Customs and Trade Fraud

What are customs duties?

The United States is the largest importer in the world, with over $3 trillion worth of goods imported into the country in each of the last few years.  Much of the foreign goods imported into the U.S. are subject to customs duties, including tariffs.  Customs duties serve as a revenue source for the government and also serve to protect rival goods made domestically, as they increase the cost of foreign goods that may have been manufactured under cheaper labor and materials costs than domestic manufacturers could compete with, or with subsidies from a foreign government.

Customs duties, including tariffs, essentially determine how much it costs to sell a product in a foreign market. Customs duties are calculated as a percentage of the good’s value that a domestic buyer pays a foreign seller for when they cross the border. These percentages are specific to and vary by the specific product at issue, the product’s country of origin, and the specific time when the product is imported, as the tariff rates may change. The importer is responsible for paying the customs duties to the U.S. Customs and Border Protection (“CBP”) before the goods are released from the authorities at ports of entry.

What is customs fraud?

While there has been increased focus on customs duties enforcement in recent years, with the application of new tariffs by the current administration, customs duties fraud has been a longstanding area of enforcement for the federal government. Because CBP does not have the resources to inspect every shipment coming through U.S. ports of entry on a daily basis, it has historically relied on customs declarations and self-reporting by importers and only inspects a small sample of the overall importations to determine compliance.  As a result, importers may be able to fraudulently misrepresent their goods to avoid paying duties without detection.

Undervaluing goods is a common form of misrepresentation. Since customs duties are calculated as a percentage of the good’s value, a lower reported value results in a lesser payment. Additionally, because customs duties are dependent on the specific product that is imported, importers can also misclassify goods in order to fraudulently pay lesser customs duties   Moreover, since customs duties rates vary by country of origin – which is the country where the good was manufactured, produced or grown or the country in which the good underwent “substantial transformation” to become a new, distinct article of commerce with a different name, character, or use –  importers may misclassify the country of origin to avoid or lower their customs duties payment.  Country of origin fraud often involves “transshipment,” in which an importer sends goods to a port in an intermediate country, with a lower customs duties rate than the country of origin, relabels them as products of the intermediate country, and then reships the goods to the United States while declaring the intermediate country as the country of origin.  In some cases, the importer will make minor repackaging or finishing changes to the goods in the intermediate country, in order to falsely claim that the intermediate country was the country of origin, even though there was no “substantial transformation” of the imported goods.

Customs Duties Fraud Whistleblowers

Because of the limited resources of CBP, whistleblowers play an important role in uncovering and recovering money that was underpaid due to customs duties fraud.

Importers that commit customs duties fraud may be liable under the False Claims Act (“FCA”), which imposes liability for companies and individuals that knowingly make materially false representations or omissions to avoid paying money they are obligated to pay to the federal government.  The FCA plays a crucial role in enforcement, as it allows whistleblowers to come forward and expose fraud, and potentially receive a monetary reward.  Indeed, over the past  years, there have several major FCA settlements involving customs and duties fraud which resulted from whistleblower cases brought under the FCA.

In addition to the FCA, the Department of Justice (“DOJ”) has elevated trade and customs fraud to a top enforcement priority for its criminal division.  Thus, whistleblowers may also report fraud through the DOJ’s Corporate Whistleblower Program, which incentivizes whistleblowers to report original information about federal corporate crimes in specific subject areas, including trade, customs and tariffs fraud.  Whistleblowers whose tip leads to a successful forfeiture of at least $1 million may potentially be eligible for a monetary award.

Those with knowledge of potential customs duties fraud should consult with an experienced whistleblower attorney to determine what options may be available. The team at Kessler Topaz  is comprised of experienced attorneys who have dedicated their careers to representing whistleblowers. Stepping forward to blow the whistle on fraud takes courage. The experienced team of whistleblower attorneys at Kessler Topaz can assist potential whistleblowers throughout the process. Consultations are free and confidential.