U.S. Attorney Announces $1.3 Million Settlement Of Civil Fraud Lawsuit Against Apparel Importer

Category: General

Country: United States

Settlement Of Civil Fraud Lawsuit For Underreporting Value Of Goods To Avoid Paying Customs Duties

BY DOJ PRESS
FEBRUARY 1, 2023 5 MINS READ

Damian Williams, the United States Attorney for the Southern District of New York, Ivan J. Arvelo, the Special Agent-in-Charge of the New York Field Office of Homeland Security Investigations (“HSI”), AnnMarie R. Highsmith, Executive Assistant Commissioner for U.S. Customs and Border Protection’s (“CBP”) Office of Trade, and Francis Russo, Director of CBP Field Operations New York, announced that the United States has entered into a settlement agreement to resolve a civil fraud lawsuit against HIGH LIFE LLC (“HIGH LIFE”), an apparel design and import company headquartered in Manhattan, for underreporting to CBP the value of apparel imported into the United States. The settlement resolves claims that HIGH LIFE underreported the value of 67 apparel shipments in order to avoid paying the full customs duties owed. Under the settlement agreement approved by U.S. District Judge Victor Marrero, HIGH LIFE has agreed to pay $1.3 million to the United States and has made admissions regarding certain conduct alleged in the Government’s Complaint. 

U.S. Attorney Damian Williams said: “Rather than comply with the law, High Life chose to underreport the value of apparel imported into this country to avoid paying legally mandated customs duties. This Office will continue to hold companies accountable when they make misrepresentations to CBP to enhance their own bottom line.”

HSI Special Agent-in-Charge Ivan J. Arvelo said: “This settlement should serve as a warning to companies that attempt to bolster their bottom line by cheating and defrauding the United States. Individuals or organizations that knowingly and willfully use tactics such as undervaluing or misclassifying goods to avoid paying lawful customs charges are violating the laws of international commerce and HSI will not stand by idly. Our special agents will work diligently with our law enforcement partners to protect legitimate businesses by apprehending those that exploit our trade systems and rob our government of vital revenues.”

CBP Executive Assistant Commissioner AnnMarie R. Highsmith said: “Importers need to know that manipulating the values they report to CBP can come with serious consequences. This case is a great example of the collaborative trade enforcement efforts between teams at CBP, who identified the original pattern of misconduct, and the U.S. Attorney’s Office.” 

CBP Director of Field Operations Francis Russo said: “U.S. Customs and Border Protection has a cadre of dedicated professionals – import specialists and regulatory auditors – with expertise in the financial details surrounding imports, including terms of sale and their effect on the dutiable value of goods when they arrive in the United States. Our trade experts found anomalies in High Life’s value calculations based on the terms of sale to its foreign suppliers and paved the way for the Justice Department and Homeland Security Investigations to move this case forward and bring it to a successful conclusion. Their knowledge and collaboration with our law enforcement partners stopped High Life’s efforts to defraud the United States of hundreds of thousands of dollars in revenue.”           

As alleged in the Complaint filed in Manhattan federal court:
HIGH LIFE purchases apparel from foreign vendors (the “Vendors”), who in turn contract with overseas factories to manufacture the apparel.  In December 2015, after CBP had detained numerous HIGH LIFE shipments due to concerns that the declared values were fraudulent, HIGH LIFE decided to transition its business model. Instead of purchasing the apparel on Landed Duty Paid (“LDP”) terms — meaning that HIGH LIFE paid the Vendors a price inclusive of all costs associated with importing the merchandise — HIGH LIFE began purchasing the merchandise on Free on Board (“FOB”) terms. Under the new FOB model, HIGH LIFE assumed importation responsibilities, including the responsibility to declare the value of the imported goods and pay the associated customs duties.

As the importer of record, HIGH LIFE was permitted, if certain criteria were met, to declare the value of the imported goods based on the price the Vendors paid the factories (“First Sale Price”), instead of the price HIGH LIFE paid the Vendors. However, HIGH LIFE could only declare the First Sale Price as the value of the orders if the goods were the subject of a bona fide sale between the Vendors and the factories, the goods were clearly destined for export to the United States, and the factories and the Vendors dealt with each other at arm’s length, in the absence of any non-market influences that affected the legitimacy of the sales price.

