Recent years have seen a rise in the number of actions brought under the False Claims Act (FCA) (31 USC 3729) based on U.S. customs violations, coinciding with increased criminalization of such violations. In 2012 FCA actions extended further into the trade area when the president of a U.S. company successfully brought a whistleblower lawsuit against a Japan-based competitor, Toyo Ink SC Holdings Co. Ltd and its affiliates (Toyo), for evading duties on imports subject to antidumping (AD) and countervailing duty (CVD) orders. The Toyo case should prompt renewed focus on import/export compliance requirements for any business affected directly or indirectly by U.S. AD/CVD issues.
Under the FCA, any person who knowingly submits a false or fraudulent claim to the U.S. government for payment or approval may be liable for a civil penalty of up to $11,000 for each claim, plus three times the amount of the damages sustained by the U.S. government, including attorneys’ fees. The FCA authorizes private citizens to sue on behalf of the United States and to receive between 15 and 30 percent of any recovery. A private FCA plaintiff typically seeks to have the U.S. government intervene in the action, which the U.S. Department of Justice agreed to do in the Toyo case. In January 2013, Toyo agreed to pay $45 million, plus interest, to settle allegations that it violated the FCA by knowingly failing to pay AD and CVD duties. The U.S. company president who originally brought the case will now personally receive nearly $8 million as his share under the FCA.
The U.S. Department of Commerce assesses AD and CVD duties following investigations to remedy unfair pricing and government subsidies that benefit specified imported goods. The duties are collected by U.S. Customs and Border Protection (CBP). The FCA suit against Toyo alleged that Toyo avoided paying AD and CVD duties on imports of the colorant carbazole violet pigment 23 (CVP-23) by improperly claiming Japan and Mexico as the countries of origin when the product was actually sourced in China and India. Imports of CVP-23 from China and India (but not from Japan or Mexico) have been subject to AD/CVD duties since 2004. Although Toyo’s imported CVP-23 underwent a finishing process in Japan and Mexico, this process was insufficient to constitute a “substantial transformation” under U.S. customs rules to allow Japan or Mexico to be claimed as the country of origin of the imports.
U.S. AD/CVD petitioners often complain that CBP does not do enough to police imports covered by AD/CVD orders and to collect duties. Further, since repeal of the Continued Dumping and Subsidy Offset Act in 2005, the law does not provide for U.S. producers to receive any AD/CVD duties collected by the U.S. government. The Toyo case should therefore be of interest to any business affected by an AD/CVD action and, more broadly, to any company with U.S. import/export operations. Notably, the “false claim” alleged in this case did not involve any contracts with the U.S. government (as in the more typical case) but was based entirely on alleged misstatements made on import documentation filed with CBP. The FCA, as used in the Toyo case, may furnish a powerful new tool for U.S. producers that believe their foreign competitors or U.S. importers are evading duties by misclassifying imports or misrepresenting their valuation or origin.