April 22, 2020
A company that imported wooden bedroom furniture from China agreed to pay a $5.2 Million customs fraud settlement. In addition, the United States criminally charged both owners for the same scheme. The government learned of the customs fraud only after a competitor filed a False Claims Act complaint.
Florida-based Blue Furniture Solutions imported wooden bedframes, dressers, and nightstands from China.
Most of Blue Furniture’s customers were dormitory complexes in the United States. Blue Furniture rapidly expanded its market share with very low prices and claims that its wooden furniture was “exactly like Made-in-USA products.”
Wooden bedroom furniture made in China is subject to customs fees and anti-dumping duties. Those fees and duties exist to protect domestic manufacturers from deceptive business practices by foreign manufacturers. They also protect domestic companies from foreign governments which unfairly subsidize their manufacturers.
To avoid paying the fees and duties, Blue Furniture Solutions and its owners Yingqing “Jeff” Zeng and Alex Cheng lied to U.S. Customs about the merchandise they imported from China. The defendants falsely told U.S. Customs the furniture was made of steel, not wood. The false statements saved Blue Furniture millions in customs fees and duties. As a result, of Blue Furniture’s customs fraud, it could unfairly underbid its competitors.
One of those competitors was Indiana-based University Loft Company. University Loft sold wooden bedroom furniture to the student housing industry for more than 25 years. It employed nearly two hundred workers at factories in Indiana and Tennessee.
As the company put it “University Loft can compete head-to-head with any other company in this industry – as long as there is a level playing field and its competitors play by the rules.”
After learning that it had lost yet another bid to Blue Furniture Solutions, the people at University Loft did some digging. They realized Blue Furniture could only be offering its low-priced wooden bedroom furniture through customs fraud.
University Loft Company fought back. After it was underbid on a large contract for a student housing project in Texas it filed a civil lawsuit. The Texas lawsuit charged Blue Furniture Solutions with unfair competition, deceptive trade practices, and false advertising. University Loft also filed a sealed False Claims Act (FCA) lawsuit. The FCA complaint officially alerted the United States government that it was being cheated out of millions of dollars in customs fees and duties.
After receiving the FCA complaint the United States did its own investigation. In the end, the feds agreed that University Loft was right on the money.
The Blue Furniture defendants tried to fight off the False Claims Act lawsuit. For example, they argued that only Blue Furniture Solutions was the official “importer of record.” So how could Zeng or Cheng, as individuals, be responsible for cheating the government?
The district court did not buy that argument. As the court pointed out, the FCA is broader than the customs fraud statute. The FCA imposes liability on anyone who knowingly “made, used, or caused a false record or statement” to avoid an obligation to the United States. Both Zeng and Cheng fit that definition.
The federal investigation turned up evidence that Zeng and Cheng instructed employees and suppliers to lie on import documents. For example, Zeng instructed the supplier of large shipments of wooden dressers made in China to falsely identify those items as metal filing cabinets on import documents.
The government investigation also found evidence that Zeng and Cheng kept track of the millions of dollars they saved by lying to U.S. Customs. To resolve the Texas FCA lawsuit, the Defendants agreed to pay a $5.2 Million customs fraud settlement.
The Blue Furniture defendants even cheated on their share of so called “Harbor Maintenance Fees.” Those are the fees importers pay based on the value of their merchandise unloaded in that harbor.
One of those harbors was in Charleston, South Carolina. The fraud uncovered in the Texas False Claims Act lawsuit came to the attention of the federal authorities in South Carolina. In 2019, the U.S. Attorney’s Office for the District of South Carolina filed a criminal indictment against Zeng and Cheng. After the False Claims Act complaint exposed their fraudulent scheme, both defendants pled guilty to conspiring to defraud the United States.
This case shows how bad players can gain significant and unfair advantages by cheating on their customs duties. But it also shows how their competitors can fight back. Namely, by filing a False Claims Act complaint to make sure there is a level playing field where every company is playing by the rules.
If you believe that one of your competitors is committing customs fraud, we urge you to contact us for a confidential and free consultation to discuss your options under the False Claims Act and other whistleblower programs.