From January 21, 2016, through June 1, 2016 (the “Relevant Time Period”), HIGH LIFE materially underreported the value of previously ordered apparel in 67 imported shipments. In transitioning from LDP to FOB terms, HIGH LIFE developed a formula that worked backwards from a previously negotiated LDP price to calculate what HIGH LIFE wanted the FOB price and First Sale Price to be and then used that First Sale Price to declare the values of 67 shipments. The prices used by HIGH LIFE for customs reporting purposes were determined after the orders for the apparel had been placed, after the pricing structure had been negotiated, and after the apparel was in production. It was improper to declare the imported merchandise using these values because the prices were not based on a bona fide sale between the Vendors and the overseas factories and were not the result of arm’s length negotiations between those Vendors and the factories in the absence of any non-market influences. Indeed, HIGH LIFE instructed the Vendors on how to calculate and report the prices that HIGH LIFE ultimately used to declare the values to CBP.

As part of the settlement, HIGH LIFE admits, acknowledges, and accepts responsibility for the following conduct:
-Once HIGH LIFE transitioned to an FOB model, it assumed importation responsibilities for the shipments. As the importer of record, HIGH LIFE could then, if certain criteria were met, declare the value of the imported goods based on the price the Vendors paid the factories, instead of the price HIGH LIFE paid the Vendors.  However, HIGH LIFE could only declare the First Sale Price as the value of the orders if the goods were the subject of a bona fide sale between the Vendors and the factories, clearly destined for export to the United States, and the factories and the Vendors dealt with each other at arm’s length, in the absence of any non-market influences that affected the legitimacy of the sales price.
-In transitioning from LDP to FOB terms, HIGH LIFE developed a formula that worked backwards from a previously negotiated LDP price to calculate what HIGH LIFE wanted the FOB price and First Sale Price to be and then used that First Sale Price to declare the values of 67 shipments made during the Relevant Time Period (the “Subject Orders”). HIGH LIFE requested the Vendors to delay shipping merchandise while the First Sale Prices for the Subject Orders were finalized.  Indeed, on December 24, 2015, HIGH LIFE’s Production Manager asked the Vendors to “hold as many shipments as possible until we finalize the First Sale.”
-Beginning in late December 2015 and continuing through January 2016, HIGH LIFE instructed the Vendors to apply HIGH LIFE’s formula to calculate the First Sale Price that HIGH LIFE would report to CBP for purposes of calculating the duties owed by HIGH LIFE.
-After the Vendors emailed spreadsheets to HIGH LIFE that purported to reflect the First Sale Prices for the Subject Orders, a member of HIGH LIFE’s production team sent an email to the Vendors directing them to “rework your FOB and [First Sale Price] based on the Highlife Estimate freight.” Following their receipt of these emails, the Vendors replied to HIGH LIFE within 24 hours with revised First Sale Prices for the merchandise included in the Subject Orders.
-When importing the Subject Orders, HIGH LIFE ultimately declared to CBP that the duties owed should be calculated based on the First Sale Prices the Vendors reported to HIGH LIFE.
-If HIGH LIFE had paid duties to CBP based on the prices HIGH LIFE itself paid for the merchandise included in the Subject Orders, instead of calculating the duties based on the purported First Sale Prices reported by the Vendors pursuant to HIGH LIFE’s instructions, HIGH LIFE would have paid significantly higher customs duties for the Subject Orders.

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Mr. Williams praised the outstanding investigative work of the Department of Homeland Security, HSI, and CBP.

This case is being handled by the Office’s Civil Frauds Unit. Assistant U.S. Attorneys Jessica Jean Hu and Anthony J. Sun are in charge of the case.

Courtesy: https://www.shorenewsnetwork.com/2023/02/01/u-s-attorney-announces-1-3-million-settlement-of-civil-fraud-lawsuit-against-apparel-importer-for-underreporting-value-of-goods-to-avoid-paying-customs-duties/