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Customs fraud whistleblower cases receive a boost from appeals court

customs fraud whistleblower false claims act

A court ruled that a global pipe fittings manufacturer’s failure to self-report the customs duties it owed could make it liable under the current version of the False Claims Act. (Photo via Flickr)

A federal appeals court last week issued a ruling that will make it easier for whistleblowers to hold companies accountable for violations of customs laws.

The Third Circuit Court of Appeals held that companies that knowingly avoid paying the government import duties may be liable under the False Claims Act.

The “qui tam” whistleblower lawsuit alleged that Victaulic, a global pipe fittings manufacturer and distributor, imported millions of pounds of pipe fittings that did not indicate their country of origin as required by law. Importers that distribute unmarked or improperly marked goods must pay a 10 percent duty, known as a marking duty.

Customs officials are unable to inspect every import, and therefore rely on importers to self-report any duties they owe. Victaulic, the lawsuit alleges, did not self-report or pay those duties.

The False Claims Act contains a provision that makes it unlawful for companies and individuals to knowingly retain money they should have paid the government. This is often referred to as a “reverse false claim.”

A trial court ruled that Victaulic’s failure to pay marking duties could not be considered a reverse false claim. But the Third Circuit overturned that decision, finding that the trial court had inappropriately applied an old version of the False Claims Act and outdated rulings to reach this result.

Prior to 2009, some courts had held that a defendant had to make an express false statement to the government to be liable for a reverse false claim. Congress rejected those earlier court rulings and amended the False Claims Act in 2009 by passing the Fraud Enforcement and Recovery Act of 2009 (FERA). Under the amended version, a defendant who knowingly avoids or decreases an obligation owed to the government – such as failing to pay required customs duties – violates the False Claims Act.

Because the whistleblower lawsuit alleged that Victaulic hadn’t submitted a false statement to the government, but had instead lied by omission, the trial court found it had not violated the False Claims Act.

That finding was clearly wrong under FERA. Victaulic had an obligation to report to Customs officials if its good were unmarked. Failure to disclose those facts to the government could violate the False Claims Act. The case will now go back to the trial court.

The ruling is United States ex rel. Customs Fraud Investigations, LLC. v. Victaulic Co., No. 15-2169, 2016 WL 5799660 (3d Cir. Oct. 5, 2016).

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