Illegal Transshipping Can Make YOU Rich: Meet the False Claims Act

1. Avoiding tariffs with illegal transshipping

Illegal transshipping can make you rich.

More accurately, reporting someone else for illegal transshipping under the False Claims Act can make you rich.

The United States has imposed tariffs and duties against a whole slew of Chinese products, increasing the costs of those products sold to the United States. To avoid these tariffs and duties, many companies are shipping their Made in China products to countries other than China, then shipping those products to the United States, claiming those products were made in a country other than China. This is called transshipping and it is illegal. See US-China Tariff Updates: What You Can (and Should NOT) do NOW.

My law firm’s international trade lawyers are being bombarded these days by companies (mostly U.S. importers) contacting us about competitor companies gaining cost advantages by illegally transshipping their products. I recently was forwarded an email from a U.S. importer client that had been sent to the client from a Chinese chemical producer/exporter, essentially telling my client the following:

  1. Buy my chemical product, which is covered by a US antidumping (“AD”) order.
  2. But don’t worry about that antidumping order, because if you buy this product from me you can avoid having to pay the massive duty the United States has imposed on this product coming from China.
  3. You can avoid this massive duty because I ship my product through Taiwan, where it is labelled as a Taiwan product and there is no duty on this product if it comes from Taiwan. No problems.

My importer client was angry because it knew transshipping and it knew it could find itself criminally liable for such a scheme. Most importantly, it also knew that some of its competitors would buy this product, import it into the United States illegally and perhaps get away with having done so, at least for a time. My client was angry because it knew that these illegal importations would give some of its competitors short-term cost and pricing advantages.

In another situation, several importers contacted me for help in “getting around” trade orders, including antidumping orders and Section 301 tariffs. I had to patiently explain to them what was legal and what was not.

Many Chinese companies are telling their U.S. importers they will just label their products with Hong Kong or Singapore or Taiwan or Vietnam country of origin stickers as though doing that is perfectly legal. That is not legal and these sort of import games constitute civil and criminal violations of U.S. law and they can and often do lead to enormous financial penalties and even prison time.

2. Chinese companies and U.S. importers have different interests when it comes to illegal transshipping

Chinese companies typically want to ship as much of their product(s) to the United States as it can. U.S. importers want to stay out of Customs trouble and avoid civil and criminal liability.

But what can a company do if it knows about Chinese producers or U.S. importers that are not playing by the rules? What can a company do if it knows about illegal transshipments?

Anyone, including Chinese companies and U.S. importers, can profit from transshipments  that violate U.S. Customs and Trade laws. The Moiety Statute, 19 USC 1619, provides for any person to receive compensation of up to 25% from the United States Government of any amount the U.S. Government recovers from an illegal transshipment based on information provided to any Customs officer or U.S. attorney, in an amount up to $250,000. To quote the statute, this reward is available to anyone who provides “original information concerning … any fraud upon the customs revenue, or any violation of the customs laws or the navigation laws which is being, or has been, perpetrated or contemplated by any other person and such information leads to a recovery of … any duties withheld, or … any fine, penalty, or forfeiture of property incurred …”

Many U.S. and foreign individuals and companies, including U.S. importers and even Chinese producers/exporters can also profit under the False Claims Act by reporting illegal transshipments. Under Title 31, United States Code, Section 3729 (G), any person or company, that “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government” can be liable for triple damages and for up to $11,000 per claim.

3. Using the False Claims Act against illegal transshipping

Section 3730 of the False Claims Act (“FCA”) provides for a private right of action, which means that a private person (or company) may sue for a violation of section 3729 (G) on behalf of the U.S. government. The private party, called a relator, can be a competitor, such as a U.S. importer or foreign producer, or an insider, such as a secretary or a filing clerk. The relator files a copy of the complaint and written disclosure of all material evidence and information possessed under seal (in confidence) in the Federal District Court to show that certain U.S. importers and/or foreign producers/exporters have committed fraud on the U.S. government by transshipping products to avoid paying tariffs or duties. The complaint is brought on behalf of the United States and the Department of Justice. The complaint and the evidence supporting the complaint are not served on the defendants; they are instead served on the U.S. government, which has 60 days to determine whether or not to intervene in the case.

If the government decides to intervene and prosecute the action, the private party will be entitled to 15 to 25 percent of any recovery. If the government decides not to prosecute the case and the private party goes forward with its own case, the private party will be entitled to 25 to 30 percent of any recovery.

The remedy in a False Claims Act case is triple damages and in many AD and countervailing duty (“CVD”) cases, especially against China, the “missing” AD or CVD duties can be well over 100 to 300% on imports over the last 5 to 6 years.  In one recent preliminary antidumping determination against mattresses from China, the antidumping rate is 1,731%, the highest antidumping rate in history.

Relators (be they competitors or individuals, outsiders or insiders) can become very rich from a False Claims Act case. I worked with the U.S. Government on an ongoing False Claims Act case against Univar USA Inc. where settlement with the Government was reached for more than $60 million and the payout to the relator was correspondingly high. In a fairly recent False Claims Act  case in Seattle, a young clerk made several million dollars for information he provided that enabled the bringing of a False Claims Act case.

The United States has plenty of effective legal hammers already in place to crush illegal transshipments to the United States, including the Moiety Statute and the False Claims Act. If you know about and are bothered by companies illegally transshipping products to the United States you should turn that to your financial advantage.

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