United States: (Really) Red Ink: $45 Million Settlement On Ink Imports Highlights The Significance Of Country Of Origin Analysis

In December 2012, the US Department of Justice (DOJ) announced a $45 million settlement with an importer of pigment used in ink manufacturing.  The importer had been charged with misdeclaring the country of origin of the pigment.  The issue was whether certain intermediate processing operations were sufficient for the imported product to be declared as originating in the country where the processing occurred.  The publicly-released description of the settlement – and the large settlement amount – highlights the importance of country of origin analysis.  Examined closely, the case also is a useful reminder that products do not always have just one country of origin.  US law requires different types of origin analyses for different situations.

Toyo Ink is a Japan-based company with worldwide operations.  Carbazole violet pigment number 23 (CVP-23) is a colorant used in the manufacture of ink.  Since 2004, imports of CVP-23 have been subject to antidumping duties for imports from India and China (ADs) ranging from 5.51% to 217.94%, and additional countervailing duties (CVDs) on imports from India ranging from 17.33% to 33.61%.  These additional import duty percentages are assessed at time of entry – but only on CVP-23 that originates from China or India.  For any CVP-23 manufactured in any other country, these additional US import duties do not apply.

The DOJ announced that Toyo paid the $45 million settlement in order to resolve allegations of false origin declarations – no determination of liability was made.  However, the charges (now settled) were that Toyo had knowingly misrepresented the country of origin in its import declarations for CVP-23, in order to avoid paying the ADs and CVDs that otherwise would have been collected by US Customs and Border Protection (CBP) at importation.  Toyo sourced its inputs from China and India, but sent the raw material to Japan or Mexico for processing into finished CVP-23.  Upon arrival in the United States, Toyo declared that Japan or Mexico was the country of origin and, accordingly, that the ADs and CVDs did not apply.  The US Government took the position that the finishing process in Japan or Mexico was insufficient to substantially transform the CVP-23, so that the correct country of origin – even of the finished product – remained the country of origin of the raw CVP-23 (China or India), and the additional AD/CVD duties should have been paid upon US importation. 

In the DOJ statement, Stuart F. Delery, Principal Deputy Assistant Attorney General for the Justice Department’s Civil Division, warned that the Toyo settlement “demonstrates that the Department of Justice will zealously guard the public fisc – taking action not only against those who fraudulently obtain government funds, but also against those who inappropriately avoid paying money owed to the United States.”  Similarly, Anne M. Tompkins, US Attorney for the Western District of North Carolina, stated, “Fair and lawful trade requires importers to truthfully identify their products and pay the appropriate duties.  Our office will vigorously investigate and prosecute importers who make false representations and claims designed to avoid the payment of lawful import duties.”

Although the DOJ announcement states that the (now settled) charges against Toyo were for knowing misdeclaration of origin, it is useful to contrast this ink case with another recent country of origin controversy surrounding products subject to ADs.  In February of this year, the US Government announced commercial fraud charges in connection with misdeclared country of origin of honey.  Honey also is subject to ADs, but only when produced in China, not from any other country.  However, in the honey case, the imports subject to enforcement did not experience any further processing outside of China.  Reports indicate that the honey was entirely of Chinese origin and was shipped directly to the United States, or merely through a third country, and simply declared as originating in a country other than China in order to avoid the additional duties.  In the honey case, the fraud is clear because the honey experienced no processing outside of China, so no country other than China could have been the correct origin for the honey that arrived in the United States.

In contrast, in the CVP-23 case, there was at least some processing outside China and India.  The DOJ notice does not describe the extent of the later processing in Japan or Mexico nor does it state whether anyone involved might have reasonably believed that the further processing properly changed the origin of the goods.  If that processing had been “substantial,” as defined by US law, the origin of the CVP-23 would have changed.  In that case, US law would have required Toyo to declare a country of origin other than China or India.  This aspect of the Toyo case demonstrates the importance for importers to review the processing operations experienced by a product in various countries before arrival in the United States, and to compare those operations to the country of origin definition that applies to the specific product being declared.  Most importantly, importers and purchasers must always keep in mind that the country of origin analysis required by US law will change depending upon the product being declared.  For example:

• US imports:  For many goods imported into the United States, the country of origin to be declared upon importation, and to be marked on the goods, will be the country in which the item experienced its last “substantial transformation” before arriving in the United States.  “Substantial transformation” is defined by the CBP Regulations as a change in “name, character or use.”  This analysis will change according to the nature of the product and importers often will need to review CBP rulings on similar products to determine which processing can be considered “substantial.”  In addition to CBP’s usual enforcement penalties, imported goods not properly marked are subject to an additional 10% duty on the value of the imported goods.  Moreover, textiles are subject to their own origin rules that require careful scrutiny to determine the correct country of origin.
  
