U.S. Files False Claims Act Lawsuit Against Barco Uniforms, Executives, and Affiliated Companies Alleging Systemic Customs Duty Evasion Scheme
SACRAMENTO, Calif. – The United States Department of Justice has initiated significant legal action against Barco Uniforms Inc., a prominent supplier of professional apparel, along with executives Kenny Chan and David Chan, and several companies allegedly operated and controlled by them. Filed in the Eastern District of California, the government’s complaint alleges that the defendants engaged in a long-running conspiracy to violate the False Claims Act (FCA) by knowingly underpaying millions of dollars in customs duties owed on apparel imported into the United States, primarily from the People’s Republic of China (PRC).
The lawsuit contends that Barco Uniforms, a California-based company founded in 1929 and known for supplying uniforms to healthcare providers and other sectors , conspired with its suppliers, allegedly managed by Kenny and David Chan, to systematically defraud the U.S. government. The core of the alleged fraud involves a sophisticated “double-invoicing” scheme designed to conceal the true value of imported garments, thereby significantly reducing the customs duties paid to U.S. Customs and Border Protection (CBP).
This enforcement action underscores the federal government’s increasing focus on combating customs fraud, particularly through the potent legal mechanism of the False Claims Act, which carries severe financial penalties including treble damages and substantial fines per violation. The case originated from a whistleblower lawsuit filed under the qui tam provisions of the FCA by a former Barco employee, highlighting the critical role private citizens can play in uncovering fraud against the government.
“Those who import and sell foreign-made goods in the United States must comply with all trade laws,” stated Acting Assistant Attorney General Yaakov M. Roth of the Justice Department’s Civil Division. “The Department will hold accountable parties who evade or underpay duties owed on imported merchandise.”
Acting U.S. Attorney Michele Beckwith for the Eastern District of California added, “We will not allow parties engaging in fraudulent schemes to underpay rightful customs duties to profit at the expense of the American public.”
The Alleged Fraudulent Scheme: Double Invoicing and Undervaluation
The government’s complaint details a complex scheme allegedly orchestrated by Barco Uniforms, Kenny Chan, David Chan, and a network of affiliated supplier companies. The central allegation is that the defendants systematically undervalued imported apparel purchased by Barco from overseas manufacturers, primarily located in China.
According to the complaint, the defendants employed a classic customs fraud tactic known as “double invoicing”. This practice allegedly involved creating two sets of invoices for the same shipment of goods:
- The “True” Invoice: Reflecting the actual, higher price paid by Barco to the foreign suppliers (controlled by the Chans) for the apparel. This invoice was used for internal accounting and payment between the parties.
- The “Customs” Invoice: A falsified invoice showing a significantly lower price for the same goods. This fraudulent invoice was allegedly presented to CBP as part of the import entry documentation.
By submitting the undervalued “Customs” invoice and associated false entry summaries to CBP, the defendants allegedly caused the calculation of customs duties to be based on artificially low values, resulting in substantial underpayment of duties legally owed to the United States government. Customs duties are typically calculated as a percentage of the imported goods’ declared value; therefore, understating this value directly reduces the duty liability.
The government further alleges that this fraudulent conduct persisted even after Barco Uniforms was explicitly warned about the risks associated with potential duty underpayments. According to the complaint, a third-party auditor hired by Barco identified potential issues and advised the company to “double-check” the duty calculations underlying the prices Barco paid its foreign suppliers. Despite this warning, the defendants allegedly continued the undervaluation scheme.
The network of companies allegedly involved in supplying Barco and facilitating the scheme, operated and controlled by Kenny and David Chan, includes:
- Able Allied Limited
- Nathan Global Direct Inc.
- J&K Garment Inc.
- Mega Goodwill Ltd.
- JS Garment Co.
- Superway Import & Export Inc.
The following table outlines the parties named as defendants in the lawsuit and their alleged roles:
Table 1: Defendants Named in United States v. Barco Uniforms Inc., et al.
| Defendant Name | Alleged Role/Description |
|---|---|
| Barco Uniforms Inc. | Primary Importer/Purchaser |
| Kenny Chan | Operator/Controller of Supplier Companies |
| David Chan | Operator/Controller of Supplier Companies |
| Able Allied Limited | Chan-Controlled Supplier Company |
| Nathan Global Direct Inc. | Chan-Controlled Supplier Company |
| J&K Garment Inc. | Chan-Controlled Supplier Company |
| Mega Goodwill Ltd. | Chan-Controlled Supplier Company |
| JS Garment Co. | Chan-Controlled Supplier Company |
| Superway Import & Export Inc. | Chan-Controlled Supplier Company |
Export to Sheets
The Legal Framework: Customs Procedures and the False Claims Act
Understanding the legal context requires examining both standard U.S. customs procedures and the specific provisions of the False Claims Act under which the government is suing.
