By Jeffrey A. Newman
The United States customs authorities are well aware that thousands of Chinese and other foreign goods are being illegally shipped into the U.S. in ways designed to evade U.S. customs duties on such things as steel, honey, furniture, clothing, shrimp, catfish and much more. These products are being “transshipped” from China into other nations and re-labeled to hide their actual country of origin. The countries accepting the Chinese products and sending them here include Mexico, Malaysia, Vietnam, Philippines, Sri Lanka, India and others. The injection of these goods into the stream of America commerce without payment of U.S. tariffs harms American businesses and our economy at large.
While U.S. customs laws are strong and can be effective, the process is slow. Now, however, Whistleblower cases filed under The False Claims Act (FCA) are being used by U.S. companies to combat this unfair competition. In addition, the Federal Government is now coming to rely on whistleblowers who report tariff evasion to reveal the details of the fraudulent schemes. U.S. Customs and Border Protection (CBP) knows these illegal activities are ongoing, but they do not know enough about the players and plans to bring actions. However, now many U.S. companies and their C-level employees are becoming aware of the details through their contacts in China and elsewhere and through their own trading partners who are also placed in a weakened position by the schemers who evade US customs laws and sanctions. In addition, the False Claims Act has real teeth in that the Government may seek up to three times the amount the companies have evaded in customs tariffs. This has a great potential for deterrence. The defendants are not just the foreign companies but also the importers when it can be shown that they knew and were therefore complicit in the tariff evasions.
The False Claims Act (31 U.S.C. Sec. 3729) allows individuals or companies to file “qui tam” lawsuits against individuals or companies who directly or indirectly defraud the Federal government. In addition, the whistleblowers who reveal the wrongdoing may recover up to 30% of what the Federal government recovers. The lawsuit is filed confidentially and under seal. In addition the statute of limitations is generally six years but may be as long as ten years under certain circumstances. The incentive is not only this reward but the protection of the U.S. economy and prevention of these damaging schemes to give unfair advantage to the Chinese and other foreign companies.
Chinese made Aluminum Mexican Entry into the U.S.
In one recent case, a California aluminum exec learned about a scheme to evade U.S. duties by a Chinese aluminum manufacturer thought to be shipping product to Mexico to a remote desert factory there where the metal was melted down into pallets and trucked into the U.S. through Brownsville Texase. The astute exec. Jeff Henderson, President of the Aluminum Extruders Council, was right. He actually hired a pilot to fly over the Mexican town of San Jose Iturbide to take aerial photos of the desert factory and learned that one million metric tons of aluminum worth about $2 billion was stored there. An investigation by the Wall Street Journal revealed that around 2010, a businessman by the name of Po-Chi Shen a native of Singapore who attended the University of California Berkely created a company that bought land about 160 miles north of Mexico City and 500 miles from Brownsville Texas. A factory was built there to melt aluminum into raw material. Mr. Shen was connected to a Chinese family involved in the manufacture of aluminum. According to news reports, the plant in Mexico melted down the aluminum for shipment to the U.S. without payment of trade restrictions claiming North American Trade Agreement benefits. In the end, the Mexican company failed to get the Nafta benefits when the U.S. authorities concluded that the metal came from China. The aluminum left at the factory has been shipped to Vietnam and some think it will still make its way illegally into the U.S. Market.
Why the False Claims Act?
When information is revealed on products illegally entering the U.S. and schemes to evade payment of customs duties, U.S. companies have a right to petition the Commerce Department to investigate the information and take actions to halt the imports and collect payments from the companies involved. This process places the decision in the hands of individuals working for the Department of Commerce and the decision as to whether to advance such an investigation becomes a policy matter within the discretion of the department. In some cases, the Commerce Department has been reluctant to do so depending on who the importers are. This is the case, for example, with honey produced in China and transshipped and re-labeled and sent into the U.S., despite specific information of the scheme obtained by U.S. honey growers.
However, when an FCA whistleblower case is filed, it is quickly reviewed and analyzed by an office of the United States Attorney and the Department of Justice. While this process too has some discretion, the legal violations of customs laws are much more strictly construed. This means that customs data will be examined and where particular intentional violations are found, it is likely that the case will advance and come under the control of the Federal authorities. Our Government is vigilant about customs duties evasion and wants to know when our laws are being broken fraudulently evaded. Because of this, the FCA whistleblower cases are much stronger vehicles for U.S. businesses than the Commerce Department to reveal and stop the wrongdoers. The evidence for this is clear. The level of Asian products shipped into the U.S. using false countries of origin has skyrocketed. The seafood industry is rampant with fraud and mislabeled seafood is shipped into the United States in massive quantities.
