Monday, March 30, 2009

CAFC Decision in Double Invoicing Case

The Federal Circuit has issued a decision on the merits in United States v. Inn Foods, Inc.  There had been a previous decision on jurisdiction, which was followed by a trial at the Court of International Trade and then this appeal on the substance.

The initial issue is whether Inn Foods' invoicing practice amounts to fraud.  Inn Foods had been receiving an invoice from growers in Mexico that had a relatively low sales prices on it.  Subsequent to entry, Inn Foods created a second invoice at something more similar to market value, retaining the original invoice number, and paid at that higher amount.  

Superficially, this looks like a standard-issue double-invoicing scheme.  But, in the age of reconciliation, is it really more like a provisional pricing mechanism?  It might have been possible to make that argument had Inn Foods adjusted its entries accordingly.  It didn't and the loss of revenue was approximately $624,000.  Based on testimony and evidence indicating both knowledge and an intent to conceal the true material facts, the Federal Circuit affirmed the finding of fraud.

The more interesting issue has to do with entries made after Inn Foods started adding a disclaimer to the entries.  In essence, the disclaimer said "Value for for customs clearance only."  Inn Foods asked that liquidation of the entries be withheld until the importer was able to audit the transaction and provide the correct transaction value.

Rather than treat this as a remedial effort, the Court held that the use of the disclaimer was itself evidence of an intent to conceal the ongoing fraud.  There were a number of reasons for this.  First, the invoices were not merely erroneous, they continued to be prepared in a manner that was knowingly false.  Second, no "audit" was necessary as Inn Foods had both invoices and knew the amount that should have been declared.  Finally, after adding the disclaimer, Inn Foods never corrected its entries.

A fact that needs to be stated is that Inn Foods was not the importer of record for this merchandise.  That was a related party called SeaVeg.  Inn Foods and SeaVeg were operated by the same personnel at the same physical address.  The two companies were separate legal entities but were subsidiaries of the same parent company.  Because Inn Foods was considered to have aided or abetted the fraud, it was understood to be liable for the penalty.   But, an open question was whether it could also be required to pay to withheld duties.

The duty recovery statute is 19 USC 1592(d), which refers back to violations of 1592(a).  The Court held that 1592(d) has a broader purpose than simply recovering unpaid duties from the nominal importer.  Rather, it is intended to "restore" the funds to the U.S. from any source liable for the payment either as importer or via subsection (a) and an aider  or abettor.  Thus, Inn Foods, while not the importer, became liable for the duties as a result of its participation in the fraud.

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