U.S. Customs Import Procedures: When goods are imported into the United States, importers are legally obligated to declare specific information to CBP. This includes accurately describing the merchandise, its country of origin, and, critically, its value. This information is typically submitted through entry documents, including a commercial invoice and an entry summary (CBP Form 7501).
The customs value is the primary basis upon which duties are assessed. U.S. law mandates specific methods for determining this value, with the preferred method being the transaction value – essentially, the price actually paid or payable for the goods when sold for export to the U.S.. The commercial invoice serves as the primary evidence of this transaction value. CBP relies heavily on the accuracy and truthfulness of these declarations and supporting documents to calculate and collect the correct amount of import duties.
Failure to declare the correct value, whether through negligence or intentional fraud like undervaluation or double invoicing, constitutes a violation of customs law. Such violations can lead to administrative penalties assessed by CBP, ranging from recovery of unpaid duties to fines potentially equaling the domestic value of the merchandise in cases of fraud. However, the government’s decision to pursue the Barco case under the False Claims Act signals allegations of a more serious, knowing, and potentially systemic effort to defraud the U.S. Treasury.
The False Claims Act (FCA): A Powerful Anti-Fraud Tool: Originally enacted in 1863 to combat defense contractor fraud during the Civil War, the False Claims Act (31 U.S.C. §§ 3729-3733) has become the government’s primary weapon against fraud involving federal funds or property. While often associated with fraudulent billing for government services (e.g., healthcare fraud), the FCA also applies to situations where individuals or companies knowingly avoid paying money owed to the government.
This is known as a “reverse false claim”. Under 31 U.S.C. § 3729(a)(1)(G), liability arises if a party “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government”. Customs duties are a clear example of such an obligation. Therefore, knowingly submitting false documentation (like undervalued invoices) to CBP to reduce duty payments falls squarely within the scope of the FCA’s reverse false claim provision.
The “knowing” standard under the FCA includes not only actual knowledge but also deliberate ignorance or reckless disregard of the truth. An innocent mistake, if discovered and not corrected, can ripen into a knowing violation.
Severe Penalties Under the FCA: Pursuing customs fraud under the FCA significantly elevates the financial stakes compared to standard customs penalties under Title 19 of the U.S. Code (e.g., Section 1592). Key differences include:
- Treble Damages: The FCA mandates damages equal to three times the amount the government lost due to the fraud (i.e., three times the underpaid duties).
- Per-Claim Penalties: In addition to treble damages, the FCA imposes substantial civil penalties for each false claim submitted. These penalties are adjusted for inflation and currently range from $11,463 to $22,927 or higher per violation. In a scheme involving numerous import entries over several years, these penalties can quickly accumulate into millions of dollars.
- Lower Burden of Proof: Unlike criminal fraud, FCA cases are civil actions, requiring a lower burden of proof (preponderance of the evidence).
The following table contrasts the potential liabilities under the FCA with standard customs penalties:
Table 2: Potential Penalties Under the False Claims Act vs. Standard Customs Penalties
| Feature | False Claims Act (FCA) | Standard Customs Penalties (19 U.S.C. § 1592) |
|---|---|---|
| Damages | Treble (3x) Government Loss (Unpaid Duties) | Recovery of Unpaid Duties |
| Civil Penalties | $11,463 – $22,927+ per false claim (inflation-adjusted) | Varies by culpability: Up to domestic value (fraud); 2-4x duty loss (gross negligence); lesser amounts (negligence) |
| Required Culpability | Knowing violation (includes actual knowledge, deliberate ignorance, reckless disregard) | Fraud, Gross Negligence, or Negligence (No penalty if reasonable care exercised) |
| Initiation | U.S. Department of Justice (DOJ) or Qui Tam Relator (Whistleblower) | CBP Administrative Action or referral to DOJ for civil action |
Note: FCA penalty amounts are subject to periodic inflation adjustments.
The Role of the Whistleblower (Qui Tam): A distinctive feature of the FCA is its qui tam provision, which empowers private citizens (known as “relators”) with knowledge of fraud against the government to file a lawsuit on behalf of the United States. The lawsuit is initially filed under seal, allowing the DOJ time to investigate the allegations and decide whether to intervene and take over the primary prosecution of the case, as it has done in the Barco matter.
