The Department of Justice鈥檚 (DOJ) 2026 National Health Care Fraud Takedown is easy to summarize as a large numbers case: 455 defendants, including 90 doctors and other licensed medical professionals, charged across 56 federal districts and 45 states and territories in alleged schemes involving more than $6.5 billion in false claims (). But for health care companies, investors, management services organizations, provider platforms, and boards, the more important message is more specific: the government is now treating fast-growing reimbursement categories as data-driven, enterprise-risk environments.

This article highlights two areas that featured prominently in the takedown: (i) wound-care and (ii) hospice care. This article summarizes the cases in those two areas, describes the significance of the takedown for those areas, and provides actionable recommendations for health care clients.

Wound-Care Cases

That point is clearest in the wound-care and hospice allegations. The DOJ highlighted alleged fraudulent wound care schemes involving amniotic wound allografts, a product category that became a focal point because the government says data analytics detected a spike in payments for allografts that led to prosecutions. The DOJ alleged that, in one nationwide scheme, providers billed Medicare more than $4 billion for a company鈥檚 allografts from approximately December 2021 through June 2024 and received more than $2 billion in payments. The government further alleged that the product economics themselves were a fraud signal: the company did not manufacture the allografts but instead acquired them from tissue banks, relabeled them for sale, charged up to $1,450 per square centimeter, and used an alleged 2,000% markup to fund kickbacks of approximately 40% of the amount charged. The release describes alleged applications to superficial wounds that did not need the treatment, infected wounds without proper treatment for infection, wounds that would not heal because a patient was terminally ill, and areas far larger than the actual wound.

Hospice Cases

The DOJ also highlighted that the Health Care Fraud Unit combined traditional data analytics with financial analysis to identify hospice fraud. The government had the ability to use data analytics to monitor the percentage of patients discharged from hospice alive (an indicator of fraud) in an alleged $27.7 million health care fraud scheme. These cases matter because the government is not simply challenging whether a code was payable; it is telling a story about vulnerable-patient targeting, clinical futility, and exploitation of end-of-life care.

Why This Takedown Matters

First, the DOJ is signaling that the 鈥渟pike鈥� matters. In mature enforcement areas, companies often think about compliance in terms of written policies, fair-market-value analyses, chart documentation, and billing audits. Those tools still matter, but this year鈥檚 takedown suggests that enforcement agencies are increasingly starting from macro-patterns: sudden volume increases, outlier reimbursement per patient, geographic dispersion, suspicious referral networks, and product-category anomalies.

The DOJ stated that the takedown involved 鈥渃utting-edge use of data analytics to target the worst actors,鈥� and reported that the Centers for Medicare & Medicaid Services (CMS) suspended 1,079 providers and revoked 1,403 billing privileges, that the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG) excluded more than 1,400 providers, and that HHS-OIG pursued more than $10 billion in payments to the Medicare Trust Fund from payments CMS caught and suspended before funds were paid to allegedly fraudulent providers. The DOJ also announced agreements designed to improve data access and break down data silos, including arrangements involving CMS and the Department of Homeland Security. For companies, this means that the first warning sign may not be a subpoena or whistleblower complaint 鈥� it may be the company鈥檚 own data profile beginning to look like an enforcement outlier.

Second, wound grafts show how enforcement risk can arise at the intersection of sales design, product pricing, clinical documentation, and end-of-life care. The DOJ鈥檚 District of Arizona case summary alleges that a vice president of sales caused hundreds of millions of dollars in illegal kickbacks, bribes, and rebates to be paid to sales representatives and medical providers, and that sham sales invoices and pass-through bank accounts were used to conceal the payments. In the Middle District of Florida, the DOJ alleged that defendants targeted Medicare patients so that a nurse practitioner could bill for unnecessary wound allografts and referring nurses could receive kickbacks, with some allografts allegedly not applied, applied to infected wounds, or applied to wounds that would not heal because the patient was terminally ill. In the Southern District of California, the DOJ alleged that mobile medical services involving expensive amniotic allograft skin substitutes were billed while a nurse practitioner was incarcerated and that services were provided by an unlicensed person.

Third, the hospice cases are especially notable in California, as the government has focused on alleged hospice fraud in this particular state. In one specific case, charges were brought against a hospice owner and two marketers for a $27.7 million Medicare fraud scheme in which the hospice owner allegedly tried to avoid detection through a scheme to purchase information of the recently deceased from a funeral home employee. The defendant was allegedly carrying out a hospice fraud scheme in which he fraudulently enrolled patients who were not terminally ill. Concerned that Medicare and law enforcement used data analytics to monitor the percentage of patients discharged from hospice alive, the hospice owner allegedly paid illegal kickbacks of $1,000 to $3,000 per person to a funeral home employee in exchange for deceased Medicare beneficiaries鈥� information. The defendant then allegedly billed Medicare for a few days of hospice services for these recently deceased individuals who had not received hospice care and created fake, back-dated medical records claiming that the beneficiaries had been seen by a physician, thereby allegedly seeking to deceive Medicare by reducing his outlier data metrics.

Fourth, the DOJ is pairing criminal cases with asset seizure, civil remedies, administrative actions, and payment-policy changes. The takedown included the seizure of more than $182 million in cash, luxury vehicles, jewelry, and other assets, and the DOJ separately described forfeiture actions involving more than $27 million from twelve South Florida clinics alleged to be 鈥渂ust outs鈥� that billed Medicare for amniotic wound allografts and services never provided (). CMS also reduced Medicare鈥檚 payment for allografts to $127 per square centimeter beginning January 1, 2026, and the DOJ stated that, without CMS action, the Part B premium increase caused by allograft payments alone would have cost every Medicare beneficiary an extra $11 per month. That combination of criminal, civil, administrative, and reimbursement levers is now the operating environment.

Specific Recommendations for Health Care Clients

Build a high-cost-product 鈥渄ata packet鈥� before the government asks for it: For every high-cost graft or biologic application, companies should be able to link supplier invoice, lot or product information, acquisition cost, patient assessment, wound measurements, infection status, healing prognosis, treating-physician coordination, application record, photographs where appropriate, claim, and payment. The goal is to make medical necessity and quantity used auditable at the product, patient, and claim levels.

Audit economics, not just documentation: Providers and their compliance teams should review whether margins, rebates, sales commissions, distributor spreads, invoice practices, credit memos, and referral-source payments create the same type of story the DOJ alleged in the allograft cases. A fair-market-value memo is not enough if the data show that compensation rises with product volume or that invoice structures obscure the real flow of money.

Treat hospice, homebound, mobile-care, and terminally ill populations as heightened-risk patient groups: The takedown repeatedly frames vulnerable patients as central to the alleged misconduct, including elderly and hospice patients in wound-graft matters. Organizations should require enhanced review when expensive products are used for patients with limited healing potential, poor infection control, terminal diagnoses, or no documented coordination with the treating physician. Hospice providers should also closely monitor discharge metrics and patient enrollment patterns, which the government is using as analytical indicators of fraud.

Run the government鈥檚 analytics on yourself: Companies should monitor reimbursement per patient, product square centimeters per wound size, utilization by clinician, sales representative, location, payer, and referral source, and month-over-month growth in any high-cost category. The key is not simply finding errors 鈥� it is identifying the outlier narrative and taking remedial action before an enforcement agency does.

Conclusion

The 2026 takedown should be read less as a one-day splashy headline announcement and more as a map of where health care fraud enforcement is going. The DOJ is combining claims analytics, payment suspensions, asset seizures, kickback theories, patient-harm narratives, and interagency data-sharing in ways that compress the time between anomalous data and enforcement action. For companies in wound care, hospice, and other high-reimbursement categories, the practical question is no longer whether the chart can support the claim in isolation. It is whether the entire business model can withstand a data-driven examination from product acquisition to patient application to payment.

