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Whistleblower lawsuit is a warning to wholesalers and retailers

Even if you are not directly responsible for breaking federal law in a scheme to avoid import duties, you might find yourself under the microscope of prosecutors. That is one of the takeaways from the recently announced settlement of a whistleblower lawsuit against a clothing wholesaler.

What makes the settlement noteworthy is that the wholesaler was not responsible for filing customs documents or paying import duties. The clothing importer also had those obligations. Yet a lawsuit filed under the False Claims Act against the wholesaler recently resulted in a $1 million settlement in what could well be a harbinger of things to come.

The wholesaler in this case, called Notations, was only indirectly involved in the importer's scheme to avoid import duties. In fact, the case began as a whistleblower action against the importer. Investigators on that case discovered that Notations had been its own importer for years prior to doing business with the importer.

Prosecutors learned that Notations was deeply familiar with duties on imports. Prosecutors said it also became obvious that Notations was simply looking away from the fraud perpetrated by its new business partner, knowing that illegal conduct was going on, but declining to report the duties-avoidance scheme.

Prosecutors also alleged that Notations helped perpetrate the fraud by creating a phony audit trail with irregular purchase orders that hid the importer's false representations to government officials.

In return, Notations got below-market prices on garments.

In the settlement of the whistleblower lawsuit, Notations conceded that it was responsible for not taking "action in response to multiple warning signs” that the importer was breaking federal law.

The case is a warning shot across the bow of retailers, wholesalers and others who hope to skirt responsibility for customs compliance. The US Attorney in the Notations case said “companies purchasing imported goods cannot turn a blind eye to fraud committed by their business partners."

If you know of fraud against the federal government, speak with a law firm dedicated to protecting you and American taxpayers.

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