Whistleblower Exposes Practices of Wal-Mart, JC Penney Importers

U.S. Attorney settles custom fraud case related to apparel made in China

By Dennis Schaal

The U.S. Justice Department and three apparel importers settled a customs fraud case that saw goods manufactured in China falsely labeled as made in Korea or Russia, and sold as such in the United States at Wal-Mart, JC Penney, Family Dollar Stores, Kohls and Marshalls stores.

The benefit to the subterfuge was that the importers—Intertex Apparel Group, J.J. Basics and Ben’s Clothing—could evade quotas on goods manufactured in China and dodge customs fees by under-valuing “the actual cost for those goods charged by the Chinese manufacturers,” according to the U.S. Attorney, Southern District of New York.

The case was developed by a whistleblower who worked in China for Intertex. Under the False Claims Act, whistleblowers are entitled to receive 15 percent to 30 percent of settlements, which in this instance was $2.8 million. The act enables the government to intervene in fraud cases brought by private individuals.

Wal-Mart, JC Penney, Family Dollar Stores, Kohls and Marshalls, which sold apparel from the importers, were not defendants in the case.

However, Joseph Black of the Washington, D.C., Cullen Law Firm, which represented the whistleblower, told CRO that “we alleged in our complaint that the retailers placed orders with Intertex and the other defendants and knew the source of the apparel. They benefitted, of course, because they obtained their goods at prices lower than if the goods were legally imported. The government, however, chose not to pursue the retailers because of the difficulty of proof.”

“We were confident they knew,” Black added, referring to the retailers.

But, Darcie Brossart, a J.C. Penney spokeswoman, disagreed.

"J.C. Penney had absolutely no knowledge of this alleged fraud," Brossart said. "J.C. Penney doesn't tolerate and refuses to take part in the practice of false country of origin labeling and, in fact, has taken many steps over the years to ensure that our suppliers know and understand the law, and J.C. Penney's expectations are for full compliance," Brossart said.

"J.C. Penney's supplier legal compliance program strives to ensure that the suppliers we do business with comply with all applicable laws and regulations, as well as our own stringent requirements," Brossart added. "In fact, our suppliers are required to certify the location of where the goods were manufactured, and we have on-site monitors at all factories where J.C. Penney private brand merchandise is manufactured. If there is credible evidence that one of our suppliers, or one of their contractors, is violating the legal compliance provisions of our contracts, we will take immediate action." 

The  importers' practice, which is believed to have gone on for several years, apparently ended in 2005 when the China quotas were dropped, Black said.

The apparel-importer defendants agreed to the $2.8 million settlement, but didn’t admit any wrongdoing.

The case highlights the ethical and business challenges that companies face as they try to monitor their supply chains and trim costs for competitive reasons.

For more on supply chain issues, read China Checkup .