On May 18, 2026, a jury in the Central District of California convicted Dr. Violetta Mailyan of orchestrating to defraud Medicare through fraudulent Botox injection claims. While the fraud itself was bold enough, what makes this case a bellwether is how the government caught her.

The Department of Justice鈥檚 (DOJ) Health Care Fraud Section鈥檚 Data Analytics Team flagged Mailyan after its analysis showed she collected more Medicare payments for Botox injections than any other doctor in the country. At trial, prosecutors drove the point home with a peer comparison exhibit 鈥� a graph showing Mailyan as an extreme statistical outlier who raked in more than $24 million over four years, which was six times more than the next highest group of providers. The visual is striking, intuitive, and devastating. It reduced a complex fraud scheme to a single, irrefutable data point: this doctor is not like others:

The Mailyan case is not an isolated success story. It is the most recent illustration of a fundamental shift in how the federal government detects and prosecutes health care fraud 鈥� a shift from reactive investigation to proactive, data-driven identification of fraudulent actors.

The Rise of the Data Analytics Team

The DOJ鈥檚 Health Care Fraud Unit鈥檚 Data Analytics Team was established to enhance the Unit鈥檚 ability to detect, investigate, and prosecute complex health care fraud schemes. Since its founding, the team has grown in both capacity and ambition. According to the DOJ鈥檚 2025 Year in Review, the Data Analytics Team completed 2,085 data requests and 164 proactive data referrals in 2025 alone 鈥� referrals that aided charging decisions, resolution of significant matters, and asset seizures.[1]

The term 鈥減roactive referral鈥� is the key phrase. Traditional health care fraud enforcement has long followed a 鈥減ay and chase鈥� model 鈥� the government pays claims, receives a tip or complaint, investigates after the fact, and then attempts to recover funds that have often already been dissipated. Proactive data referrals work to invert this paradigm. The Data Analytics Team identifies statistical anomalies, billing outliers, and suspicious patterns in claims data before a complaint is filed and, in some cases, before the money even goes out the door.

The Mailyan case is a textbook example. Nobody filed a whistleblower complaint. No disgruntled employee called a tip line. The data itself raised the alarm.

What This Means for Health Care Providers

The practical implications for health care providers are significant. The DOJ is no longer primarily dependent on whistleblowers, patient complaints, or traditional investigative leads to initiate cases. The government is actively mining Medicare and Medicaid claims data to identify outliers 鈥� and it is doing so continuously.

The Mailyan trial exhibit, a peer comparison graph showing the defendant multiple standard deviations from her peers, is a preview of what juries will see in future cases. It is simple, visual, and powerful. A provider who is a dramatic statistical outlier will face the immediate inference that something is wrong, and the burden of explaining away that data will fall squarely on the defense.

For compliance purposes, providers should assume that their billing data is being analyzed and compared against their peers at all times. Internal compliance programs should incorporate the same types of analytics the government is using 鈥� peer comparisons, outlier detection, and trend analysis 鈥� to identify and remediate potential issues before the government comes calling. As the DOJ鈥檚 enforcement record makes clear, it is far better to be the one who finds the anomaly first.

Conclusion

The conviction of Dr. Mailyan is a milestone not because of the fraud itself but because of what it represents about the future of health care fraud enforcement. The government found this case not through a tip, not through a whistleblower, but through data. And it proved the case at trial not primarily through cooperators or paper trails, but through a graph showing that the defendant鈥檚 billing was so far from the norm as to be inexplicable by any legitimate practice.

As the DOJ continues to invest in its Data Analytics Team and AI-powered detection capabilities, providers should expect that the era of 鈥減ay and chase鈥� is giving way to an era of 鈥渄etect and prevent鈥�. The peer comparison chart in the Mailyan trial may prove to be one of the most consequential trial exhibits in recent health care fraud enforcement 鈥� not for what it showed about one doctor but for what it signals about how the government intends to find and prosecute the next one.

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On May 27, 2026, the Assistant Attorney General in charge of the Department of Justice鈥檚 (DOJ) Civil Division, Brett Shumate, that civil lawyers within the DOJ and U.S. Attorney鈥檚 Offices will need to fast-track and prioritize sealed False Claims Act (FCA) qui tam cases involving fraud against federally funded state administered benefits programs. According to the DOJ鈥檚 announcement, the Civil Division intends to evaluate these sealed matters within 60 days where possible, and no later than 120 days, pursuant to a March 2026 executive-order-driven enforcement initiative. This directive will require the DOJ鈥檚 civil lawyers to issue subpoenas, review records, and conduct interviews in an unusually compressed timetable.

This development has immediate consequences for recipients of Civil Investigative Demands (CIDs). For these state-based benefit matters, this directive will require companies and other entities that receive CIDs for documents, interrogatory responses, or testimony to mobilize quickly, preserve relevant information immediately, and make early strategic decisions about response scope and privilege. Extended deadline continuances may become harder to obtain if the DOJ is operating under internal review clocks tied to sealed-case decision points.

This accelerated decision schedule will necessarily shift the burden of litigation to relators and their lawyers requiring them to handle the resulting litigation with a minimal burden on the government. That reality makes the pre-intervention phase more consequential: presentations to the DOJ during the CID and seal period may now have an even greater impact on whether the government intervenes, narrows its theories, or declines the case altogether.

The DOJ鈥檚 leadership emphasized in the memorandum that a 鈥渨hole-of-government鈥� approach would apply: the DOJ will coordinate quickly with criminal prosecutors, fraud enforcement units, and affected agencies to evaluate criminal, civil, and administrative remedies, including payment suspensions and program-specific analysis. Overall, the goal is to accelerate meritorious benefits fraud cases and focus government resources on the most serious and complex schemes.

It will be essential for companies and individuals who receive these CIDs to retain counsel and start collecting the responsive records immediately upon receipt.

Practical Implications for Providers, Contractors, and Managed-Care Participants

Organizations participating in Medicaid, Medi-Cal and other state-administered benefit programs should expect faster information demands and less tolerance for slow internal collection efforts once a CID or related inquiry arrives. Entities that rely on decentralized claims, eligibility, utilization-management, pharmacy, or subcontractor data may face greater challenges because the government鈥檚 timeline will not pause while records are gathered across business units.

Three practical implications stand out:

• Preservation and collection must begin immediately. Legal, compliance, and business teams should identify custodians, systems, and third-party data sources at the outset rather than waiting for rolling negotiations over scope.
• Early case assessment becomes more important. Counsel should quickly test the factual theory, reimbursement pathway, damages assumptions, and any materiality arguments before the DOJ reaches an intervention decision.
• Parallel-enforcement planning should occur on day one. Because the DOJ has signaled closer coordination across enforcement channels, responses should account for potential criminal, administrative, suspension, and overpayment ramifications at the same time.

Given the importance of FCA matters to the healthcare industry, in-house counsel at such organizations should be extra attentive when CIDs arrive regarding Medicaid and Medi-Cal in light of these new, compressed deadlines. 

On April 28, 2026, the U.S. Department of Justice (DOJ) the seizure of more than $2 million from Expert Wound Care PC, a Pasadena-based wound care clinic accused of defrauding Medicare by billing for skin graft procedures never performed. The clinic allegedly submitted over $46.6 million in false claims within approximately seven months. The case underscores the DOJ鈥檚 growing reliance on statistical benchmarking and data analytics to identify aberrant billing patterns 鈥� a strategy increasingly targeting wound care providers in particular.

DOJ鈥檚 Data-Driven Enforcement Methods

According to the affidavit supporting the seizure warrant, the government flagged Expert Wound Care based on several statistical red flags:

• Per-claim averages. From July 2025 to March 2026, the clinic averaged approximately $37,449 per claim for skin substitute grafts 鈥� more than double the national average of $16,837.
• Billing trajectory. Medicare billing escalated from $4,975 in July 2025 to approximately $33 million in December 2025, an extraordinary spike easily detectable through automated monitoring.
• Utilization rates. The clinic鈥檚 rate of beneficiaries receiving skin substitute grafts was 38.5% 鈥� over six times the national average of 6%. Its share of total claims for these procedures was 63%, roughly nine times the national average.
• Payment concentration. One beneficiary alone accounted for approximately $6.2 million in payments, with an average paid amount per beneficiary of approximately $299,639.