  
• AD/CVD:  For the CVP-23, separate from the origin analysis for the CBP declaration and marking of the goods, the origin for AD/CVD purposes was governed by an analysis required by the US Department of Commerce (DOC).  Unhelpfully, the DOC’s analysis also is called “substantial transformation,” just like the one used by CBP.  However, the DOC’s test is not the same at CBP’s test for declaration and marking purposes, even though several of the same themes are covered.  The DOC’s analysis for AD/CVD purposes can occasionally result in an origin result different from the CBP test.
  
  
• US Free Trade:  Determining the country of origin of an item according to “substantial transformation” does not mean that US law regards the item as a product of that country for all purposes.  Free trade agreements such as the North American Free Trade Agreement (NAFTA) and import programs such as the Generalized System of Preferences (GSP) each have their own definitions of country of origin.  NAFTA origin usually requires an analysis of the harmonized tariff numbers for the finished good and its inputs and may require an analysis of local value content.  GSP requires an analysis of both substantial transformation and local value content, with exceptions for certain products (not to mention expiration of the GSP program from time to time).  Other programs such as the Caribbean Basin Economic Recovery Act, and other US free trade agreements with Chile, the Dominican Republic and Central America, Israel, Jordan, Korea, Morocco, Singapore, and other  countries, each have their own definition of origin.  In order to claim duty-free treatment under any one of those programs, the US importer typically must review the standard for that specific program and collect the commercial documents showing that specific standard for that program has been met by the item being imported.  In addition, the trade agreements’ rules may require a separate analysis for country of origin marking.
  
  
• Made in USA:  Even if a product is proven to be processed in the United States such that it no longer must be marked with a foreign country of origin (or even can be declared as US-origin if re-imported), this does not mean that the goods can be marked “Made in USA” when sold in the United States.  The “Made in USA” description is governed by an entirely separate set of rules from the US Federal Trade Commission (FTC).  The FTC requires that “all or virtually all” inputs and labor be of US origin before a “Made in USA” (or similar language) marking or advertisement may be used.  This is a much higher standard than parts from various countries being “substantially transformed.”  It is fairly common for an item to be processed in the United States from imported inputs such that a foreign country of origin marking is not required under CBP rules, but a “Made in USA” marking still is not permitted under FTC rules.  The FTC permits less absolute statements to be used (such as “Assembled in USA” or “Produced in USA from imported parts”) depending on the specific facts.
  
  
•  US Government Procurement:  Regardless of the country of origin found and declared for the imports above, the US Government has further, separate standards for the items it purchases.  Some items purchased by the US Government are subject to the Buy America Act, which requires manufacturing in the United States and 50% US value content.  However, government procurement purchases more often are subject to the Trade Agreements Act (TAA) which permits purchases of goods that are US-origin or that originate from one of several countries with which the United States has a specific treaty arrangement.  The TAA requires goods to be (1) entirely produced in the United States or one of the designated countries, or (2) “substantially transformed” in an approved country.  TAA substantial transformation analysis does rely on CBP standards and rulings, which should be reviewed before certifying compliance to the US Government.  

In the Toyo case, the CVP-23 from India or China was subject to product-specific AD/CVD orders, but the risk arising from errors in a country of origin analysis is much broader than AD/CVD enforcement.  In addition to the usual penalties and enforcement that can come from CBP or the other government agencies described above, country of origin is increasingly seen as an issue that can be addressed under the False Claims Act (FCA).  Under the FCA’s qui tam provision, whistleblowers can sue on behalf of the US government and receive a portion of any funds recovered under the suit.  The allegations that Toyo Ink was making false origin claims for AD/CVD purposes on imports of CVP-23 were first made in a whistleblower lawsuit filed under the FCA by John Dickson, the president of a US producer of CVP-23.  Reports estimate that Mr. Dickson’s share of the Toyo settlement as more than $7,875,000.  Numerous reports, websites and blogs have publicized the Toyo payout as an example of the benefits of filing whistleblower claims in these situations.

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