The Whistleblower & Anti-Fraud Blog
The whistleblower, a business competitor of the allegedly dishonest importer, received a $286,000 whistleblower reward.
Industrial tools firm King Kong Tools has paid $1.9 million to settle a whistleblower lawsuit alleging it transshipped Chinese merchandise through Germany—fraudulently redesignating them as German origin—to circumvent applicable customs duties.
Whistleblower China Pacificarbide—which competes with King Kong in the industrial tools market—filed the lawsuit under the False Claims Act. It will receive $286,000 or approximately 15% of the recovery as a whistleblower reward, in addition to attorney’s fees, according to the U.S. Department of Justice, which intervened in the case.
According to the Justice Department, King Kong held out its industrial tools as “made in Germany” when in fact they were fully assembled in China. It allegedly simply shipped those products from China to Germany before importing them into the U.S., falsely declaring Germany rather than China as the country of origin or COO.
This, despite that the products did not undergo any processing in Germany—much less the “substantial transformation” required to change their COO from China.
As a result, King Kong allegedly knowingly evaded payment of applicable Section 301 tariffs on the imports of up to 25%, the Justice Department stated.
The settlement is notable in that it exemplifies two emerging themes in customs-fraud whistleblower litigation—first, the use of transshipment as pretext for the misdeclaration of goods’ COO; and, second, a business rival stepping forward as the whistleblower.
Transshipment as a pretext for misdeclaring imports’ country-of-origin
The use of transshipment as a pretext for misdeclaring the COO of imported merchandise—and thereby evading applicable tariffs—is an increasingly prevalent type of customs fraud.
A product’s COO is the country in which it was manufactured, produced, or grown. If more than one country is involved in the production process, the COO is the last country in which the product underwent “substantial transformation” as to its name, character, or use. Importers are required to declare the COO on customs entry documents.
Goods may be shipped to third countries prior to importation for legitimate reasons—as part of the manufacturing process, for example, or simply to aggregate cargo on a larger vessel to save on freight costs.
Doing so as a pretext for changing the COO to the third country and thereby circumventing customs duties, however, is fraudulent.
Importers engaging in this form of customs fraud falsely claim their merchandise underwent “substantial transformation” in the third country, when, in fact, only minimal processing, or only repackaging or relabeling—or no changes at all—occurred.
Transshipment schemes like this are thought to be rampant, particularly with respect to Chinese products like those imported by King Kong which are subject to Section 301 tariffs of up to 25%.
Those tariffs cover more than $300 billion in Chinese merchandise—including hundreds of Harmonized Tariff Schedule or HTS categories in technology, energy, and other sectors—and importers are desperate to avoid paying them.
While King Kong misdeclared the COO as Germany, the most common “hubs” for transshipped and fraudulently misdeclared Chinese-made goods are Vietnam, Thailand, Malaysia, and Taiwan.
Business rivals as customs-fraud whistleblowers
Customs-fraud whistleblowers tend to be employees of the allegedly dishonest importer—mostly individuals working in logistics, compliance, sourcing, procurement, or accounting.
Nevertheless, the ranks of customs-fraud whistleblowers are increasingly populated by business rivals.
Customs fraud is essentially a form of unfair competition. Dishonest importers generally used the money they saved cheating on duties to undersell and steal market share from their law-abiding competitors, who are as a result highly motivated to blow the whistle on them to re-establish a level playing field.
Significantly, injured competitors are frequently able to detect customs fraud given their familiarity with supply chains, production processes and costs, and product pricing. They may also be able to obtain evidence of the fraud from other industry players like manufacturers, customers, and trade consultants.
The King Kong whistleblower is a prime example.
It detected King Kong’s alleged fraud when it visited the factory of one of its Chinese suppliers and observed it manufacturing products bearing King Kong’s logo, packaged in cartons labeled “Highest Quality from Germany.”
It also saw King Kong promoting those products as German-made and selling them at prices 25% below what it could its imports from China. Given labor costs were five times higher in Germany than China, it realized it was not realistically possible the products in question were actually made in Germany. The prices would have to have been double, were that the case, it allegedly computed.
Notably, the King Kong whistleblower relied on publicly available information to bolster its claims.
That information included facts disclosed in a patent-infringement lawsuit filed by another competitor against King Kong; shipping-manifest and bill-of-lading data on King Kong’s shipments, obtained from the global trade data service Panjiva; and satellite imagery of the plant in Germany where the products were supposedly made.
Customs-fraud whistleblowers are frequently able to corroborate their allegations using this type of public-source evidence.
Customs-fraud whistleblowing under the False Claims Act
Customs fraud violates the False Claims Act, pursuant to which parties that fraudulently overcharge or underpay the U.S. government or its agencies may be held liable for three times (trebled) damages, plus penalties.
The False Claims Act’s qui tam or whistleblower provisions entitle private parties known as whistleblowers to file lawsuits on the government’s behalf and receive 15-30% of the recovery as a reward.
Whistleblowers need not be U.S. citizens or even reside in the U.S. and are frequently from other countries.
Fighting customs fraud is a high priority of the Justice Department, given duties and tariffs are second only to taxes as sources of government revenue.
Contact a Whistleblower Attorney
If you know of an importer engaged in customs fraud, it is imperative to speak with an experienced customs-fraud whistleblower attorney about your rights under the False Claims Act. To be eligible for a False Claims Act whistleblower reward, you must file a qui tam lawsuit and be represented by legal counsel.
Reach out to customs-fraud whistleblower lawyer Mark A. Strauss for a free and confidential consultation. All communications with Mr. Strauss are protected by attorney-client privilege.