These metrics reflect the DOJ鈥檚 institutionalized outlier-detection methodology. The Health Care Fraud Unit鈥檚 dedicated Data Analytics Team monitors billing trends, identifies aberrant providers, and helps prosecutors detect emerging schemes. DOJ leadership has stated publicly that 鈥渃utting-edge data analytics jumpstarted鈥� investigations in the wound care space, including a separate $900 million amniotic wound care fraud scheme.

This data-driven approach accelerated in 2025 and 2026. In June 2025, the DOJ announced its largest-ever National Health Care Fraud Takedown, charging 324 defendants in connection with over $14.6 billion in alleged fraud 鈥� including seven defendants charged with approximately $1 billion in fraudulent claims for performing medically unnecessary skin grafts on dying patients. In December 2025, owners of Arizona wound graft companies were sentenced to over 14 years in prison for a $1.2 billion wound graft fraud scheme, with $126 million in assets seized. In November 2025, one of the nation’s largest wound care providers agreed to pay $45 million to resolve False Claims Act allegations that it programmed billing software to ensure Medicare was always billed for higher-reimbursed procedures.

The DOJ has further committed to data-driven enforcement by announcing a Health Care Fraud Data Fusion Center, bringing together data specialists from the DOJ, Department of Health and Human Services Office of Inspector General, and the FBI to leverage cloud computing, artificial intelligence, and advanced analytics. The newly launched West Coast Health Care Fraud Strike Force 鈥� covering Arizona, Nevada, and Northern California 鈥� was formed explicitly because 鈥渄ata analytics show鈥� a migration of fraud schemes to these regions. See Foley鈥檚 recent blog on the West Coast Health Care Fraud Strike Force.

Key Takeaways and Risk Considerations

This enforcement action, viewed alongside broader DOJ prosecutions in the wound care sector, carries several important implications:

Wound care remains a top enforcement priority. The concentration of major prosecutions 鈥� from the $1.2 billion Arizona case to the $45 million False Claims Act settlement to the Expert Wound Care seizure 鈥� reflects the DOJ鈥檚 sustained focus on what it views as a high-risk category prone to upcoding, services-not-rendered fraud, and medically unnecessary utilization.

Whistleblowers are no longer the primary trigger. Proactive data analytics allow the DOJ and the Centers for Medicare & Medicaid Services to identify aberrant providers before any complaint or subpoena is issued. Providers whose billing patterns deviate significantly from benchmarks should expect scrutiny 鈥� regardless of whether a qui tam relator has come forward.

Statistical outlier status supports civil and criminal enforcement. The government uses data not just to flag potential fraud, but as substantive evidence, particularly to show that a provider 鈥渒new or should have known鈥� about improper billing. Rapid billing growth, per-claim averages far exceeding norms, and concentrated beneficiary payments can all support inferences of knowledge and intent.

Asset seizure is an aggressive early-stage tool. The government moved to seize funds before any indictment, using the civil forfeiture process to deprive the clinic of its proceeds while the investigation continues. Providers should understand that the DOJ may act swiftly to freeze assets, creating immediate financial disruption.

We will continue to monitor developments in this area. This alert is the first in a series that will explore the full spectrum of legal and compliance challenges facing wound care providers today 鈥� including the clinical and reimbursement context driving enforcement activity since 2019, the contractor audit and overpayment landscape, administrative law judge appeal strategies, common government liability theories, defense approaches to extrapolated recoupments and parallel proceedings, and proactive compliance frameworks. Future installments will offer in-depth guidance on each of these topics.

Please do not hesitate to reach out to your Foley relationship partner or to our Government Enforcement Defense & Investigations and Health Care teams with any questions about how these enforcement trends may affect your organization.

The U.S. Department of Justice (DOJ) reported a record year for False Claims Act (FCA) enforcement in fiscal year 2025, with more than $6.8 billion in settlements and judgments 鈥� the largest annual total in the history of the statute. The DOJ also reported a record 1,297 qui tam actions filed by whistleblowers and 401 investigations opened by the government during the year.

The 2025 results confirm that the FCA remains one of the government鈥檚 most significant civil enforcement tools, particularly in matters involving federal health care programs, government contracts and grants, cybersecurity obligations, and, increasingly, customs and trade issues. Those results also offer an important preview of likely enforcement priorities in 2026, alongside newer uses of the False Claims Act.

Key Enforcement Themes in FY 2025

Health Care Continues to Drive FCA Recoveries

As in prior years, health care matters accounted for the majority of FCA recoveries, representing more than $5.7 billion of the total amount recovered in FY 2025. The DOJ highlighted several recurring areas of focus, including:

• Managed care, particularly allegations involving unsupported diagnosis codes and retrospective chart reviews used to add improper diagnoses;
• Prescription drugs, including drug pricing, illegal kickbacks, copay assistance arrangements, speaker programs, and dispensing practices; and
• Medically unnecessary services and substandard care, including inappropriate inpatient admissions, unnecessary wound care, infection control deficiencies, inadequate staffing, and poor quality of care in residential settings.

These categories reflect DOJ鈥檚 continued scrutiny of coding, reimbursement, and quality-of-care issues across the health care sector.

Procurement, Loan, and Grant Fraud Remain Active Priorities

The DOJ also continued to pursue FCA cases involving government procurement and pandemic-related relief programs. Notable cases throughout FY 2025 cover a range of allegations, including:

• billing Medicare for COVID-19 tests that were not provided,
• billing higher-reimbursement codes for services performed at COVID-19 testing sites,
• false statements in PPP and EIDL loan applications,
• use of confidential procurement information to influence contract awards, and
• failure to disclose accurate cost and pricing data in government contract proposals.

These cases demonstrate that the DOJ remains focused on not only traditional procurement fraud but also alleged misuse of pandemic-era funding and reimbursement programs. In 2025, the DOJ obtained more than 200 settlements and judgments resolving allegations of pandemic-related fraud, recovering more than $230 million.

Cybersecurity Enforcement Continues to Expand

The DOJ鈥檚 Civil Cyber-Fraud Initiative continues to generate meaningful enforcement activity. The DOJ recovered more than $52 million in cybersecurity-related FCA settlements in 2025.

The government鈥檚 recent settlements have focused on allegations that contractors and grant recipients:

• failed to implement required cybersecurity safeguards,
• falsely certified compliance with contractual cybersecurity standards,
• submitted inaccurate cybersecurity assessment information, or
• failed to timely identify and remediate known vulnerabilities.

For companies that contract with the federal government or participate in federally funded programs (such as through a federally funded state contract), cybersecurity compliance remains an important and growing FCA risk area, particularly where the company makes representations to the government regarding controls, testing, or incident response.

Customs and Trade Enforcement Is a Developing FCA Risk

One of the clearest emerging themes from 2025 is the DOJ鈥檚 increased focus on customs and trade fraud. This is reflected in the DOJ鈥檚 creation of a Market, Government, and Consumer Fraud Unit within the Criminal Division鈥檚 Fraud Section as well as a Trade Fraud Task Force that facilitates increased coordination among the DOJ, U.S. Customs and Border Protection, and the Department of Homeland Security.

The DOJ appears particularly focused on:

• country-of-origin errors,
• tariff misclassification,
• under- or mis-valuation of imported goods,
• forced labor and UFLPA-related issues, and
• creative workarounds designed to reduce duties, such as unbundling costs or services and seeking alternative HTS codes.

Given heightened tariff exposure, increased availability of import data, and express government interest in whistleblower referrals in this area, importers should expect customs-related FCA risk to remain elevated in 2026.

