FCA: Why We Need Whistleblowers . . . and How to Avoid Them

President Abraham Lincoln had had enough. His troops at the front of the bloody Civil War wereΒ ill fromΒ rancid food,Β receivingΒ lame mules and horses, faulty rifles and ammunition, all because of unscrupulous contractors to the U.S. government. As a result, Congress passed the False Claims Act (FCA) on 2 March 1863 whichΒ they hoped would provideΒ a remedyΒ for such abuse of the government and put a stop to the abuse of its troops.Β 

Over time, the False Claims Act has, indeed, proven a valuable remedyΒ for the governmentΒ against entities seeking improper payment for goods or services rendered; however, only in recent years has the government exercised the β€œreverse” provision of the statute which allows redress from anyone who avoids or decreases the amount owed to the government.Β This statute wouldn’t be nearly as successful without the help of whistleblowers. They are not a new phenomenon; there were whistleblowers as far back as Medieval times. America’s first, or at least most famous, whistleblower wasΒ Benjamin Franklin, who blew the whistle onΒ the governor of Massachusetts, appointed byΒ the English monarchy, who intentionally misled Parliament to β€œpromote a military buildup in the Colonies.” Since that time, whistleblowers have had an uneven historyΒ and reputation, at least until the last several decades.Β 

Our last blog, β€œThe Catastrophe of a Blind EyeΒ on Trade Violations”, coveredΒ theΒ disastrousΒ resultsΒ ofΒ turning a blind eye to trade violationsΒ committed by suppliers.Β Byer California, Inc.Β was given as an example of a companyΒ who settled a fraud caseΒ with the CBPΒ in March 2019 for $325,000 for turning a blind eye to a supplier’s undervaluing merchandise imported from VietnamΒ for years.Β They were finally brought to the CBP’s attention by the actions of a whistleblowerΒ who brought justice to the government and a tidy sum to their pocket.Β 

But before we go into the agony or ecstasy of whistleblowing, let’s look a little deeper into the FCA.Β [/vc_column_text][vc_column_text css_animation=”none”]

Just What is the False Claims Act (FCA)?Β 

As previously mentioned,Β actions brought under the FCA haveΒ traditionallyΒ been based on complaints that entities received improper government payments. However, because of the β€œreverse” provision of the FCA statute, importersΒ and those with whom they do businessΒ ought alsoΒ beΒ aware of their liability: β€œany person whoΒ knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” 31 USC 3729(a)(1)(G).Β The statute goes on to say that β€œfor purposes of this section, the terms β€˜knowing’ and β€˜knowingly’ mean that a person, with respect to information (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.” 31 USC 3729(b)(1)(A)(i-iii). In other words, any entity who seeks, in any way, to lower duties on imported goods owed to the government, whether knowingly or unknowingly, may also be sued under the FCA.Β 

Generally, import/export fraud revolves around misrepresenting one of the key factorsΒ used to evadeΒ properΒ United StatesΒ duties:Β 

  • MisclassificationΒ of imported goodsΒ as determined by theΒ Harmonized Tariff System (HTS).Β Companies mayΒ misrepresent the characteristics of the goodsΒ or the typeΒ of goodsΒ being imported.Β For example, in 2018,Β American DawnΒ paid $2.3M to settle charges that it misclassified towels as polishing cloths to pay a lower tariff rateΒ and Texas-basedΒ University FurnishingsΒ paid $15M to settle an FCA suit for misclassifying its wooden bedroom furniture manufactured in China as office furniture;Β 
  • TheΒ valueΒ of the goods;Β 
  • Country of Origin.Β A variety of schemes have arisen to avoid the payment of high tariffs, particularlyΒ country of origin misidentificationΒ andΒ theΒ failure to identify country of origin. In transshipping schemes, products are shipped from the true country of origin (typically China) to a second country and then to the United States. Customs officials merely see a shipment arriving from Greece or another country with no tariff requirementΒ or perhaps from Mexico with its NAFTA agreement. Countries with common transshipping schemes are Vietnam, Indonesia, Mexico, Malaysia, Thailand, Philippines, Panama, Taiwan, and India.Β Β 

With the Fraud Enforcement and Recovery Act of 2009 (FERA), whistleblowers got aΒ 

boost because they could earn awards by revealing companies who avoided tariffs by not showing a country of origin, notΒ only byΒ an affirmative misrepresentation on a customs form as was traditionally theΒ case. SeeΒ United States ex rel. Customs Fraud Investigations, LLC. v. Victaulic Co.Β 

The FCA,Β among other things, allowsΒ citizens to sue on behalf of the government and to be paid a portion of the recovered funds in what is called theΒ qui tamΒ provisionΒ [31 USC 3730(c)]. Citizens in these actions are known as relators.Β They are also known as whistleblowers.Β [/vc_column_text][vc_single_image image=”72045″ img_size=”full” alignment=”center” style=”vc_box_shadow” css_animation=”none”][vc_column_text css_animation=”none”]

