When federal prosecutors hit Byer California Inc. with a $325,000 settlement in March over customs duties, it wasn’t just about extracting a sum. The Justice Department also got the San Francisco-based apparel wholesaler to admit it had maintained its relationship with an importer whose owner tried to bribe Byer’s own compliance manager with a wad of cash.
The episode shows how prosecutors target companies’ internal controls and oversight — or compliance, in corporate parlance — when they investigate fraud. Last week, the DOJ issued new compliance guidelines that may help companies navigate this enforcement.
Prosecutors will assess how well companies design and implement their compliance programs and whether it actually works, according to the guidelines the agency unveiled on April 30. For apparel and textile firms, better compliance programs can not only combat some fraud prevalent in the industry, but also help them avoid fines and charges during government investigations, said white collar attorneys.
“[Prosecutors] are going to look at what companies are doing in terms of due diligence on their business partners, and quality control on invoices coming in,” said Jaimie Nawaday, a partner at Kelley Drye & Warren LLP, and a former assistant U.S. Attorney in the Southern District of New York. “Or if they’re turning a blind eye because they’re benefiting from importing at low prices.”
In the past decade, the DOJ has increasingly pursued civil and criminal penalties against companies for potential violations in their international dealings, no longer content with mere administrative oversight by U.S. Customs and Border Protection or other agencies, former prosecutors said.
One tool the agency has used lately against the garment industry is the False Claims Act, which penalizes companies that file false documents to the government. Last year, the Justice Department extracted $2.8 billion in civil fines and settlements in FCA cases alone, though much of it was from the health care industry. But the department’s fraud recovery numbers show its appetite for such investigations in recent years — in 2014, its most productive yet, it won almost $5.7 billion in civil settlements and penalties in FCA cases.
Apparel and textile companies in particular have been hit with penalties in recent years for trying to avoid customs duties. In January 2018, textile importer American Dawn agreed to pay more than $2.3 million for allegedly misclassifying goods to pay lower tariffs. The previous year, Pennsylvania-based garment wholesaler Notations Inc. agreed to pay $1 million and execute a compliance program as part of its settlement with federal prosecutors in New York, who said it “repeatedly ignored warning signs” that an importer it was working with was trying to underpay customs duties.
Effective compliance programs would catch such transgressions early, said attorneys.
“If you find yourself on the wrong side of an FCA matter, it will commence with the government serving an administrative subpoena on you, asking for information on the shipment,” said Rick Van Arnam, a partner at international trade law firm Barnes Richardson & Colburn LLP. “And at that point, you’re put in a very defensive posture.”
Prosecutors look especially closely at companies’ compliance programs when they’re investigating claims under civil fraud statutes, including the False Claims Act, because the goal there is to demonstrate a company’s negligence. And when companies relegate compliance to a toothless back office function, that can help make that case, said former prosecutors.
“In a civil case, prosecutors need to show recklessness,” said Nawaday. “You could probably build a civil fraud case if you found a completely defunct compliance program.”
It also matters in criminal investigations, where prosecutors usually look at how companies implement their codes of conduct, whether their internal audits and investigations have some level of independence from their leadership, and whether managers and directors support that kind of transparency and reporting. The goal for companies is to show that they’re not treating their compliance efforts as a mere bureaucratic formality, said white collar attorneys.
“[As prosecutors], we would zero in very specifically on companies’ codes of conduct and training, because it would demonstrate how bought in the management was,” said Steve Cazares, a partner at Davis Wright Tremaine LLP, and recent deputy chief of the major frauds section in the U.S. Attorney’s office in Los Angeles.
“Does the management actually support and encourage the compliance program and the codes of conduct and training, or are they just papering the file?” he said.