Federal authorities have brought criminal and civil charges against Joseph Bailey, CEO of a children’s apparel company headquartered in Manhattan.
Geoffrey S. Berman, the U.S. Attorney for the Southern District of New York, indicted Bailey for participating in a years-long scheme to defraud U.S. Customs and Border Protection (CBP) by submitting invoices that allegedly falsely understated the true value of the goods his company imported into the U.S. The indictment claimed Bailey’s scheme resulted in the loss of more than $1 million in duty revenue.
At least one customs expert, Salvatore J. Stile II, president of customs brokerage Alba Wheels Up International, said such activity could be related to the tariff turmoil brought on by President Trump’s punitive actions against China.
“It could be that companies are looking for ways to avoid paying the extra tariffs by using what are essentially criminal actions,” Stile said.
The criminal case has been assigned to U.S. District Judge William H. Pauley III. In addition, a civil fraud lawsuit against Bailey and his companies, Stargate Apparel Inc. and Rivstar Apparel Inc., is assigned to U.S. District Judge J. Paul Oetken.
The civil complaint asserts that Bailey, Stargate and Rivstar violated the False Claims Act by submitting invoices to CBP that falsely understated the true value of the goods they imported into the U.S. The conduct in this matter was first brought to the attention of federal law enforcement by a whistleblower who filed a lawsuit under the False Claims Act.
“As alleged, Joseph Bailey defrauded the United States by several schemes with one theme–misrepresenting the value of imported goods to avoid payment of customs duties,” Berman said. “Bailey now faces criminal charges for his alleged fraud and the government’s civil suit seeks treble damages and penalties against Bailey and his companies.”
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Angel M. Melendez, Homeland Security Investigations Special Agent in Charge, said, “It is important to remember that customs fraud is not a victimless crime, as it affects legitimate trade and business.”
According to the allegations in the government’s indictment and civil complaint, from 2007 to 2015 Bailey and other employees of Stargate engaged in a scheme to fraudulently understate the value of imported goods. After purchasing much of its merchandise from a manufacturer located in China, Bailey and others at Stargate allegedly engaged in a “double-invoicing scheme” in which Stargate would receive two sets of invoices from the Chinese manufacturer for the same shipment of goods.
One invoice, referred to as the “pay by” invoice, was significantly higher and reflected the actual price paid by Stargate for the goods, the U.S. Attorney’s Office charged, with the second invoice reflected a significantly lower price for the goods and was presented to CBP. This allowed Stargate to pay a fraudulently lower amount of customs duties.
Around 2010, Bailey and other employees of Stargate began a new variation of the customs fraud scheme, involving invoices for “sample” goods, by which the Chinese manufacturer would send two separate sets of invoices for a given shipment that together reflected the true price of a particular shipment of clothing. The first invoice, typically entitled the “commercial invoice,” described the goods purchased and was submitted to CBP. The second invoice purportedly reflected amounts paid by Stargate for “sample” goods and was not submitted to CBP. Sample goods are not subject to customs duties.
However, the indictment charges that the “samples” invoice was not, in fact, for samples actually purchased, but rather was a means to make an additional payment to the manufacturer for actual goods purchased by Stargate without disclosing that payment to CBP. Typically, the “samples” invoices reflected a unit price for sample goods that was significantly greater than the unit price for the non-sample goods reflected on the invoice submitted to CBP. In addition, the “samples” invoice reflected the purchase of unusually large quantities of sample goods.
In addition to these allegations, the government’s civil fraud complaint also alleges that Bailey and the companies engaged in similar schemes involving additional manufacturers. Similar to the schemes involving the Chinese manufacturer, these schemes involved a second invoice, which purported to be for “samples,” “accessories,” “commissions” or “testing costs,” but in reality reflected an additional payment made by the defendants for the same goods described in first invoice, but that was not submitted to CBP. Through these schemes, the defendants undervalued the goods that entered into the U.S. by tens of millions of dollars, according to the U.S. Attorney’s Office.
Bailey is charged with one count of conspiracy to commit wire fraud, which carries a maximum sentence of 20 years in prison; one count of wire fraud, which carries a maximum sentence of 20 years in prison, and one count of falsely effecting the entry of goods into the U.S., which carries a maximum sentence of two years.
Bailey, Stargate and Rivstar are also charged with civil claims under the False Claims Act, through which the government may recover treble damages and civil penalties arising from his conduct.
Stile said companies should understand the extensive and sophisticated database and technology CBP has to track imports and documents. He said he wouldn’t be surprised that the agency is looking more at transshipments and high levels of goods arriving from Vietnam as a result of the trade war.
The criminal case is being handled by the Office’s Complex Frauds Unit, and Assistant U.S. Attorneys Dina McLeod and Dominika Tarczynska are in charge of the prosecution. The civil case is being handled by the Office’s Civil Frauds Unit, and Assistant U.S. Attorneys Dominika Tarczynska and Jean-David Barnea are in charge of the matter.