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As the Joe Biden administration works to assert its authority in enforcing customs duty rules, new analysis suggests that US importers may be increasingly exposed to the country’s longstanding False Claims Act (FCA).

According to a series of reports from law firm Sidley, importing firms have become ever more vulnerable to so-called “reverse false claims” since changes were made to the wider FCA.

The firm says that amendments made as part of the Fraud Enforcement and Recovery Act of 2009 (FERA) expanded the scope of liability for reverse false claims, brought when a company is thought to have held onto money it should have paid the government.

For importers, this means possible penalties for a failure to sufficiently pay taxes, duties or fees on goods.

According to Sidley, the volume of claims brought against domestic importing companies could rise further in the coming years, driven in part by the new administration’s eagerness to expand FCA enforcement.

“The expanded liability due to the FERA amendments to the False Claims Act, a larger universe of and greater incentive for whistleblowers, and a new administration eager to expand FCA enforcement foreshadow a likely increase in trade-related FCA claims,” Sidley says.

To better understand the influence the Biden administration could have on the FCA, GTR speaks to Barbara Broussard, a partner specialising in global arbitration, trade and advocacy at Sidley.

 

GTR: Looking at the changes made in 2009 as part of FERA, what are the key amendments that have driven a rise in reverse false claim cases?

Broussard: For importers, possibly the most consequential amendment was changing the scienter standard to cover instances where a company “knowingly conceals” or “knowingly avoids” an obligation to pay the government. Previously, the FCA had been construed to require an affirmative false statement. This amendment made clear that the FCA also covers simply omitting otherwise relevant information. If a company chooses not to tell the government it failed to leave off a ‘Made in China’ mark on its product to get out of paying a 10% marking duty, for instance, they risk FCA liability.

Another key amendment was the narrowing of the public disclosure bar, allowing FCA actions to be brought on more publicly disclosed information than previously. If there’s something already published about this violation in certain places, then it’s a bar to an FCA case being brought, because the whole idea of the FCA is to help the government discover these issues. If it’s already publicly known there is a problem, then you’re not really helping the government discover anything, essentially. The 2010 amendments narrowed the sorts of disclosures that will bar a suit.

Third, not so much a change, but rather a gloss, Congress took the opportunity to make clear in legislative discussions that the reverse FCA is meant to cover import duties.

 

GTR: Who typically brings these cases? Which sorts of companies are generally on the receiving end?

Broussard: Normally, the relators are whistleblowers, either employees or competitors. So people with some kind of insider or industry knowledge. A lot of the recent cases have actually been brought by former employees; people who flagged that a company has been incorrectly inputting information such as the classification or the valuation [of goods].

As for the firms on the receiving end, reverse false claims are brought against any number of companies. You see them mainly brought against importers that deal in goods subject to anti-dumping and countervailing duties, just because that’s where the most money is. Anti-dumping and countervailing duty rates can be exceedingly high. So there’s a greater incentive to both declare incorrect information and bring a case for a declaration of incorrect information.

In our analysis, we also conducted a survey of recent FCA cases. One key trend we identified was that whistleblower recoveries are getting larger. In September 2020, for instance, multinational industrial engineering company Linde agreed to pay US$22.28mn to settle FCA allegations for import violations. This was one of the largest trade-related FCA settlements to date. The whistleblower, a veteran employee of Linde, which imports materials for use in the construction of natural gas and chemical manufacturing plants, alleged that the company underpaid duties, including anti-dumping and countervailing duty, by misidentifying and misclassifying merchandise and failing to include assists in the declared value of its goods from 2011 to 2017.

 

GTR: Are there any stats detailing to what extent there’s been a rise in cases involving reverse false claims in the past few years?

Broussard: We tried to pull that together. But it’s difficult, because we can ultimately only see when the Department of Justice publishes a settlement, or when a relator and a company litigate or settle a case where the Department of Justice has chosen not to join. This is because reverse false claims cases are filed under seal, and it’s up to the government to decide whether to intervene or not. So it’s actually very hard to tell how many cases were in fact filed, versus eventually settled. Anecdotally, however, we’ve seen an increase in cases in recent years.

 

GTR: With the Biden administration having come into power, what impact could there be on reverse false claim cases?

Broussard: Anecdotally, it’s typical to see a rise in FCA cases during democratic administrations. Simply by virtue of there being a “D” next to his name, there is some reason to believe the Biden administration will be more aggressive in bringing FCA claims and more solicitous of the private bar. President Biden has said as much publicly. Now, that statement was in reference to health care, which is sort of obvious in the middle of a pandemic, that the government wants to be more forceful with enforcement actions as it pertains to health care, given the government is making significant payments in the health care field. It wasn’t particularly tied to customs. However, we’ve also seen similar statements from republican Senator Grassley, who used to be the chairman of the Senate Finance Committee, which is the one responsible for customs and international trade. As such, we’re seeing statements coming out of both sides of the aisle right now about the intent to use the FCA more aggressively.

 

GTR: Have you seen any significant cases yet?

Broussard: No, not yet. What we would see now would be settlement notices, which had been in the works for a while. For example, the Linde settlement that came out in September related to action between 2011 and 2017. We’re unlikely to see any effects of the Biden administration in the early months of the administration. New filings are also done under seal, giving the government a chance to investigate the allegations before the defendant becomes aware. So I don’t think we’ll get a sense of an increase in cases for a while.

 

GTR: How could the section 301 and 232 tariffs, used extensively under former President Trump, complicate FCA matters further under Biden?

Broussard: Where we’ve really seen a lot of the focus on FCA in the trade space is where there are high duty rates, which has historically been anti-dumping and countervailing duty, or marking, which comes with a 10% duty for a failure to properly mark. So the reason we think that section 301 and section 232 tariffs are likely to generate an increase in FCA cases is simply the dollar values attached them. There might be an incentive for some people to mis-declare the correct information to try and save money on the duty, as well as incentive for relators to file cases, because the dollar values will be so much higher. 301 duties range from 7.5% to 25%. In 232, it is between 10% and 25%. So there is a lot of money at stake compared to the US’ traditional weighted average duty rate, which in recent history, pre-301 tariff, had been around, or under, 2%. US duty collection after 301 and 232 tariffs more than doubled. So there’s just a lot more money that’s owed to the government, which raises the stakes for importers. As such, this is another factor that could push the number of cases upwards in the coming years.