DOJ Continues to Evaluate FCA Theories in the Diversity, Equity, and Inclusion (DEI) Context

2025 enforcement activity also demonstrated the DOJ鈥檚 growing use of the FCA to investigate federal fund recipients鈥� DEI practices as alleged violations of federal civil rights laws. Recent remarks by DOJ officials suggest that the focus is not on the existence of DEI programs themselves but rather on whether contractors engage in conduct that could be characterized as unlawful race- or sex-based discrimination in hiring, promotion, compensation, or training opportunities.

Although this remains an evolving area, companies with federal contracts should be mindful of conduct that could draw DOJ attention, including measuring leader performance by progress towards DEI goals or tracking diversity goals in a manner that expresses preference for people of a particular race or sex. Companies should continue to monitor developments closely, particularly where compliance certifications intersect with employment or contracting practices.

Looking Ahead

FY 2025 enforcement activity suggests several practical takeaways for companies facing FCA exposure in 2026.

• First, whistleblower activity remains a major driver of enforcement. The record number of qui tam filings confirms that private parties will continue to play a central role in surfacing potential FCA claims, even as DOJ expands direct enforcement activity.

• Second, the DOJ continues to place value on self-disclosure, cooperation, and remediation. A number of 2025 resolutions reflected credit for proactive disclosure, cooperation in identifying relevant facts and damages, and compliance enhancements. Companies confronting potential issues should assess early whether internal investigation, remediation, and disclosure may mitigate risk.

• Third, the government is continuing to apply the FCA in both established and emerging contexts. Health care remains the dominant enforcement area, but cybersecurity, customs and trade, DEI, and other nontraditional theories are receiving increasing attention.

Practical Considerations

In light of these trends, companies should consider whether their compliance programs are adequately calibrated to current FCA risks. That may include:

• reviewing controls around billing, coding, and reimbursement practices;
• reassessing procurement and pricing certifications made in connection with government contracts;
• evaluating cybersecurity compliance against contractual requirements and recognized standards;
• reevaluating employment practices that could be perceived as expressing a preference for 鈥� or discriminating against 鈥� any race or gender;
• reviewing import compliance processes, including classification, valuation, and origin determinations;
• strengthening internal reporting and escalation channels; and
• ensuring prompt investigation and remediation of identified issues.

2025鈥檚 record-setting enforcement activity makes clear that the DOJ and the relators鈥� bar intend to continue using the FCA aggressively in 2026. Organizations that receive federal funds, participate in federal health care programs, or do business with the government should be prepared for continued scrutiny across a widening range of enforcement areas.

A recent Ninth Circuit decision underscores why importers should be worried that they will be hit with a large government bill under the False Claims Act (FCA) to pay for newly raised duties imposed on imported products. The case concerned an importer of welded pipe fittings from China that fought antidumping duties and took its case to trial before a jury. After it lost, the District Court ordered $8,085,546.03 in single damages and then trebled it, plus costs, for an award of approximately $26 million. The importer appealed and ultimately lost again at the Ninth Circuit. The case raised complicated legal points that might have had some traction during pre-trial settlement negotiations but less so now, with the Ninth Circuit鈥檚 affirmation on June 23, 2025. United States ex rel. Island Industries v. Sigma Corporation, ___ F.4^th ___ No. 22-55063 (9^th Cir. June 23, 2025).

FCA Trial: Underpayment of Antidumping Duties

Jurisdiction. First, Sigma tried to avoid jurisdiction by arguing the general customs enforcement statute blocked the United States鈥� or a relator鈥檚 right to bring an FCA case, arguing that 19 U.S.C. 搂 1592 is the exclusive cause of action available to the United States. Like the FCA, 搂 1952 prohibits false statements or material omissions to support claims for imported goods into the United States and further provides a specific mechanism for the United States to recover fraudulently or negligently avoided customs duties. The Ninth Circuit, however, rejected Sigma鈥檚 argument that 搂 1592 provided the sole remedy for addressing any underpayment of tariffs. The panel also held that 28 U.S.C. 搂 1582, which vests in the Court of International Trade exclusive jurisdiction over 鈥渁ny civil action which arises out of an import transaction and which is commenced by the United States . . . to recover customs duties,鈥� posed no jurisdictional obstacle to a relator鈥檚 False Claims Act suit in district court to recover underpaid customs duties. While recognizing the significant overlap in enforcement remedies, the Ninth Circuit held that 搂 1592 is not an exclusive remedy for customs violations and that administrative enforcement actions under 搂 1592 may proceed in parallel to an FCA case brought by a relator.

Liquidation. Second, Sigma argued that it had no 鈥渙bligation鈥� to pay antidumping duties on products it had originally described as steel couplings, arguing the Department of Commerce did not plan to collect additional duties on older entries and relying on regulations regarding the liquidation of entries. The Ninth Circuit rejected this argument, too, holding the liquidation of an entry does not preclude the government from recovering legitimately owed duties on that entry and finding an 鈥渋mporter cannot evade duties, wait until its entries are liquidated, and then assert based on that liquidation that its actions did not deprive the government of money.鈥� To the contrary, the Ninth Circuit emphasized that an importer鈥檚 鈥渙bligation鈥� to pay antidumping duties is established at the time of entry, not at the time of liquidation.

Scienter. Third, Sigma contended it lacked scienter for any false statements by arguing there was insufficient evidence for the jury to conclude Sigma acted with either deliberate ignorance or reckless disregard for the truth of its entry forms when it declared on customs documents that it did not owe antidumping duties on its welded outlets. The jury heard evidence that products from China, and steel products in particular, frequently were subject to antidumping duty orders. The jury also heard evidence that Sigma admitted it never inquired into whether the welded outlets might be subject to an antidumping order as well as whether it might owe additional duties on the goods. The jury was provided with an 鈥渙strich鈥� jury instruction regarding Sigma鈥檚 knowledge and found Sigma had knowingly avoided the payment of the duties. The Ninth Circuit affirmed the jury鈥檚 verdict.

Takeaways

1. Customs enforcement statutes present no jurisdictional bar to a relator bringing a separate FCA action because it is a separate cause of action.
2. Parallel FCA suits likely will result in significantly higher penalties than Customs generally imposes because the obligation to pay duties attached at the time of entry, and the FCA permits damages to be trebled.
3. While liquidation (which typically occurs 300 days after entry) generally marks the final assessment of duties for imported products, the fact that entries may have reached the liquidation phase months after entry does not bar a relator from recovering lawfully owed duties or preclude a relator from bringing claims on those entries if the defendant made inaccurate factual assertions in the entry documentation at the time of importation.
4. During a trial, the jury can be instructed that a defendant may not act like an 鈥渙strich鈥� and avoid learning relevant information when 鈥渟imple inquiries鈥� would have alerted the importer that it was submitting false statements or claims to the government.

If you have questions about this topic, please feel free to reach out to any of the authors or your 番茄社区; Lardner attorney. If you would like to see future updates regarding 鈥淲hat Every Multinational Company Should Know鈥� about operating in today鈥檚 complicated international trade world, please sign up for our Tariff & International Trade blog 鈥�

The Trump Administration鈥檚 Department of Justice (DOJ) has made clear that it will aggressively use the False Claims Act as part of its corporate enforcement program. The message is not subtle. Enforcement actions are accelerating, and the statute鈥檚 scope is being leveraged aggressively to advance broader economic, political, and cultural priorities.

Many non-U.S. companies may never have heard of the False Claims Act (FCA), and those who have may assume this U.S. law doesn鈥檛 apply to them. But if your company does business with the U.S. government, sells into federally funded programs, moves goods through U.S. ports, or pays U.S. duties, you may be exposed to substantial legal and financial risk in the U.S. under the FCA.

What鈥檚 at Stake?

