The U.S. Department of Justice (DOJ) recently announced a settlement of more than $11 million with Harman International Industries, Inc. (Harman), a subsidiary of Samsung Electronics, arising out of Harman’s alleged evasion of duties owed under an Antidumping/Countervailing Duty order. The settlement resolves a lawsuit that was originally filed by a whistleblower under the qui tam provisions of the False Claims Act. That whistleblower, who worked in a compliance function within Harman, will receive an award of more than $2.3 million.
Harman is a U.S.-based subsidiary of Samsung, and assembles electronic devices. A common component of such devices is known as a “heat sink,” which is part of systems to keep electronics from overheating. Heat sinks are typically made of extruded aluminum.
In 2011, the Department of Commerce issued AD/CVD orders covering products of China made of extruded aluminum. Those AD/CVD orders had an exclusion for “finished heat sinks,” a subcategory of heat sink subject to a specific definition and testing requirements.
Harman was a frequent importer of large quantities of Chinese-made heat sinks.
According to his complaint, the whistleblower, Jesrel Mitre, was a long-time employee of Harman, whose job title was “U.S. Customs Compliance & Logistics Cost Specialist.” In 2018, he began working on Harman’s importation of heat sinks. He made inquiries with engineers and others within the company, and determined that Harman’s imported heat sinks did not meet the requirements of the “finished heat sink” exclusion, and so were subject to the AD/CVD orders. Those orders imposed duty rates of between 33-86%.
But, according to the complaint, Harman had not been paying those duties. And Harman had been misinforming Customs & Border Protection (CBP) about the nature of the products it was importing. When products are imported into the United States, the importer must file with CBP a Form 7501 Entry Summary, which provides information necessary for CBP to calculate the amount of duties owed. One of the fields in the Entry Summary is for “Entry Type.” In that field, Harman should have been entering “03,” meaning that the imports are subject to an AD/CVD order. But instead, Harman had been entering “01,” meaning “Free and Dutiable,” a category that does not include any product subject to an AD/CVD order.
Mitre did what he was supposed to do. The complaint alleges that he informed his supervisor about the issue, and sought assistance from an outside trade advisor in confirming his analysis and doing calculations of how much Harman owed. His supervisor asked him to draft a “prior disclosure” – a document by which an importer can inform CBP about a failure to pay duties on past imports. Mitre prepared that draft prior disclosure, and provided it to his supervisor in December of 2018. However, Harman never sent the prior disclosure to CBP and, in fact, continued to import the heat sinks without paying AD/CVD duties. Mitre updated his calculations, and sent that update to his supervisor in March of 2020. The complaint alleges that, again, Harman took no action to inform CBP of the problem.
Finally, in September of 2020 – almost two years after he had brought up this issue internally at Harman, and waited for Harman to take action—Mitre filed his qui tam lawsuit in federal court in Michigan. A qui tam lawsuit is brought by a private citizen under the False Claims Act, alleging that a company has defrauded the government in some way. The qui tam provision of the False Claims Act covers evasion of duties and tariffs, like the duties owed under the aluminum extrusion AD/CVD orders. When a whistleblower files a qui tam case, they can receive an award from the government of between 15-30% of the amount recovered by the government as a result of the case. The technical term for a whistleblower who brings a qui tam case is “relator.” Relators are often company insiders like Mitre, but in customs fraud cases are also often competing companies.
The qui tam case against Harman case remained “under seal”—meaning it was a secret filing that was not available to the public—for more than five years, while DOJ and CBP investigated Mitre’s allegations, and then negotiated the settlement with Harman. DOJ then also agreed to pay Mitre an award (sometimes called a “relator’s share”) of 19.5% of the settlement amount.
This case and settlement illustrate a number of important points about customs fraud qui tam cases. First, the nature of Harman’s evasion involved analysis of the specific imported heat sinks to determine whether or not they fell within the “finished heat sink” exclusion in the AD/CVD order. The “scopes” of AD/CVD orders, and the exclusions from those scopes, are often very technical. And AD/CVD order scope is something separate and apart from classification under the Harmonized Tariff Schedule of the United States (the HTSUS). This case did not include an allegation that Harman was using the wrong HTSUS code. Rather, the alleged “falsity” on the Form 7501 Entry Summaries was in the “Entry Type” field, which hinged on proper application of the AD/CVD order “scope” provision. Accordingly, this demonstrates that determining proper HTSUS classification is not the end of the line for declaring products entering the United States; rather, an importer must also separately determine whether the products are subject to AD/CVD orders.
Second, if the allegations of the complaint are to be believed, this case was a massive compliance failure by a major company. The company had internal customs compliance professionals, and yet had been improperly declaring its heat sinks for many years. Then, when one of those compliance professionals discovered the error and appropriately raised it up the chain at the company, the company still failed to take any action for almost two full years before the qui tam case was filed. This shows that even very large companies with internal compliance systems sometimes do not actually employ those compliance systems correctly. The existence of a compliance department is not evidence of actual compliance.
Third, this case demonstrates the oftentimes slow pace of customs fraud qui tam cases. This one took more than five years from filing to settlement. On average, such cases take about three years from filing to settlement. So, this one took an above-average length of time to resolve. Either way, however, qui tam cases take significant time to get from filing to resolution. In the end, however, the whistleblower was handsomely rewarded for helping the government collect more than $11 million.
