FCA and Duty Orders: Key Weapons in a Trump Trade War?

This article was originally published by Law360.

Given his protectionist stance, Trump may direct the Departments of Justice and Commerce and the US Customs and Border Protection (CBP) to step up their combined enforcement actions to protect US companies from illegal dumping practices, particularly for products coming from China. Regardless of how Trump approaches AD/CVD orders, understanding the interplay between these enforcement agencies will be key in limiting a company’s exposure for violations.

As it stands now, there are 373 AD/CVD orders in place covering everything from fresh garlic to hot-rolled carbon steel flat products. China, a favorite target of Trump, has 102 anti-dumping and 38 countervailing duty orders on the books, by far the largest number levied against any other country.

These orders impose additional duties, ranging as high as 266 percent, on imports of products manufactured outside of the US which the Department of Commerce has determined are being sold in the US at less than fair value and the US International Trade Commission has determined are causing material injury to a US industry that manufactures the same or similar products. This places companies who import products from China that are subject to AD/CVD orders at greater risk, simply on a statistical basis.

Typically anti-dumping and countervailing duty investigations are initiated after a petition is filed by manufacturers, producers or wholesalers in the United States of the same or similar products; by a certified union, recognized union or group of workers in the United States of the same or similar products; by a trade or business association whose members manufacture, produce or wholesale the same or similar products in the United States; or by an association of these groups.

The petition must contain detailed allegations regarding the rates at which the goods are subsidized or sold at less than fair value, and material injury, threat of material injury or the establishment of an industry in the United States that is materially retarded by the dumping of products at less than fair market value.

Importantly, the government has the authority to self-initiate anti-dumping and countervailing duty investigations. This authority has been rarely exercised in the past (the last time Commerce self-initiated a CVD investigation was 1991 against softwood lumber products from Canada), but that can radically change if Trump decides to get more aggressive with China and target what he perceives as unfair practices targeting US businesses.

The government also has the authority under the trade laws to self-initiate changed circumstances reviews of AD/CVD orders. Changed circumstances reviews address questions about the applicability of the order, such as changes to a corporate structure which may require a different (and usually higher) cash deposit rate, and can also be used to revoke an order if the domestic industry is no longer interested in the order. Self-initiation of AD/CVD investigations or changed circumstances reviews are certainly tools the Trump administration could use to advance his trade policies.

Congress recently granted CBP unprecedented authority to investigate and enforce allegations that companies are evading AD/CVD orders. The new law allows US producers, wholesalers, unions, foreign manufacturers or exporters, and trade associations of the same or similar products covered by an AD or CVD order to file an allegation that an importer has entered the merchandise subject to the order through evasion.

The Department of Commerce and the International Trade Commission can also submit evidence to CBP that reasonably suggests a person has been evading an AD or CVD order. In short, while a wall between the US and Mexico may take some time to build, Trump has readily available tools to build a trade wall against China using enhanced enforcement of AD/CVD by CBP.

The Department of Justice has also increasingly jumped into the enforcement game by using the False Claims Act (FCA) to enforce AD/CVD orders to combat the illegal dumping of Chinese goods into the US marketplace. These cases are typically referred to as “reverse false claims” because money owed to the government — duties, in this case — is being improperly withheld.

The combined enforcement efforts by the Department of Justice and CBP can expose an importer to penalties two or four times the duties, taxes and fees of which the US was deprived, or equal to the domestic value of the imported merchandise under Tariff Act of 1930, in addition to treble damages and penalties ranging from a minimum of $10,781 to a maximum of $21,563 per violation under the FCA.

In an AD/CVD case, the damages are the uncollected duties which would have been owed had the importer correctly entered and paid the duty. With duties running as high as 266 percent, the damages alleged by the government for avoiding AD/CVD duties can rise at an astronomical rate.

The government also often takes the position that every entry constitutes a false claim on which a penalty may be assessed, which, when coupled with penalties under the Tariff Act and treble damages under the FCA, can quickly expose an importer to millions of dollars in liability in short order.

The incentive to use the FCA to enforce AD/CVD orders is enhanced by the whistleblower provisions, which enable the whistleblower to receive up to 30 percent of any recovery, depending on whether the government decides to intervene in the case. If the government does intervene and takes over the case, the whistleblower can simply ride on the government’s coattails as the case proceeds, with the hope of receiving a large bounty at the end of the day.

With this incentive, disgruntled industry competitors and employees have increasingly filed FCA cases involving violations of AD/CVD orders imposed on products imported from China, with the types of products at issue running the gambit.

Here are a just few of the most recent cases: United States ex rel. Xing Wei v. Yinshun Garments Inc., et al., No. 1:13-cv-00055 (SDNY) (women’s garments); United States ex rel. Bissanti v. Daniel Scott Goldman et al., No. A14-CV-00497 (W.D. Tex.) (wooden bedroom furniture); United States ex rel. Reade Manufacturing Co. v. ESM Group Inc., Civ. No. 10-CV-504-S (W.D.N.Y.) (magnesium powder used in flares); United States ex rel. Graphite Electrode Sales Inc. v. Ameri-Source Holdings Inc., et al., Case No. 13-cv-0474 (W.D. Pa.) (small-diameter graphite electrodes).

Avoidance of duties also can expose an importer to criminal liability under a myriad of federal criminal statutes, including smuggling, false statements, conspiracy and mail and wire fraud. Whistleblower complaints under the FCA are filed under seal, and criminal prosecutors are not shy about using the sealed complaint as the basis for obtaining a federal search warrant and indictment. Nor has the government been shy about running parallel proceedings, where the importer is fending off criminal charges, while at the same time defending identical allegations in a FCA action.

With China in the target zone and Trump’s protectionist stance, in conjunction with competitors shouting foul play under the FCA, a new attorney general about to be appointed and a pack of aggressive federal prosecutors about to be unleashed at the Department of Justice, it is imperative for importers to have a robust compliance program in place when importing products subject to AD/CVD orders, particularly when those products originate from China.

Compliance requires knowledge of what products fall under these orders, filing accurate entry forms and invoices, and ensuring that products are properly marked with the country of origin. If orders are ambiguous, companies should consider requesting a scope ruling from the Department of Commerce to obtain clarity, and even challenging the scope ruling in the US Court of International Trade, if the breadth of the order as interpreted by the Department of Commerce exceeds common industry understanding and practices. The bottom line: no company wants to be the poster child for Trump’s trade war with China.

Arent Fox attorneys have significant experience in customs compliance, investigations/audits, scope requests, and litigation matters. We have represented companies in False Claims Act cases involving the payment of customs duties, including anti-dumping duties, and routinely work with companies to develop import compliance programs. Compliance programs not only help to prevent violations, but they also increase a company’s ability to mitigate exposure by investigating allegations and filing prior disclosures when warranted. Arent Fox will continue to follow the developments as the Trump administration clarifies its trade and enforcement policies.