The FCA is a civil, not criminal, statute that imposes liability for knowingly submitting, or causing to be submitted, false or fraudulent claims for payment to the U.S. government, or making false statements that result in false claims being paid. The FCA also prohibits making false statements that lead to an underpayment of monies owed to the government, such as customs duties. The statutory framework includes whistleblower provisions that allow private individuals, including competitors and employees, to file lawsuits on the government鈥檚 behalf and to share in the government鈥檚 recovery.

In the past year alone, DOJ-initiated FCA investigations nearly tripled. Settlements and judgments under the FCA exceeded . A number of these cases involved international trade and customs practices, including the misclassification of imported goods, incorrect valuation of goods, and failure to properly report country-of-origin information.[i] The risk is particularly acute because many non-U.S. companies do not realize they are operating in a regulatory environment with U.S. criminal and civil liability.

Common Exposure Points for Non-U.S. Companies

For non-U.S. companies, the most common points of exposure to the FCA include:

• Contracting directly or indirectly with U.S. federal agencies;
• Selling products or services into U.S. government-funded programs;
• Engaging in international development projects funded by the U.S. government; and
• Participating in U.S. supply chains where foreign companies themselves act as the importers of record or cause someone else to pay the duties, file customs paperwork, or submit pricing certifications.

Examples include incorrect tariff classifications, origin misstatements, underreported entry values, inflated prices relating to U.S. contracts, or failing to meet quality standards promised in a U.S. contract. FCA liability attaches when a false statement is 鈥渕aterial鈥� to the government鈥檚 payment decision and was made 鈥渒nowingly鈥� 鈥� which includes reckless disregard or deliberate ignorance. We have provided in-depth analysis of these risks in this blog series.

A New Political Overlay: DEI as a Compliance Flashpoint

To mitigate risk in the current environment, non-U.S. companies with FCA exposure also must be aware that the Trump Administration鈥檚 focus on diversity, equity, and inclusion (DEI) initiatives may further expand FCA exposure. Executive Order 14173 directs federal agencies to treat compliance with anti-discrimination laws as a material condition of payment under federal contracts and grants. It also requires contractors and grantees to certify that their DEI programs do not violate these laws. If such terms are incorporated into contracts (and the executive order mandates they be included on a going-forward basis) with non-U.S. companies, noncompliance could give rise to FCA liability. Given this, non-U.S. companies should monitor their contract terms closely, review internal DEI practices, and prepare for potential scrutiny in this new enforcement space.

This puts many companies 鈥� particularly in Europe 鈥� in a legal and operational bind: While they may feel they are required to implement affirmative diversity and inclusion measures under local law, they may now face U.S. enforcement risk if those same programs are seen as violating U.S. anti-discrimination law. The result can be a regulatory 鈥淐atch-22,鈥� where compliance with one jurisdiction鈥檚 legal mandate may be treated as a violation in another. Global companies must now steer carefully through potentially conflicting legal obligations and heightened scrutiny.

Practical Steps to Mitigate FCA Exposure

If your company鈥檚 operations intersect in any way with U.S. government funds, the U.S. government鈥檚 funds, or regulatory filings, you should take steps now to get ahead of the risk. Practical recommendations include:

• Map your U.S. touchpoints. Understand where and how your company is involved in U.S. government-related transactions, contracts, or import flows.
• Validate trade compliance. Ensure robust controls are in place to confirm product classification, country-of-origin reporting, pricing accuracy, and proper use of special trade programs (such as the USMCA).
• Audit contract representations. Review the accuracy of all statements made in or related to U.S. government contracts 鈥� direct and indirect 鈥� and assess such contracts for compliance with U.S. non-discrimination laws.
• Train the frontline. Provide compliance training for staff responsible for customs, contracting, or communications with U.S. partners and agencies.
• Engage legal counsel early. Don’t wait for a subpoena. Assess exposure proactively, especially in light of whistleblower and the new DEI risks.

Final Thoughts

The Trump Administration鈥檚 amplified focus on FCA enforcement represents a significant shift in federal procurement oversight 鈥� with far-reaching consequences for entities engaged in U.S. government contracting. Non-U.S. companies should proactively assess their exposure and implement comprehensive compliance strategies to navigate this evolving regulatory landscape.

Summer associate Abby Keilin provided assistance in the composition of this blog post.

If you have questions about this topic, please feel free to reach out to any of the authors or your 番茄社区; Lardner attorney. If you would like to see future updates about operating in today鈥檚 complicated international trade world, please sign up for our Tariff & International Trade blog 鈥�

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[i] See 番茄社区; Lardner LLP, The False Claims Act, /insights/publications/2019/10/the-false-claims-act/; 番茄社区; Lardner LLP, Multinational Company Risk: Customs False Claims Act Actions Under the Trump Administration, /insights/publications/2025/03/multinational-company-risk-customs-false-claims-act-actions-trump-administration/; 番茄社区; Lardner LLP, Multinational Company and the False Claims Act, /insights/publications/2024/02/multinational-company-false-claims-act/.

Last month, the Department of Justice put trade, customs, and tariff fraud squarely in the spotlight. This isn鈥檛 just another line item on the compliance checklist, it鈥檚 a loud-and-clear signal that import-related enforcement is no longer just an administrative concern. It鈥檚 now a front-and-center DOJ priority.

On May 12, DOJ Criminal Division Chief Matthew Galeotti announced 10 high-impact white-collar enforcement priorities. Sitting alongside health care fraud, corporate recidivism, and national-security-linked corruption was something you would not have seen from prior administrations: customs and trade fraud, including tariff evasion.

It鈥檚 not a surprising move 鈥� at least not to us. Back in March, our International Trade team at Foley predicted this turn in two separate publications:

• Criminal Enforcement of Trade, Import, and Tariff Rules: A Growing Risk for Businesses
• The Rising Risk of Customs False Claims Act Actions in the Trump Administration

We noted then that customs enforcement was moving out of the regulatory shadows and toward the aggressive tactics historically reserved for FCPA, health care, and financial crimes. With this new DOJ announcement, that evolution is now official policy.

What鈥檚 Driving the DOJ鈥檚 Shift?

This enforcement focus is no accident. It reflects the broader 鈥淎merica First鈥� priorities of the Trump administration, a strategy aimed at reshaping global trade in favor of U.S. interests, as well as a means of collecting additional revenue. From sweeping tariffs to heightened scrutiny of Chinese imports, the administration is using every tool at its disposal 鈥� civil, criminal, and regulatory 鈥� to protect domestic industry, to close perceived trade loopholes, and to ensure collection of all tariffs. As the DOJ鈥檚 new approach, 鈥淸t]rade and customs fraudsters, including those who commit tariff evasion, seek to circumvent the rules and regulations that protect American consumers and undermine the Administration鈥檚 efforts to create jobs and increase investment in the United States. Prosecuting such frauds will ensure that American businesses are competing on a level playing field in global trade and commerce.鈥� For companies that import goods, the message is clear: Compliance with trade laws is no longer just a regulatory obligation, it鈥檚 a frontline national priority.

What In-House Counsel Should Do Now: A Practical Framework

In response, manufacturers should elevate trade compliance to the same level of urgency as anti-corruption or sanctions compliance. Drawing from our comprehensive white paper, Managing Import and Tariff Risks During a Trade War, here鈥檚 a practical framework for GCs and compliance officers:

Identify Your Risks

• Retrieve and analyze your company鈥檚 ACE (Automated Commercial Environment) import data.
• Conduct a customs risk audit, focusing particularly on ensuring that HTS classifications and countries of origin are accurately (and consistently) reported to Customs for all imports.
• Map supply chain and broker relationships.

Plan for Disruption

• Diversify sourcing and build supply chain flexibility.
• Collaborate with finance to model tariff impact scenarios.
• Establish rapid-response strategies for emerging duties or bans.

Manage Contractual Exposure

• Build tariff pass-through mechanisms into commercial agreements.
• Include change-in-law clauses that allow flexibility in sourcing.
• Clearly define responsibility for customs classifications and compliance.

