Although U.S. Customs and Border Protection ("Customs") has been consistently urging companies to develop written internal Customs compliance programs under Customs’ informed compliance/shared responsibility principles, a recent federal case has provided another reason for companies to implement or strengthen internal customs compliance controls—Qui Tam liability under the False Claims Act.

On May 3, 2005, the U.S. District Court for the Northern District of California denied a motion by Nature’s Farm Products ("NFP") to dismiss a false claims action brought by the United States for fraudulent misstatements of country of origin on Customs documents. According to the opinion, in 1998, the International Trade Administration found that Chilean mushrooms were being sold at less than fair value, and applied an antidumping duty of 148.1 percent on NFP’s mushrooms. In reaction, NFP officers allegedly devised a scheme to circumvent the antidumping duties by shipping large drums of "brined" mushrooms to Canada, where they were "de-brined," repackaged for retail sale, and labeled as products of Canada. During a period of a year-and-a-half, NFP reportedly made approximately 150 such fraudulent shipments to the United States with a total declared value of approximately $4.8 million, thus evading approximately $7.8 million in antidumping duties. Court documents also indicate that the United States has reached separate settlements with Ravine Foods, Inc., Aliments Heritage, and the Bank of China, related to their alleged participation in this scheme. Although the court has not yet decided on the merits of the case, it has upheld the application of the False Claims Act to the underlying facts.

Of particular importance to importers, companies which finance import operations, and any other import-related businesses, is the way in which these alleged violations were brought to the attention of federal authorities. The case against NFP was originally brought as a Qui Tam action by Huangyan Import & Export Corp. ("Huangyan Import & Export"), a competitor of NFP, who discovered evidence of NFP’s scheme while conducting discovery in an unrelated civil lawsuit. Under the False Claims Act, a private citizen, referred to as a Relator, is permitted to file a Qui Tam suit in the name of the U.S. Government by charging government contractors and other entities who receive, use, or owe government funds with defrauding the government. Often referred to as the "whistle-blower" statute, the False Claims Act provides incentives to persons filing a Qui Tam suit by sharing any funds recovered with the person bringing the suit. In cases of False Claims Act liability, the government is entitled to collect and the Relator is entitled to share in the recovery of three times the loss resulting from the false claim. Thus in the NFP case, $25.4 million is reportedly at stake. Although Huangyan Import & Export was ultimately dismissed from the case, the United States has continued to pursue NFP under the False Claims Act, thus keeping open the door to future Qui Tam actions for Customs violations and compliance shortcomings.

The allowance of Qui Tam suits for Customs violations creates a powerful financial incentive for persons in a position of trust within a company, or who are otherwise aware of internal company dealings, to take action on any perceived wrongdoing related to Customs violations. Also, company competitors not only have this financial incentive, but have a strong competitive incentive to report false claims as well. Just as importantly, an unrelated company may be pulled into a broader enforcement action because of a Qui Tam suit filed against one of its customers, clients, or affiliates. Even if this company is not directly involved in the wrongdoing, its records could be subject to audit and investigation by federal enforcement authorities. While it is impossible to control the business dealings of other companies, a company may dramatically reduce the likelihood it will become involved with defrauding companies, and may significantly reduce the impact of any enforcement action, by implementing a Customs compliance program with appropriate transaction screening, recordkeeping, internal audit, and training provisions. While no amount of internal controls can completely thwart employees determined to commit fraud on the federal government, a Customs compliance program can ensure that such misconduct is quickly identified and appropriately addressed. Such decisive internal action could have saved NFP, Ravine Foods, Aliments Heritage, and the Bank of China from years of problematic and burdensome federal scrutiny.