Instances of import fraud can appear in many different ways.  For example, a company attempting to avoid U.S. tariffs may misrepresent the country of origin of Chinese goods by first importing them into Mexico, labeling them “Made in Mexico,” and then exporting the falsely labeled products to the United States.  Alternatively, a company may evade tariffs by assigning incorrect Harmonized Tariff Codes to these goods – such as misclassifying specialized electronic components as generic, lower-tariff plastic parts.

How does the False Claims Act apply to customs duties and tariff evasion?

The False Claims Act is designed to prevent individuals and companies from submitting false claims to the government to obtain payment or avoid financial obligations, protecting the government from fraud and abuse.  Thus, by making efforts to evade tariff payments or under reporting custom duties, the company or individual is fraudulently attempting to withhold money owed to the government – violating the FCA.

What types of employees or insiders might qualify as whistleblowers in these cases?

The False Claims Act includes a qui tam provision, which allows private individuals or non-governmental organizations to file a lawsuit on behalf of the U.S. government to recover damages lost from fraud.  All employees, even non-citizens, can qualify as whistleblowers.  However, they must have nonpublic information about the fraud, and they must be the first to file a qui tam suit regarding the fraud.  Employees working in the import and manufacturing sectors with firsthand knowledge of a company’s import fraud should seek legal counsel, such as the experienced attorneys at Miller Shah LLP, to see if they qualify.

What rewards and protections are available to whistleblowers who report import fraud?

Under the FCA, whistleblowers are entitled to 15%-30% of the recovery from successful qui tam lawsuits.  This can amount to significant rewards for whistleblowers.  For example, just this past December, CERATIZIT USA LLC agreed to pay $54.4 million to resolve FCA allegations that it improperly avoided U.S. customs duties on tungsten carbide products imported from China.  Because the claims were brought forth by a whistleblower, that individual will be entitled to a considerable sum of the settlement as a reward.

Included in the FCA are a series of protections for whistleblowers bringing forth allegations of fraud.  Whistleblowers are protected from retaliation by their employers, encouraging those suspecting fraud to speak up.  Relators can file sealed lawsuits while the government completes its investigation of the alleged fraud, effectively shielding the identity of the relator during this period.  Furthermore, if a whistleblower is subjected to retaliation, the FCA provides for reinstatement at the seniority level the individual would have attained but for the retaliation, along with double back pay plus interest, and compensation for attorneys’ fees and litigation costs.

How can experienced whistleblower and employment attorneys help protect individuals who come forward?

If you suspect import fraud, or any type of fraud against the company, you should seek legal counsel to discuss your claims and understand how you can best protect yourself.  Our skilled whistleblower and employment attorneys at Miller Shah LLP have extensive experience in specialized matters involving import fraud.  We invite you to schedule a free 30-minute consultation with one of our intake specialists, which will allow our attorneys to evaluate your claims and determine your best course of action.