Since 1986, more than $20 billion has been reportedly recovered as a result of lawsuits under the False Claims Act (FCA) and related state statutes aimed at combating fraud against the government. Such claims are often brought as qui tam lawsuits, which permit private parties to file suits on behalf of—and to retain a portion of any monies determined to be owed to—the government. Although FCA recoveries historically have been attributable in large part to cases involving allegations of fraud in connection with government healthcare programs and government procurement, a new trend is emerging. Increasingly, compliance lapses involving a variety of international trade rules are serving as the basis for FCA suits. Compliance officers should take steps to protect companies against this growing area of potential liability for international trade activities.
In May 2012, the U.S. Department of Justice (DOJ) intervened in a qui tam lawsuit under the FCA against a corporate group responsible for manufacturing and importing an ink product that is subject to antidumping and countervailing (AD/CVD) duties when sourced from certain countries. The suit, which was brought by a competitor of the importer, alleged that the group knowingly misrepresented the product’s country of origin on customs entry documents to avoid paying AD/CVD duties. The group has publicly stated its belief that its origin representations were accurate. A central question in the suit thus likely will be whether the group correctly determined the country of origin of the ink product, the materials for which were reportedly sourced in China and India and then finished in Japan and Mexico.
This suit highlights what many compliance officers already know: in today’s globalized economy, determining the origin of manufactured products is a complex process susceptible to error. Nonetheless, many importers historically have not sought confirmation from the government or independent experts of their origin determinations. Recent trends indicate that the stakes are now much higher for importers. Although negligence alone generally will not suffice to establish FCA liability, FCA suits can be based on charges that the defendant acted with reckless disregard. A successful FCA suit permits the government to recover up to three times its damages plus civil penalties, which can equate to multi-million dollar recoveries depending upon the volume and value of the targeted imports.
Other International Trade Triggers of FCA Liability
Many government contractors already are familiar with potential FCA liability associated with country of origin determinations. A number of lawsuits against multiple contractors have sought FCA penalties and damages based on allegations that the contractors provided to the U.S. government goods from impermissible countries under the relevant contracts, as well as incorrect origin certifications.
Moreover, erroneous country of origin determinations are not the only source of potential FCA liability for companies engaged in international trade activities. Duty drawback claims, whereby an importer requests a refund of duties paid on imported goods that are subsequently exported from the United States, have long provided the potential for FCA liability, given the often complex calculations and recordkeeping involved with such claims. Similarly, inaccurate tariff classifications, which can reduce the amount of duties owed on imported merchandise, also can easily give rise to FCA suits. In short, virtually any international trade compliance lapse that results in the failure to pay the full amount owed to the U.S. government can lead to claims of FCA liability.
Protecting against FCA Liability
To minimize the risk of FCA liability stemming from international trade activities, compliance officers should take steps to ensure the accuracy of representations made to the U.S. government. For example, importers of complex manufactured products and the contractors who sell such products to the U.S. government should consider obtaining country of origin rulings from U.S. Customs and Border Protection. Similarly, importers may wish to obtain tariff classification rulings to avoid allegations that the company misclassified imported goods in a tariff provision that carries a lower rate of duty. Alternatively, importers might seek written advice on such questions from recognized subject matter experts. Finally, importers whose products are subject to AD/CVD duties when sourced from certain countries may wish to obtain scope rulings from the U.S. Commerce Department’s Import Administration prior to importation.
Sidley Austin LLP has a team of lawyers well-versed in the interplay of the FCA and international trade rules. We would be pleased to assist companies in the review and enhancement of their international trade compliance programs to protect against potential FCA liability stemming from international trade compliance lapses.