Sections 301 and 232 Tariffs Increase Trade-Related False Claims Risk, Sidley Says
Sections 301 and 232 tariffs have created greater exposure to trade-related False Claims Act allegations, Sidley Austin said in a May 10 analysis. Since President Donald Trump drastically increased CBP's workload via the tariffs, greater incentives now exist to skirt the tariffs through fraudulent activity such as transshipment or inappropriate country of origin analysis for imports. This incentive for fraudulent activity mirrors the ramped-up incentives for the FCA allegations by those seeking to obtain a financial award for calling out the illegal behavior, the firm said.
Sign up for a free preview to unlock the rest of this article
If your job depends on informed compliance, you need International Trade Today. Delivered every business day and available any time online, only International Trade Today helps you stay current on the increasingly complex international trade regulatory environment.
In part three of a series on emerging FCA risk in trade, (see 2104210028 and 2104290068), Sidley discussed the sections 301 and 232 tariffs' roles in the increased trade-related FCA risk and steps companies can take to mitigate this risk. The primary FCA risk is in the form of the "substantial transformation" test, Sidley said. When determining if the tariffs are applicable to a given product, CBP determines the country of origin of that good, which is a complex process typically done through a substantial transformation analysis. This test looks at whether a good has undergone a significant change in another country, in which case the origin would change.
Sidley recommended engaging in proper supply chain due diligence to ensure the proper country of origin is reported. Sidley's analysis mirrored CBP's own recommendations for establishing country of origin that point to implementing an internal control system with five components: control environment, risk assessment, control activities, information and communication, and monitoring. Among these, Sidley recommends avoiding reliance on suppliers to determine country of origin and conducting diligence on the supplier to "verify its existence, production capacity and location," while inquiring about how the supplier analyzes the country of origin and what rules are applicable.
Further, CBP allows for post-entry corrections to be made to entry forms while the FCA does not. “At least one U.S. district court has held that a prior disclosure of customs violations made to CBP pursuant to 19 U.S.C. § 1592 does not bar an FCA action concerning the same allegations or transactions,” Sidley said. Due to this burden, it is essential for companies to eliminate potential customs violations that could be the source of an FCA claim.