The False Claims Act (FCA) (31 U.S.C. Sec. 3729) allows individuals or companies to file qui tam lawsuits against individuals or companies that directly or indirectly defraud the Federal Government. These whistleblowers may recover up to 30% of what the U.S. recovers from the lawsuit. The FCA suit is confidentially disclosed to the Federal government and the case is filed “under seal” meaning that no one except for the Federal government representatives may see it, including the wrongdoer Defendants. This gives the government time to investigate the claims without anyone involved with the wrongdoers knowing its being investigated. The Federal government may have assistance from the FBI and Customs officials who know what documents to examine to see if the allegations of fraud can be corroborated.
In his book Real Food/ Fake Food, ( Algonquin Books of Chapel Hill), Author/Journalist Larry Olmsted explains that in most major U.S. cities you are not likely to get the fish you order and pay for at most restaurants as species substitution is a frequent scam. For example, the fish most commonly used to fake Grouper is the Cambodian fish Ponga, a type of Asian catfish, farmed in Asia and imported here. It looks like Grouper. The fish farms in Asian nations are not clean and often contain dangerous chemicals antibiotics and other contaminants. Yet thousands of tons of these fish are imported and disguised as other kinds of fish. According to Olmsted, the country of origin in the seafood industry is frequently falsified to cover up those fish raised in fish farms.
Wild Salmon from Alaska is considered an excellent fish to eat as it is a source of omega-3 fatty acids. However various studies show that various fish including trout are imported from South America which are fraudulently labelled as salmon. Most salmon sold in restaurants are not wild caught but rather are grown in fish farms which are, for the most part, not as healthy.
Shrimp is one of the most popular seafood but most of it sold in the U.S. has been imported and raised in shrimp ponds in Thailand and elsewhere where unapproved antibiotics and illegal chemicals are used. Tons of shrimp are transshipped to nations with favorable US tariff rates and re-labeled. The U.S. shrimp fisheries in the south have been damaged by these foreign imports of tainted shrimp.
Chinese furniture importer pays $10.5 million in FCA case
Last month Bassett Mirror Inc. a Virginia importer of Chinese furniture paid $10.5 million to settle claims it improperly evaded federal anti-dumping duties. A whistleblower Kelly Renee Wells, a merchant in Huntsville Alabama who sells furniture online, filed a whistleblower case in 2013 under The False Claims Act after discovering that she could not compete with larger retailers who were buying bedroom furniture from China as living room hall or bath furniture in order to evade the 216 percent duty imposed since 2004 after Chinese furniture makers , subsidized by the Chinese government were selling wooden bedroom furniture at very low prices in the U.S.
Adulterated Chinese Honey
In 2013, Five persons and two U.S. honey-processing companies were charged with federal crimes relating to illegal importation of Chinese honey through other countries to evade customs duties. Two of the companies Honey Holding d/b/a Honey Solutions and Groeb Farms Inc. of Onsted Michigan entered into deferred prosecution agreements and paid a total of $3 million in fines.
A number of other cases of unscrupulous honey importers have been revealed. Some Chinese companies transshipping to other nations, cut the honey with high fructose rice syrup. Some of the honey which has illegally entered the U.S. was adulterated with the antibiotic chloramphenicol not approved by the FDA.
Americans consume over 1.4 pounds of honey each year and over 70 percent of it is imported. In 2001, the Commerce Department set a large tariff on Chinese honey as they were being dumped into the market and sold for prices substantially lower than the market prices. After that, Chinese honey makers started shipping to Shanghai, Thailand and South Korea and changing the shipping levels as those nations do not have major customs tariffs. Then the product is shipped here. When chemists detected that the transshipped honey contained the unapproved antibiotics used in China, the barrels were rejected. However then the Chinese companies stopped using it. The fraud on America continues today.
Jeffrey Newman represents whistleblowers in customs fraud cases as well as other whistleblower cases. If you want to report tariff evasion schemes, you will need an experienced whistleblower attorney.