Minimize Legal Exposure

• Review and correct import declarations regularly.
• Confirm compliance with UFLPA and other partner agency rules.
• Implement internal controls around broker instructions and tariff engineering.

Identify Cost-Saving Opportunities

• Explore bonded warehouses, FTZs, and drawback programs.
• Assess opportunities for tariff engineering and preferential treatment under trade agreements like USMCA.
• Consider use of temporary importation bonds (TIBs) where appropriate.

Strengthen Supply Chain Integrity

• Perform due diligence on upstream suppliers.
• Map materials and origin to avoid forced labor violations.
• Implement traceability protocols and audit programs.

This isn鈥檛 just a customs compliance issue anymore, it鈥檚 a corporate integrity and reputational risk issue. The whistleblower incentives are real, especially under the False Claims Act. The penalties are large. And the prosecutorial appetite is growing.

The Takeaway

We鈥檝e said it before, and we鈥檒l say it again: Customs fraud has moved from the margins to the mainstream of DOJ enforcement.

If your company imports goods, trade compliance should be a priority. DOJ is not waiting for egregious cases; it is actively looking for systemic vulnerabilities, misclassifications, and tariff evasion strategies dressed up as 鈥渓ogistical creativity.鈥�

The time for general counsel to engage is now. Audit. Adjust. Contract. Train. Fix. Because enhanced enforcement is not coming someday 鈥� it鈥檚 already here.

Additional content on all things Customs and international trade is found on our Tariff & International Trade Resources page. For more insights or a tailored compliance review, reach out to the author or International Trade or International Investigations teams at 番茄社区; Lardner LLP. We鈥檝e been tracking this shift since before it was fashionable.

Our previous article on What Every Multinational Company Should Know About 鈥� Customs Enforcement and False Claims Act Risks (Part I) outlined how import-related risks have substantially increased given the combination of the new high-tariff environment, the heightened ability of Customs (and the general public) to data mine import-related data, and the Department of Justice鈥檚 (DOJ) stated focus on using the False Claims Act (FCA). In Part II, we laid out how to prepare for the most common False Claims Act (FCA) risks arising from submitting false Form 7501 entry summary information. We now complete the series on 鈥淐ustoms Enforcement and False Claims Act Risks鈥� with Part III, which focuses on preparing for the most common FCA risks arising from improper management of import operations.

Risks Arising from Knowing Failures to Correct Errors

If importers discover a systematic error, the position of Customs is clear: The importer is under an obligation not only to correct the error for future entries but also to use measures like post-summary corrections to update prior entries. This is demonstrated by a DOJ settlement in which an importer paid to settle allegations that it 鈥渕ade no effort to right its wrongs even after acknowledging internally that it had underpaid millions of dollars of duties owed.鈥� This type of knowing error is exactly the type of conduct that can expose importers to reverse FCA liability.

Customs Compliance Response

• Apply Current Knowledge to Unliquidated Entries. Because liquidation takes (approximately) 314 days after entry, Customs grants a 300-day to correct most entry-related information. If you discover an error, Customs requires not only that the error be corrected going forward but also that any non-liquidated entries be corrected as well.

• Consider Making a Voluntary Prior Disclosure. If an importer initiates a voluntary disclosure before Customs begins its own investigation, then Customs may not pursue penalties, assuming the voluntary disclosure is full and accurate, and the importer pays back any tariffs and interest due. This is an especially important advantage for the new Trump tariffs, since many of them direct that Customs should impose maximum penalties for failure to pay all of the new tariffs, without taking into account traditional Customs mitigating factors. Filing a voluntary self-disclosure before Customs initiates an administrative investigation avoids any Customs administrative penalties (provided the importer follows through with a thorough and accurate disclosure). While a self-disclosure is not a free pass to avoid FCA liability, it can reduce the multiplier and penalties assessed in settlement negotiations.

Risks from Failing to Follow Form 28 and 29 Corrections for Prior Entries

Customs commonly issues Form 28 Requests for Information and Form 29 Notices of Action that target a handful of entries (or even a single entry) where it has questions about the accuracy of submitted entry information. If this results in Customs issuing a correction, then the importer is required to correct not only the entry but also any other entries covered by the reasoning. Failure to do so was one of the key elements of the $22.8 million settlement noted above, where DOJ emphasized that although the importer had received Form 29 Notices of Action, it took to correct its ongoing entries (and never corrected prior entries).

Customs Compliance Response

• Set Up ACE Notifications. Importers should set themselves up with ACE access so that they directly are receiving copies of Form 28 Requests for Information, Form 29 Notices of Action, and other communications from Customs rather than relying on customs brokers to provide such information. This will ensure that the importer is aware of all potential corrections to its Form 7501 Entry Summary information and can timely respond to any Customs inquiries.

• Follow Through on Implementing Conforming Changes. When Customs issues a correction to a single entry or set of entries, the importer is required to identify all analogous entries and correct them for any unliquidated entries, because they are not final. Customs also has the authority to open an inquiry into liquidated entries under Section 1592 if the importer does not file a voluntary disclosure.

Risks Arising from Failure to Notice Red Flags from Suppliers

Under Customs regulations, the importer of record has the sole responsibility to pay all tariffs due. There is, however, no such restriction under the FCA, which means that multinationals that receive imported goods from suppliers can still be liable for FCA claims. For example, an importer of garments from China paid to settle allegations that it 鈥渞epeatedly ignored warning signs that its business partner, which imported garments from China, was engaged in a scheme to underpay customs duties owed on the imported garments it sold to鈥� the importer. Thus, even though the customer was not the importer of record, it settled on the basis it had accepted 鈥渞esponsibility for its failure to take action in response to multiple warning signs that [the importers of record] were undervaluing their imported goods and therefore paying less in import duties than they should have been paying.鈥�

Moreover, in 2016, both the importer and manufacturer of clothing goods agreed to pay to settle claims that they conspired to underpay customs duties using invoices that misrepresented the value of the goods at issue. That same year, a U.S. defense contractor agreed to pay to settle allegations that it used Chinese-imported ultrafine magnesium in flares manufactured and sold to the U.S. Army, in violation of its contract with the military. Though it was the importer who allegedly misrepresented the country of origin, DOJ alleged that the contractor conspired with the importer to sell the nonconforming goods to the government.

Customs Compliance Response

• Monitor Business Partners for Red Flags. In a high-tariff environment, there are more incentives than ever for importers to take steps to try to minimize their tariff liabilities. Educate personnel in Procurement, Accounting, and other relevant areas of the company to be alert to potential underpayments by suppliers, which also is useful for situations where business partners might provide incorrect information where your company acts as the importer of record. Simply put, know your business partners well.

Risks Arising From Avoiding Customs Penalties

In general, any situation in which an importer takes steps to avoid Customs penalties can lead to a potential FCA penalty. Examples include failing to mark the country of origin (10% Customs penalty), providing false or misleading information on entry documents (as we covered in Part II), failing to maintain required records, or noncompliance with forced labor regulations. By way of example, the Third Circuit found that failure to notify Customs of marking violations can support an FCA allegation. 839 F.3d 242 (3rd Cir. 2016), cert. denied, 138 S.Ct. 107 (2017). Illustrating this risk, an importer paid to settle allegations that it had failed to mark imported pharmaceutical products with the appropriate COO and thus violated the FCA by 鈥渒nowingly avoiding the marking duties owed to the United States for those imports.鈥�

Another example includes a DOJ settlement in which an importer agreed to settle allegations that it falsely labeled tools it imported as 鈥渕ade in Germany鈥� when the tools were, in fact, made in China. According to DOJ, if the products had been described as Chinese products, the importer would have been required to pay a 25% tariff on the goods. Thus, by allegedly falsely describing the tools as 鈥淕erman,鈥� the importer avoided paying these tariffs.