Whistleblowers are People, Too. AndΒ PerhapsΒ Your Competitor… 

Customs agentsΒ and other government agenciesΒ attemptΒ to track goods imported into the United StatesΒ toΒ assure their shipment is legalΒ and that the appropriate duties and tariffsΒ are paid;Β however,Β there are not nearly enough governmentΒ resourcesΒ availableΒ toΒ inspectΒ the 25 million containers enteringΒ theΒ country. The result is thatΒ the amount of fraudΒ committed in orderΒ to evade U.S.Β tariffs isΒ increasing exponentially. WhistleblowersΒ may be reporting either their own employers or their employers’ competitors who they suspect are violating the law by evading tariffs. TheΒ False Claims ActΒ allows them to receive up to 30% of what the government recovers if the information leads to a settlement or successful trial.Β Whistleblower suits under the False Claims Act mustΒ normallyΒ be filed within six years after the date on which the violation was committed, although under certain circumstances, aΒ claim may be broughtΒ within 10 yearsΒ after the violation.Β 

Current and former employees as well as consultantsΒ working for offending companies or for a competitor have the detailed inside information required toΒ become whistleblowers and toΒ bring a False Claims Act caseΒ whichΒ generally must be based on original or non-publicβ€―information.Β 

In addition, companiesΒ themselvesΒ often act as whistleblowersΒ inΒ qui tamΒ cases against competitors. In these cases, they often have an in-depth knowledge ofΒ pricing, information regardingΒ supply chains,Β specific product knowledge,Β and may even have been contacted by those perpetrating the same customs fraud schemes.Β Β 

Your Best ProtectionΒ from Whistleblowers: AΒ TradeΒ Compliance ProgramΒ 

No matter how small or how largeΒ yourΒ business, importers and exporters must be capable ofΒ demonstratingΒ aΒ robustΒ compliance program that closely monitors import/exportΒ dataΒ and generatesΒ the appropriate documentation for an audit trail. Organizations must exercise regular reviews of theirΒ internalΒ systemsΒ along withΒ any updates implemented to demonstrate an ability to adapt its procedures asΒ required.Β This is your best shield against a whistleblower suit brought under the FCA.Β 

According to theΒ Bureau of Industry and Security (BIS)Β and theΒ Directorate of Defense Trade Controls (DDTC), the following are guidelines of what should be includedΒ as a minimumΒ in a compliance program:Β 

  • Management CommitmentΒ 
  • Risk AssessmentΒ 
  • Export AuthorizationΒ 
  • Re-exports/RetransfersΒ 
  • Restricted/Prohibited Exports & TransfersΒ 
  • Recordkeeping & Documentation PolicyΒ 
  • Training/AwarenessΒ 
  • Adequate Resources Dedicated to ComplianceΒ 
  • Continuous Risk Assessment of the Export ProgramΒ 
  • Cradle to Grave Export Compliance SecurityΒ 
  • Compliance Monitoring & AuditsΒ 
  • Reporting Export ViolationsΒ 
  • Corrective Actions in Response to Export ViolationsΒ 
  • Build and Maintain ManualΒ 

We’re Not Talking PeanutsΒ Β 

  • BascoΒ Manufacturing paid $1.1 million to settle allegations it engaged in transshipping by declaring Malaysia the country of origin in order to avoid antidumping duties imported from China.
  • Toyo Ink paid $45 million to settle allegations that it evaded paying duties on products containing carbazole violet pigment 23 from China and India, declaring the country of origin as Japan or Mexico. The whistleblower case was brought by a competitor which became aware of the scheme.
  • Basset Mirror Company paid $10.5 million to settle an FCA case which asserted that it masked the type of furniture it imported from China in order to avoid duties.
  • Otterbox paid $4.3 million to settle an FCA case alleging that it did not place correct values on the imported products to evade duties.

In addition to the 15-30% of penalties recovered to whichΒ whistleblowersΒ are entitled, ifΒ theyΒ areΒ retaliated against forΒ theirΒ efforts toΒ exposeΒ improprieties,Β the FCAΒ alsoΒ has a provisionΒ forΒ whistleblowersβ€―to bring suit against the entitiesΒ orΒ peopleΒ that engaged in retaliation. Sometimes these provisions allow for theβ€―whistleblowersβ€―to recover as much as two timesΒ theirΒ damages plusΒ theirΒ attorneys’ fees.Β 

Exposing wrongdoing by an employer or competitor is worth the risk.Β In 2018,Β whistleblowers recovered over $326 million for reporting fraud, with $39 million being awarded to aβ€―singleβ€―whistleblower.Β 

Pay attentionΒ 

Make sure your company, or its competitors, pays what is owed to the United States. If you see errors, omissions, orΒ the commission ofΒ fraud, report it to your company’s management. If no positive actionΒ isΒ taken, your next step may be as aΒ qui tamΒ relator through the False Claims Act. You might be a whistleblower.Β 

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