Byer California Cited for Evading Customs Duties by Undervaluing Garments

After years of litigation, Byer California has agreed to pay $325,000 in a civil fraud lawsuit that alleges the decades-old San Francisco clothing company for five years undervalued the cost of its merchandise coming through customs, paying lower duties than normal.

The case came to light when a whistle-blower, identified as Michael Krigstein, told federal officials that Byer California reportedly had been receiving goods from Queen Apparel NY Inc. on a DDP, or delivered duty-paid basis, meaning that Queen Apparel took care of filing the customs forms and delivering the goods to Byer California.

But federal prosecutors maintained in a lawsuit filed in the Southern District of New York that Byer knew that Queen Apparel was undervaluing Byer’s garments in customs forms submitted between 2009 and 2013 to Customs and Border Patrol inspectors but Byer continued to do business with Queen anyway.

“Byer chose to continue sending work orders to Queen for garments that it understood would be imported into the country with false customs forms resulting in fraudulent underpayment of customs duties,” the U.S. Department of Justice said in a March 27 press release announcing the settlement. “Byer admitted to and accepted responsibility for certain conduct alleged in the government’s complaint and agreed to pay $325,000 to the United States.”

Phil Byer, chief executive of Byer California, said the company fully accepts responsibility for its conduct described in the settlement agreement. Although Byer did not inform customs about Queen’s suspected undervaluation, he said, it did not conspire with Queen to undervalue merchandise.

“Byer was not part of the undervaluation scheme that Queen had in place with other customers, and Byer did not obtain lower prices as a result of any of Queen’s valuation calculations,” he noted. “While it was found that Queen occasionally paid the government less duty than was legally owed, Byer paid Queen market prices for the imported goods and resold that merchandise to its U.S. customers for regular market prices.”

He said the company decided to pay a settlement fee considering the cost to further litigate the case.

Byer California, a major supplier of juniors and misses clothing to major department stores, was one of a handful of apparel companies named in a civil fraud lawsuit first filed in 2013 under the federal False Claims Act. The other companies named included Motives Inc., a clothing importer, and Motives Far East and Motives China Ltd., foreign clothing manufacturers. They were accused of engaging in a double-invoicing scheme where there were two sets of invoices, one with lower prices shown to customs and one with the actual prices of the garments.

In a 2016 settlement agreement, Motives admitted to underreporting the value of its imported clothes and agreed to pay $13.375 million to the United States. “Motives disguised the true value of goods imported into the United States to cheat the government out of millions of dollars in customs duties,” said Angel Melendez, a special agent-in-charge for Immigration and Customs Enforcement. “This scheme backfired.”

Other apparel companies, named in different lawsuits, have been caught up in this kind of scheme. In 2014, clothing manufacturer Dana Kay and its affiliate companies, including Danny & Nicole, were sued for underreporting the value of their garments and ended up paying $10 million to settle their False Claims Act case.

According to the government, Dana Kay and its affiliates produced invoices for customs that undervalued the price of a garment by, on average, $2.50 a piece. Customs officials maintained that with customs duties averaging 22 percent, Dana Kay was saving 55 cents per garment.

That added up to a lot because Dana Kay was importing millions of skirts, dresses and blouses every year, which were sold under various label names including Studio 1, Taylor Dresses, Zarr Collection and Gabby Skye, as well as private-label clothing produced for Chico’s, Cache, Ann Taylor and Dress Barn. “This was simple customs fraud,” said Michael Fitzgerald, the New Jersey lawyer who represented Michael Krigstein, the whistle-blower in that case too.

Krigstein, a former employee of Dana Kay, received $2.2 million for tipping off customs officials, which was 22 percent of the $10 million settlement.

What all these cases have in common is that a whistle-blower alerted customs officials that these companies were undervaluing their garments when bringing them in through customs. And all the garments were brought in DDP as opposed to FOB, or free on board.

FOB means the clothing company importing the merchandise is responsible for getting the goods through customs or hiring a freight forwarder or customs broker to do all the paperwork.

For years, customs officials have urged that importers take more responsibility for their imports and bring them in FOB as opposed to relying on overseas manufacturers to deliver the goods under DDP.

Richard Wortman, a customs attorney in Los Angeles for Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt, said this case is not the general rule because it was not initially brought by the government but by a whistle-blower.

“There have been a series of False Claims Act violations recently with a number in the apparel sector,” Wortman said. “They are usually filed by a disgruntled former employee, someone who has knowledge and is not happy with the company for whatever reason.”

He said the lesson people should learn through these cases is that Los Angeles is the land of companies that love to bring in goods DDP, but they need to be careful and review all customs documents. “Customs is focused on DDP imports,” he said. “Customs has a belief that DDP is a bad thing. There are absolutely good business reasons for importing DDP because you don’t tie up your money because you don’t owe anything until you get your goods.”

He warned that if the price listed for a garment in the importing documents sounds too good to be true, there is something wrong. “You should be doing some due diligence,” Wortman advised. “You can’t turn a blind eye.”

Customs brokers and attorneys said they noticed that last year the government began taking a more intensive look at imported goods. Elon Pollack, a customs attorney in Los Angeles with Stein Shostak Shostak Pollack & O’Hara, said he is seeing more shipments being flagged that are brought in by nonresident importers. “People who have been importing for five or six years are all of a sudden getting their entries rejected,” he said.

Robert Krieger, president of the Los Angeles customs brokerage company Krieger Worldwide, said customs officials are getting more sophisticated with computer software that can analyze the stated purchase price of a garment and see if it conforms to the price listed for similar garments brought into the country. “Let’s say you are bringing in cotton woven denim jeans from China,” Krieger said. “There is a harmonized tariff number for that, and customs has data for every importer of that product for the last couple of years.”

If the garment’s price falls below 10 percent of the typical price, customs officials start asking questions, he said.