Customs Fraud

What is customs fraud?

Many goods imported into the United States are subject to tariffs and duties, depending on the type of product and the country of origin. The U.S. government reports trillions of dollars in imported goods every year, and collects billions of dollars in duties.

Tariffs and duties help protect domestic industries from unfair pricing by foreign competitors. For example, imports from some countries are subject to special assessments, called anti-dumping tariffs and countervailing duties. The U.S. imposes such assessments when foreign exporters “dump” products on U.S. markets at prices below cost and to offset foreign government subsidies on certain goods.

But unscrupulous foreign exporters and U.S. importers engage in schemes to reduce or evade the payment of import tariffs and duties, motivated by substantial – but illegal – cost savings that can result.

Customs fraud includes the various schemes companies use to evade tariff and duty payments they owe to the federal government when they bring goods into the United States. Dishonest foreign exporters and domestic importers who evade customs tariffs and duties not only cheat American taxpayers, but also gain an unfair advantage over their competitors who follow the law.

What are different types of customs fraud?

There are many different kinds of fraud involving tariffs and duties. Some of the most common include:

Undervaluing imported goods.

The declared value of goods imported into the U.S. on the customs import declaration determines the amount of duty an importer must pay. To pay less than the amount they actually owe, dishonest importers fraudulently undervalue the actual cost of imported goods or falsify their quantity or weight, often by using forged or altered invoices. Undervaluation is the most common type of customs fraud.

Misrepresenting country of origin

Tariffs and duties vary based on a good’s country of origin. The country of origin for a good is generally the country in which the good is manufactured, produced or grown, though there are detailed rules for making that determination. To calculate the amounts an importer owes, the U.S. government uses country of origin “markings” that are on all imported products.

Unscrupulous importers use various methods to fraudulently misrepresent the origin of goods to evade tariff and duty payments. Dishonest importers may fraudulently misrepresent the origin of goods by marking the wrong country of origin or not including any country-of-origin information at all on the documents they must provide when importing goods.

Importers may also use a more elaborate means to misrepresent a good’s country of origin called “transshipping.” This involves deliberately shipping products from their actual country of origin (for example, China) to another country (say, Vietnam), and then to the United States, in an effort to falsely claim that intermediate country (here, Vietnam) as the country of origin. Importers also use transshipping to take advantage of lower customs duties on imports from the intermediate country, avoid quotas on goods from the actual country of origin, and benefit from special trade programs with the intermediate country that offer lower duty rates.

Misclassifying imported goods.

The U.S. government sets tariff and duty rates based on the imported item. Dishonest importers may falsely describe or classify a product to evade the actual amounts they owe. This is called misclassification.

The U.S. government has shown a keen interest in pursuing whistleblower cases involving misclassified imported goods.

Constantine Cannon represented a whistleblower who reported a long-running scheme by his former employer to misclassify brake pads imported from Asia to avoid tariffs resulting in an $8 million settlement.

Structuring or splitting shipments.

Imports of many goods below a certain value are not subject to customs duties. To take advantage of this exception, dishonest importers may “structure” or split a shipment up into multiple shipments to stay below the dollar threshold and avoid customs duties it owes.

While cases involving structuring imports to evade duties are less common, whistleblowers have been at the forefront of exposing such misconduct.

Constantine Cannon represented a whistleblower who reported that his former employer routinely split US-bound orders into separate shipments to avoid duties by artificially keeping the shipment value below a dollar threshold. The company agreed to pay $908,000, and the whistleblower received 18 percent of that settlement as a reward.

Does customs fraud violate the False Claims Act?

Yes. A knowing failure to pay customs tariffs or duties violates the False Claims Act. An importer or exporter may be liable under the False Claims Act for making false statements to avoid or decrease payments it owes to the government. Customs fraud violates what is known as the “reverse false claims” provision of the law.

The False Claims Act exposes defendants to “treble damages” – liability for three times the actual amount of the fraud – and penalties for every individual false claim.

U.S. Customs and Border Protection (CBP) also provides a platform for individuals to report suspected trade violations, and informants using that program may be eligible for a share of amounts recovered as a result of their tips.  However, informants under the CBP program face limitations that are not present under the False Claims Act:

• CBP informant awards are capped at $250,000. There is no whistleblower reward cap under the False Claims Act, and whistleblowers are eligible for up to 30% of amounts recovered by the government.
• CBP states that it cannot provide informants with information about specific actions taken as a result of their tips. Under the False Claims Act, an action is filed in federal court, overseen by a federal judge, with the involvement of the Department of Justice.

Who can blow the whistle on customs fraud?

Anyone with knowledge of customs fraud, anywhere in the world, can be a whistleblower.

Employees of importers and exporters – whether involved in distribution, finance, merchandising, sourcing, tax, or nearly any other role – often have information about customs fraud that could lead to a claim and financial reward under the False Claims Act.

Just as important, businesses that have information about fraudulent conduct by their competitors can be whistleblowers. Companies can bring claims and receive whistleblower rewards under the False Claims Act. In fact, more than any other type of False Claims Act lawsuit, successful cases involving customs fraud are often brought by competitors of unscrupulous importers and exporters.

Companies use the False Claims Act and other whistleblower-reward laws to report their competitors for engaging in unfair business practices to gain an improper competitive advantage. There is a strong business case for a company to bring a lawsuit against a dishonest competitor. The whistleblower award the company can obtain is a direct benefit. Levelling the playing field by stopping the misconduct of competitors that refuse to play by the rules is another benefit. And recovering money for U.S. taxpayers is a social good that honest companies are proud to advance.

Should I consult a lawyer if I want to report customs fraud?

Yes. You will need to be represented by a lawyer to pursue a False Claims Act lawsuit. More importantly, customs fraud cases fall into complex areas of law with overlapping legal schemes that may give fraudsters unique defenses not typically seen in False Claims Act cases.

Potential whistleblowers may have already reported customs fraud to the CBP or another government agency.  Usually, this prior reporting does not prevent a whistleblower from filing a False Claims Act case. If you believe you may have a case and are concerned about the impact of any prior reports you made, you should talk with an experienced whistleblower attorney.

If you have information you believe shows customs fraud and would like to speak to an attorney, please contact the experienced False Claims Act attorneys at Constantine Cannon.