If the case is successful, the relator is entitled to receive a share of the government’s recovery, typically ranging from 15% to 30%, plus attorneys’ fees. This financial incentive encourages individuals with inside information about fraud to come forward. In this case, the lawsuit was originally filed by Toni Lee, identified as the former Director of Product Commercialization at Barco Uniforms. Qui tam suits have become a major source of FCA cases, leading to billions of dollars in recoveries for the U.S. Treasury annually. In FY2024 alone, the DOJ recovered over $2.9 billion from FCA cases, with a record number of qui tam suits filed.
Increased FCA Enforcement in Customs: The Barco lawsuit aligns with a broader trend of increased DOJ focus on using the FCA to combat customs fraud. Officials have explicitly stated their intent to “aggressively” deploy the FCA against importers evading duties, particularly in light of fluctuating tariff landscapes. Since 2011, there have been over 40 resolutions of FCA customs cases, recovering nearly $250 million, with nearly half occurring since 2023. Recent multi-million dollar settlements involving undervaluation, misclassification, and country-of-origin fraud demonstrate this commitment.
Industry Context: Barco Uniforms and Apparel Import Fraud
Barco Uniforms: A Legacy in Healthcare Apparel: Barco Uniforms Inc. is not a newcomer to the apparel industry. Founded in 1929 and shifting focus to healthcare uniforms in 1936 under Kenneth Donner, the company has built a 90+ year legacy. Headquartered in Gardena, California , Barco positions itself as a leader in design innovation for premium professional apparel, particularly within the healthcare sector.
The company is known for pioneering innovations like using nylon for easy-care uniforms, creating modern scrub sets, and offering tops and bottoms separately. Key brands under the Barco umbrella include the globally popular “Grey’s Anatomy™ by Barco” line (launched in partnership with ABC in 2006), “Barco One” (noted for using recycled materials), and “Skechers™ by Barco”. Barco states that one in three U.S. healthcare professionals has purchased its scrubs, indicating significant market penetration. The company emphasizes values of caring, innovation, quality, and sustainability, including using recycled materials in some product lines and supporting charitable work through the Barco’s Nightingales Foundation.
The allegations of systemic customs fraud stand in stark contrast to the company’s public image and stated values, making the lawsuit particularly noteworthy.
Customs Fraud in the Textile and Apparel Industry: The apparel and textile sector is frequently targeted by customs fraud schemes due to several factors. Textiles often carry relatively high import duty rates compared to other goods, sometimes exceeding 30%, creating a strong financial incentive for evasion. The complexity of global supply chains in the apparel industry also provides opportunities for illicit activities.
Common tactics used in the industry mirror those alleged against Barco, including:
- Undervaluation: Declaring a lower value for imported garments to reduce ad valorem duties.
- Misclassification: Using incorrect Harmonized Tariff Schedule (HTS) codes to qualify for lower duty rates.
- Country of Origin Fraud / Transshipment: Falsely declaring the origin of goods (e.g., claiming Chinese goods originate elsewhere) to avoid specific tariffs (like Section 301 duties) or circumvent quotas. This often involves routing goods through third countries.
CBP considers textiles a Priority Trade Issue, dedicating significant resources to enforcement. In Fiscal Year 2023, CBP seized over 5,000 textile shipments valued at more than $129 million and issued over $19 million in related penalties. The agency utilizes data analytics, physical inspections, factory verifications, and laboratory analysis to detect fraud. The rise of e-commerce and low-value (de minimis) shipments has also presented new challenges for enforcement.
The alleged scheme involving Barco, spanning potentially many years and numerous import entries, represents the type of large-scale, systemic fraud that both CBP and DOJ are actively targeting, particularly through the powerful provisions of the False Claims Act.
Government Commitment to Enforcement
Officials involved in the case emphasized the government’s resolve in pursuing customs fraud allegations.
“CBP is proud of the investigative work and analysis done on this case and will continue to work collaboratively with inter-agency stakeholders to safeguard our nation’s economic security,” said Director of Field Operations, David Salazar, of the CBP San Francisco Field Office.
The investigation involved collaboration between the DOJ Civil Division’s Commercial Litigation Branch, Fraud Section, the U.S. Attorney’s Office for the Eastern District of California, CBP, and Homeland Security Investigations. Senior Trial Counsel Elspeth A. England and Assistant United States Attorney David E. Thiess are leading the prosecution for the government.
Important Note
The claims asserted by the United States in the complaint, captioned United States ex rel. Lee v. Barco Uniforms Inc., et al., No. 2:16-CV-1805 (E.D. Cal.), are allegations only. There has been no determination of liability against Barco Uniforms Inc., Kenny Chan, David Chan, or the associated companies named in the lawsuit. The defendants will have the opportunity to respond to the allegations in court.
