British apparel retailer Pure Collection and its CEO Samantha Harrison agreed to pay more than $900,000 to settle a whistleblower lawsuit alleging that the clothing seller purposefully evaded U.S. customs duties from 2010 to 2017.
Apparel companies and suppliers have found numerous ways to skirt U.S. laws and regulations, from undervaluing goods entering the country to mislabeling the country of origin.
“In fashion, there are many ways to skin a cat” when it comes to dodgy customs practices, said Mary Inman, a partner at Constantine Cannon, the law firm that served as co-counsel for the case. Phillips & Cohen served as lead counsel and Bernstein, Shur, Sawyer & Nelson P.A. also was co-counsel.
Since 2008, successful whistleblower cases filed under the False Claims Act (FCA) against fashion retailers, wholesalers and manufacturers have recovered $34.25 million.
The original Pure Collection complaint was brought by Andrew Patrick, a British citizen who worked for the retailer from 2010 to 2014. Pure Collection manipulated shipments to U.S. customers, splitting a single order into multiple smaller shipments so as to undervalue the total order amount. At the time, Customs and Border Protection (CBP) rules exempted duties on orders whose value did not exceed $200, a limit it subsequently raised to $800. Pure Collection went so far as to advertise on its e-commerce site that it actively helped customers avoid paying duties and when all else failed, even reimbursed customers for any duties they wound up shouldering, according to the suit.
Patrick approached Constantine Cannon after three separate unsuccessful attempts to alert U.S. authorities via CBP, the U.S. Embassy and the IRS. In 2016 he filed his whistleblower suit in federal court in Maine.
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Pure Collection and its CEO are on the hook for $908,100.
[Read more on customs fraud: US Cracks Down on Apparel Companies for Falsifying Import Invoices]
Pure Collection had set its sights on breaking into the lucrative catalogue in the U.S., competing head-to-head with the likes of Land’s End and L. L. Bean, Inman explained. Skirting customs obligations created an uneven playing field, offering the British brand a competitive advantage and increased profits.
“Not only is the federal government not getting the money it’s owed, but policy is being undermined that’s designed to give a leg up to American manufacturers,” added Inman. Companies should expect the Trump Administration to be vigilant in enforcing the Buy American Act, which requires the U.S. government to prefer American-made products in its purchases, she said.
The FCA, a Civil War-era piece of legislation also called the “Lincoln Law,” was essential to prosecuting the Pure Collection case, and has been key to bringing a number of suits in recent years. There’s a growing awareness, said Inman, of whistleblower provisions noting that suits can be brought against U.S. companies by non-citizens. Eighty percent of all FCA cases result from whistleblower participation, according to Taxpayers Against Fraud. What’s more, the FCA is among the biggest revenue generators—as well as enforcement tools—for the Department of Justice, which raked in $3.4 billion from such whistleblower cases in fiscal 2017. Whistleblowers receive a share from the funds recovered in these cases.
The 2009 passage of the Fraud Enforcement Recovery Act (FERA) also has contributed to the increase in filings, according to a Wall Street Journal article. In years prior, FCA cases focused on entities that avoided paying a debt owed; FERA opened the door to go after companies that knowingly evaded paying applicable fees to the government.
Though it doesn’t involve an apparel company, the industry should be paying close attention to United States ex. Rel. Customs Fraud Investigations LLC v. Victaulic Co., Inman said, which could have implications for import-reliant fashion businesses. Victaulic left out the country of origin on imported pipe fittings and also failed to notify the government that the goods were not labeled, thus avoiding the 10 percent customs duties it owed. The case is being reconsidered in a district court.
In October, Pennsylvania garment wholesaler Notations Inc. reached a $1-million settlement in an FCA case that pointed to shady dealings by its suppliers, indicating that the U.S. government is scrutinizing all steps in a company’s supply chain. According to the suit, Notations ignored signs that importers Yingshun Garments and Import Global Designs Inc. were engaging in fraudulent practices. The importers issued double invoices that included prices for imported garments that were discounted by 75 percent or greater in order to get around duties requirements.
“As global supply chains grow more complex, it is important for American businesses to know their suppliers and be confident of their integrity,” said CBP acting director Leon Hayward.