Recently the former CEO of Stargate Apparel, Inc. and Rivstar Apparel, Inc., ran afoul of U.S. Customs and Border Protection (“CBP”) for Customs fraud due to the under-valuation of apparel imported into the United States from China. A former employee turned whistleblower filed a ‘qui tami’ whistleblower complaint under the False Claims Act. The former employee, who worked through a whistleblower attorney and who alerted the U.S. government through the U.S. Southern District of New York, provided enough documentation that led to the investigation and a civil settlement of $6 million dollars.
Allegedly the former CEO of Stargate Apparel, Inc. and Rivstar Apparel, Inc. under-reported the valuation of clothing imported from at least two suppliers in China in a scheme that spread over a ten-year period from 2004-2015. The Department of Treasury documents show that there were ‘two types of double invoicing schemes to fraudulently under value and underpay customs duties for the clothing being imported by the companies.’
At the direction of the former CEO, Stargate Apparel Inc., would order clothing through its primary supplier and their affiliates, who were all located in China. Beginning in 2007 and continuing through 2010, the Chinese supplier provided Stargate with two invoices for each shipment of goods.
- The first invoice was the ‘pay by invoice,’ or commercial invoice, provided by the overseas supplier to Stargate for the actual cost of the shipment. In turn, Stargate used this invoice to pay the overseas supplier.
- The second invoice provided to Stargate, at a much lower value, was the document provided to its customs broker to clear customs and make payment of the required duties and taxes based on the false valuation of the shipment.
From 2010 through 2015 a second scheme was developed by the CEO and Stargate to continue with the false reporting of valuation on the imported clothing. Again, two different invoices were provided to Stargate by its overseas supplier, but in a twist, in combination, the invoices would provide investigators with the total amount paid by the company to the supplier.
- The ‘commercial invoice’ prepared by the suppliers indicated the description of the items being purchased and a reduced value for the shipment. Stargate used the lower valued invoice to make payment to the overseas supplier; and used this same invoice to present to their customs broker for the customs entry and for the basis for their payment of duties and taxes to Customs at the time of import.
- The second invoice provided by their suppliers showed an amount paid by Stargate for ‘sample goods,’ ‘accessories charges,’ ‘commissions,’ or ‘testing charges,’ and was never presented to Customs. Instead, Stargate used this ‘second’ invoice to make another payment to the Chinese suppliers for the items purchased. Between the two invoices, the overseas suppliers received full payment for the items ordered.
The former CEO utilized his second company, Rivstar Apparel Inc., in much the same way as he had Stargate. Rivstar would instruct its Chinese suppliers to provide two separate invoices for each shipment of goods purchased from them.
- The first invoice did not reflect the actual ‘price paid and payable’ amount. Instead, the valuation was at a much-reduced cost. This lower valued invoice was used to make payment to the supplier and provided to the customs broker for the import entry and payment of duties and taxes.
- The second invoice stated, ‘testing cost’ and, as before, was never presented to Customs. The investigation found there was not actual ‘testing’ of any of the items Rivstar purchased. Rather, this invoice again was an additional payment to the supplier. In combination the two invoices represented the true value of the shipment and what should have been reported at the time of entry.
At the end of the day, the two companies and its CEO grossly underpaid duties to avoid paying millions of dollars of duties for the goods they imported into the U.S. In the final settlement the former CEO was directed by the courts to pay $3.2 million dollars to the United States. Stargate and Rivstar, and the employee stock ownership plan, which currently owns the two companies, will pay $2.8 million dollars to the United States to settle the civil complaint. In addition to the monetary settlement, there is a directive that both companies must ‘develop and implement compliance policies that will include measures to ensure they pay on the full, actual value of all imports and otherwise comply with applicable laws and regulations.’
Separately from the above civil action, the former CEO will forfeit $1,661,617 dollars and serve six (6) months in federal prison to settle the criminal charges brought against him by the government for his culpability in the fraud schemes.
We will never know what prompted the former employee to approach the federal government with his evidence but through the information provided, the government was able recoup much of the lost duties. For his help during the investigation, the whistleblower will receive $1.2 million dollars or 20% of the overall settlement.
The Cost of Non-Compliance
Just like trying to avoid paying your personal income taxes, participating in schemes such as those described above will eventually cost importers more than they bargained for both in repayment of duties and harm to a company’s reputation.
Importers must be mindful of what Customs will be looking for when they believe there is the potential for Customs Fraud. Below are several areas to review to ensure invoices presented to Customs are correct:
- “Price paid or Payable” – making sure you are using a valuation that is accepted by Customs.
- Transshipments – trying to obfuscate the actual country of origin by routing the shipment through a third country.
- Misclassification – falsely describing merchandise to reduce the tariffs owed.
- Undervaluation – falsely declaring a shipment’s value.
- Structuring – splitting up a shipment into multiple shipments to reach a lower de minimus value to avoid payment of duties.
It is also strongly recommended that importers perform regular assessments of their imports which includes ensuring that the value declared to Customs is indeed the value being paid to the supplier. If you need someone to review your valuation or a conduct an import assessment, contact ESI for a free consultation.
Beverly Demma is a Sr. Consultant for Export Solutions -- a full-service consulting firm specializing in U.S. import and export regulations.