Customs Compliance Response

• Confirm Consistent Marking. Ensure the COO for marking decisions is made in accordance with the correct legal regime, by following the rules of free trade agreements like the USMCA (even in situations where special tariffs may require the use of substantial transformation principles for determining the amount of other tariffs due). Ensure marking is made either directly on the product or, where allowed, on a relevant container or other acceptable fashion to ensure it remains intact for the ultimate purchaser.

• Maintain Required Records. Customs regulations require that, subject to certain exceptions, records must be kept for five years from the date of the activity which required creation of the record. Importers should ensure that they are complying with Customs recordkeeping requirements and that their employees are familiar with recordkeeping requirements. The FCA also requires that documents supporting claims 鈥� and the claims documentation itself 鈥� be true and accurate.

• Conduct a Supply Chain Integrity Check and Continuous Monitoring. Complying with labor and transparency requirements is integral to tariff management. Importers should know every step in their supply chains and conduct integrity checks or audits of their suppliers. This can help ensure your company stays informed of new developments to comply with laws 鈥� especially in the areas of forced labor, human trafficking, environmental regulations, and modern slavery 鈥� and thus avoid potential FCA liability pertaining to these types of regulations. Importers also should implement systems to regularly monitor their suppliers鈥� performance and compliance, and continuously evaluate their supply chain for new potential risks that might arise. For further guidance on how to best monitor your supply chain, check out our white paper on Managing Supply Chain Integrity Risks.

Between the new Trump tariffs, increased Customs attention to tariff underpayments, newly announced DOJ emphasis on tariff payments, and the greater visibility of Customs into importing data, the potential for Customs FCA actions is greater than ever. As demonstrated throughout this three-part series, DOJ has a rich history of using a wide variety of issues to support FCA actions. DOJ鈥檚 announced attention to concentrate on Customs compliance and the full payment of tariffs means that future customs-related FCA cases will build on a foundation of existing cases. These previous cases have already given DOJ and whistleblowers the chance to test out a multitude of the factual and legal theories discussed throughout this series, with both DOJ and relators likely to be incentivized by the potential for significantly higher recoveries and the apparent increased enforcement flexibility resulting from the new tariff regime.

Thus, under the Trump administration鈥檚 trade agenda, multinationals should expect heightened scrutiny of imports and DOJ鈥檚 increased use of the FCA to bring customs-related actions. It is therefore more critical than ever for importers to assess and revamp their Customs compliance programs to address these new risks. Proactively addressing compliance issues, strengthening internal controls, and documenting decision-making processes can reduce exposure and better position multinationals to respond effectively if Customs scrutiny arises. In an environment with increased potential for enforcement and where corresponding penalties are steep, early preparation is both a risk management strategy and a competitive advantage.

If you would like further information about managing Customs and international trade risks, we recommend our white paper on Managing Import and Tariff Risks During a Trade War.

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The Foley International Government Enforcement Defense & Investigations Team is monitoring all tariff-related developments, including any modifications, clarifications/guidance, or additional measures introduced by the Trump administration, which we are posting as they occur on our Tariff & International Trade Resources blog. As new information becomes available, we will provide updates and analysis to help importers navigate the evolving international trade paradigm, including for new tariffs.

Our white paper on 鈥淢anaging Import and Tariff Risks During a Trade War鈥� outlines a 12-step plan to provide practical steps to help importers navigate the tariff and international trade risks in the current tariff and trade environment, while the companion white paper on 鈥淢anaging Supply Chain Integrity Risks鈥� provides practical advice to deal with heightened supply chain risks pertaining to goods imported into the United States, including the increasing use of detentions by Customs.

If you have questions about this post, please feel free to reach out to any of the authors or your 番茄社区; Lardner attorney. If you would like to see future updates regarding 鈥淲hat Every Multinational Company Needs to Know鈥� about operating in today鈥檚 complicated international trade world, please sign up for our Tariff & International Trade blog 鈥�

As detailed in Part I of our three-part series on Minimizing Customs Enforcement and False Claims Act Risks, the combination of the new high-tariff environment, the heightened ability of Customs (and the general public) to data mine, and the Department of Justice鈥檚 (DOJ) stated focus on using the False Claims Act (FCA) substantially increases import-related risks. In light of this heightened risk, Part II and the forthcoming Part III of this series focus on preparing for specific areas where we see heightened enforcement risk, both for Customs and FCA penalties, with this article addressing the most common FCA risks arising from submitting false Form 7501 entry summary information.

Risks Arising from Misclassifications

By far, the most common Customs errors we see relate to misclassifications on Form 7501 entry summaries. If made knowingly, these misclassifications can lead to FCA liability, as demonstrated by a high incidence of DOJ settlements based on alleged known classification errors. Relevant FCA examples include and settlements, each premised on importers knowingly misclassifying entries into lower-tariff classifications to avoid paying duties owed on the companies鈥� imports.

Additionally, aggressively classifying goods to avoid being subject to the China Section 301 tariffs can create the risk of FCA liability. Such opportunistic classification led to a settlement by an importer that used inaccurate classifications despite receiving repeated CBP notices informing the importer that the classifications it had been using for similar goods were erroneous. The importer continued using the incorrect classifications for over three years, even after an outside consultant confirmed the importer had been using incorrect classifications.

Customs Compliance Response

• Maintain a Regularly Updated Classification Index. Well-supported and consistent classifications are the key to avoiding these types of errors. The most important tool for ensuring accuracy in classifications is a robust and regularly updated Customs Classification Index, which should list the HTS classification for regularly imported SKUs while incorporating support for classification decisions made, including an application of the Customs General Rules of Interpretation, advisory opinions, responses to protests against liquidation, and other relevant support.

• Conduct Classification Reviews. We often find that importers leave classification decisions up to customs brokers, assuming they are experts and responsible for identifying the correct codes. Customs, however, places full responsibility for the accurate submission of all Form 7501 information on the importer of record, not the broker. Periodically review your classifications, especially for frequently imported items, to ensure accuracy.

• Evaluate Classification Accuracy in Post-Entry Reviews. Customs allows importers 310 days after entry to fix any classification errors. Conduct post-entry checks to confirm the accuracy of all submitted information, and use post-summary corrections to correct any errors, including misclassifications, before liquidation. This will help catch errors and, where corrected, undermine FCA scienter.

• Review Tariff Engineering. With tariff rates rising, Customs is aggressively looking for importers who have engaged in opportunistic classification to try to lower import charges. This includes a special focus on importers who have changed their classifications after the imposition of new tariffs. This does not mean importers should view themselves as locked into adverse and incorrect classifications. They should, however, adequately document any classification changes and be prepared to respond promptly to Customs inquiries.

Risks Arising from Misrepresenting the Physical Characteristics of Imported Goods

Making known misrepresentations to incorrectly claim a lower tariff classification can lead to FCA liability. For instance, an importer of brake parts settled an FCA case alleging it knowingly misrepresented the physical characteristics of its entries (claiming they were duty-free unmounted brake pads rather than mounted brake pads subject to a 2.5% classification) for .

Customs Compliance Response

• Confirm Accuracy of Factual Support for Classifications. In most cases, classification is determined by (1) the physical attributes of the product and, in certain cases, (2) the primary use of the product. Ensure you have accurate backup and consistent classification for each of these issues.
• Document and Retain Classification Decisions. Ensure you maintain detailed records for all classification determinations, and keep them for at least five years from the time of entry.

Risks Arising from Improper Country of Origin Declarations

Because of the imposition of special Section 301 tariffs on China, the number of importers caught making errors relating to declaring the wrong country of origin (COO) has sharply risen. The imposition of reciprocal tariffs only magnifies the importance of the COO. Generally these cases involve imported goods that were assembled in third countries using parts and components from a high-tariff country. In these situations, careful analysis is required to ensure there is sufficient manufacture, value added, and change in the name, character, and use of the product so the result is a 鈥渟ubstantially transformed鈥� product that is a new and different article of commerce.

