Commentary: Due Diligence to Protect Your Assets

When the Los Angeles County Bar’s Customs Law Committee met with the local U.S. Attorney in July, one point got universal agreement: There aren’t enough prosecutions regarding purely import-export trade fraud. Although it might seem an odd thing for lawyers to say, there’s some logic to it — and it’s not a matter of creating more work for the lawyers.

To get the attention of an industry, people must be reminded regularly that there are serious consequences for violating the law or regulation. Failure to reinforce those consequences inevitably leads to lax internal controls and due diligence. In the import-export arena, only a handful of recent cases involved criminal prosecution for purely trade-related violations. One recent one involved an importer who undervalued goods. The loss of revenue was less than $500,000, but the company’s owner ended up in jail.

A more recent accusation came when New York state authorities charged London-based Standard Chartered Bank with “wire stripping,” which allegedly allowed Iranian money to be laundered through U.S. banks. Wire stripping is a process whereby information about the source or routing of the wire is removed so there is nothing to identify the instructions and funds as having come from a sanctioned country.

The authorities say the bank took this action because it wanted to collect millions of dollars in fees. One bank executive, the authorities assert, also wrote an e-mail questioning why the Americans thought they could tell the rest of the world with whom to deal. The FBI is said to be investigating, but you have to wonder: Where is the Office of Foreign Assets Control in all of this?

Another illustration of the types of cases being brought is the antitrust settlements with the airlines and forwarders in the U.S., Japan and Europe. These were also the outcome of international trade activities, but weren’t prosecuted for purely import or export violations.

In the export arena, we have seen a few notable convictions. The one getting the most press involved J. Reece Roth, a University of Tennessee professor convicted of conspiring with Atmospheric Glow Technologies to unlawfully export defense articles to China and of wire fraud for defrauding the university.

Roth’s problems arose in conjunction with a contract AGT, a university spinoff, won from the U.S. Air Force to develop a plasma actuator intended to reduce drag on the wings of drones. Under the terms of the contract, Roth was prohibited from sharing sensitive data with foreign nationals.

Despite clear warnings, Roth took his laptop containing project plans to China, where he asked a colleague to e-mail data about the project to the account of a Chinese colleague. Upon receipt, Roth shared the contents with the colleague, a violation of deemed export regulations that restrict the export of sensitive technology or data.

Further violations arose because Roth had two foreign students, one Chinese and one Iranian, working with him on the project without government knowledge or approval. He received a 48-month sentence.

Another recent action involved import issues brought under the False Claims Act. This sort of lawsuit arises when a whistleblower provides the government with evidence of fraud against government contracts and programs. As often happens, the government takes a long time to act, so typically the whistleblower sues, in a sense on behalf of the government, to recover the stolen funds. As in most whistleblower contexts, if the lawsuit is successful, the whistleblower receives a portion of the recovery.

In this case, the violation involved misclassification of auto parts made in China. About two-thirds of the $6.3 million settlement was paid from seized assets. The related criminal proceedings led to one company pleading guilty to a charge of entry of goods by means of false statements. The sentence was two years’ probation and a $25,000 fine.

What did the parties do? They misclassified the goods, entering them as free of duty, but charging customers the correct 2.5 percent, pocketing the difference. A total of 706 entries are said to be involved where the manifolds were entered as unfinished, when they were actually finished. The duty calculated as evaded was $2,549,000. The matter came to the government’s attention when a whistleblower filed the claim.

What does the government need to do? First, the seizure of goods is an effective tool, but this happens to individual shipments, and no publicity is allowed because of the Trade Secrets Act. So, although some in industry know, for example, about the importer-of-record issue related to fabric and garments, there have been no prosecutions. Perhaps hapless folks in the U.S. doing a friend or relative in China a favor have no idea what they are getting into when they agree to become importer of record. Imagine how the dynamics might change if one or two people ended up in jail for getting into these schemes?

A few years ago, a port publicized the penalty settlement with a company for NAFTA violations. On the one hand, the news reminded companies about the importance of compliance. On the other, it sent shockwaves through the industry. If OFAC and the Bureau of Industry and Security can announce their settlements, why can’t Customs?

These cases prove again that people matter. You can have the best compliance program in the world, but if it’s not followed, bad things generally happen. When was the last time your company performed a due diligence checkup?

Susan Kohn Ross is an international trade attorney with Mitchell Silberberg & Knupp in Los Angeles. Contact her at

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