FCA cases illustrate the twin risks that can arise from incorrect COO declarations. In 2021, the DOJ settled an FCA matter for , alleging the importer knowingly failed to designate that certain imports were manufactured in China, thus evading Section 301 duties.

Customs Compliance Response

• Confirm Accuracy of Substantial Transformation Analysis. One of the highest-priority areas of Customs scrutiny is to find instances of importers evading customs duties either by transshipping through lower-tariff third countries or by shipping parts and components to a third country and then engaging in only minor assembly operations (e.g., from China to another Southeast Asia country). If the goods are not substantially transformed into a new and different article of commerce, then they cannot claim the lower-tariff COO. Review all instances where parts and components from a high-tariff country, like China, are used in further manufacturing in a lower-tariff country. Ensure there is a reasonable basis for the COO declaration, and document the analysis in case of Customs inquiry.

Risks Arising from Undervaluation

Failing to declare the full value of entries is another common error. Most importers use transaction value, which requires the importer to start with the price actually paid or payable, add certain mandatory additions (e.g., the value of assists and royalties), and accurately reflect any allowed voluntary deductions. Recent examples include , , and settlements of allegations relating to known under-declared entry values resulting in underpaid tariffs, as well as a of civil claims resulting from the DOJ joining an FCA whistleblower lawsuit. An additional sobering example is a settlement of claims against an importer that knowingly undervalued its goods through the remedy of .

More specifically, the known failure to include assists (i.e., customer-provided production aids such as tools, dies, and molds) within the entered value can incur FCA liability. Where a U.S. company provides such assists, it needs either to declare the full value of the assist on the first entry or set up a system to attribute the full value of the assist over the useful lifetime of the product, thus declaring it piecemeal over time. These values do not show up on commercial invoices, making it easy to forget to include this mandatory addition to entered value. But the risks of knowingly failing to do so are demonstrated by two FCA settlements of $4.3 million and for the alleged failure to include assists in the entered value.

Customs Compliance Response

• Understand How to Calculate Entered Value. Most companies use transaction value to determine the entered value. Valuation is complicated in situations involving post-entry price adjustments, cash or quantity discounts, indirect payments, exchange rate conversions, and other tricky areas. Ensure valuation is calculated correctly for all entries, including for the inclusion of off-invoice mandatory additions to value.

• Establish a System for Identifying and Tracking Assists, and Consistently Follow It. Importers should have a system for systematically identifying and tracking assists, which can be as simple as a spreadsheet. If this historically has not been done, a review of a company鈥檚 trial balance ledger can potentially identify historically provided assists. All assists either should be recognized on the first entry of the applicable universe of goods or apportioned over the expected useful lifetime of the assist. If the latter method is used, establish a system for tracking all relevant entries benefiting from assists and consistently add them when calculating the entered value. Share such information with your customs broker to implement a secondary check.

Risks Arising from Improper Claims of Preferential Treatment Under Free Trade Agreements

Another common error we see is failing to meet free trade agreement (FTA) requirements, such as failing to work through the COO requirements. Along these lines, in one FCA action an importer paid to settle allegations that, among other things, it knowingly claimed improper preferential treatment under FTAs.

Customs Compliance Response

• Always Have Certificates of Origin On Hand at Time of Entry. One of the most common errors we see in customs audits and disclosures is one of the simplest to fix: Ensure that you always have the USMCA certificate of origin available at the time of importation. Under the USMCA, it is not possible to create these after the time of entry.
• Apply Correct Country of Origin Principles. FTAs include different COO principles. These generally are based on a tariff-shift analysis, which is viewed as providing more certain outcomes than the more subjective substantial transformation test commonly applied by Customs. Certain products, such as automotive products under the USMCA, also have special rules for determining preferential status. Note as well that it may be necessary to apply FTA principles to determine the COO for purposes of paying normal Chapter 1-97 duties while applying substantial transformation principles for determining the country of origin for special tariffs, such as section 232 or 301 tariffs imposed by President Trump.

Risks Arising from Failure to Pay Antidumping and Countervailing Duty Orders (AD/CVD Orders)

In addition to the normal Chapter 1-97 tariffs, the U.S. government imposes a parallel set of duties under more than 600 AD/CVD orders. Because AD/CVD tariffs often are very high, failure to properly declare and pay all AD/CV duties can quickly run up tariff underpayments.

As a result, one of the most common Customs FCA claims is for failing to pay AD/CV duties. agreed to pay $500,000 to resolve allegations that it violated the FCA by knowingly making false statements on customs declarations to avoid paying AD duties on imports from China, with four other importers agreeing to pay , , , and based on alleged known classification failures based on the same order. Three other importers paid settlements of to settle allegations that they had knowingly evaded AD duties under the aluminum extrusions AD duty order, while another paid to resolve allegations that it knowingly misrepresented the COO to evade AD/CV duties.

Customs Compliance Response

• Use HTS Screening. The scope of an AD/CV duty is determined by its written scope, not whether it falls within any given HTS subheading. Nevertheless, every order provides HTS subheadings for the convenience of importers. Screen all entries against these HTS subheadings as an initial check, and follow up on any potential matches.
• Be Wary of Counter-Intuitive Coverage of AD Duty Orders. Be aware that certain AD/CVD orders, such as the aluminum extrusions order against China, are not susceptible to HTS screening and require individual examination. Also, consider that certain AD duty orders, such as the one on solar panels, have tricky rules for determining the product scope. Learn which orders are of particular relevance for your import profile and carefully screen all potential matches against them.

Risks Arising from Misapplying Customs Duty-Free Exemptions

A number of Customs programs can result in duty-free entries, such as U.S. goods returned and the Generalized System of Preferences. Illustrating the risks inherent in misapplying duty-free exemptions, importers paid and to settle allegations that involved 鈥渋mproperly evad[ing] customs duties 鈥� breaking up single shipments worth more than those amounts into multiple shipments of lesser value in order to avoid the applicable duties.鈥�

Customs Compliance Response

• Carefully Confirm Eligibility Under All Tariff-Saving Programs. Each tariff-saving program has its own rules, which can include special eligibility requirements. Carefully review these rules and document their applicability before claiming preferential treatment.

Risks Arising from Failure to Appropriately Value Goods from Related Parties

Another common problem is that importers either do not have a transfer pricing study in place to support the arms-length nature of their pricing when purchasing from affiliates, or they improperly rely on an IRS transfer pricing study (which is impermissible because CBP has specific standards for transfer pricing studies that differ from the IRS standards). Although we are not aware of any FCA case alleging improper pricing from related parties, this conduct is common and can potentially impact a large volume of entries, making a known misdeclaration a risk factor for potential FCA liability.

Customs Compliance Response

• Confirm the Existence of a Customs-Specific Transfer Pricing Study. If you do not have a customs-specific transfer pricing study in place, consider conducting or hiring a customs accounting specialist to prepare a bridge memorandum to analyze the underlying data. If you do not have an IRS transfer pricing study, then obtain one (and also take care of your IRS transfer pricing requirements).

• Confirm the Consistent and Accurate Application of the Results. It is important not only to have a customs transfer pricing study but also to consistently apply its results. Ensure the entered value from every import from a related party is confirmed against the conclusions of the study.

In sum, DOJ has a rich history of using a wide variety of issues to support FCA claims, especially relating to the known false submission of Form 7501 entry summary information. By considering the compliance responses outlined above, importers can ensure that their entry summary information is accurate in the first place, to best avoid known false submissions. Part III of this series will turn its focus to FCA risks arising from improper management of import operations.

If you have questions about this topic, please feel free to reach out to any of the authors or your 番茄社区; Lardner attorney. If you would like to see future updates regarding 鈥淲hat Every Multinational Company Should Know鈥� about operating in today鈥檚 complicated international trade world, please sign up for our Tariff & International Trade blog 鈥