When people and companies bring goods into the United States to sell them, they frequently have to pay a tax or tariff called a customs or import duty. In 2019, customs duties brought in $71 billion to the federal government. Our customs system relies on importers accurately reporting the type, value, and country of origin for the merchandise they bring into the U.S. and paying the right import duties.
But unscrupulous importers find many ways to cheat the government and gain an unfair advantage over their competitors. According to a 2019 study, there were approximately 65,000 unpaid customs duty bills totaling $4.5 billion from 1993 to 2018 that the government is still trying to collect.
The government has long explained that it is very hard to catch customs fraud on its own. For this reason the government has increasingly relied on whistleblowers and the False Claims Act to combat and deter customs fraud. Whistleblowers have helped the government recover millions of dollars in customs fraud and received significant whistleblower rewards
Customs Duties are taxes (also called tariffs) imposed on goods transported into the United States. The purpose of Customs Duties is to protect our country’s domestic companies from unfair foreign competition. For this reason, most customs duties are designed to stop foreign companies from selling goods in the US below cost and harming domestic competition.
These duties are technically called antidumping and countervailing (AD/CV) duties, because they are designed to combat two related practices:
The United States assesses antidumping duties on products imported at unfairly low prices and countervailing duties on products subsidized by foreign governments. These duties are intended to address injury to domestic businesses or markets from these practices.
There are other tariff programs including those under section 301 of Trade Act of 1974. This law allows the United States to impose additional tariffs on nations engaging in unfair trade practices. These have recently been employed against certain goods originating from China.
Customs duties are set at a percentage of the value of the imported good. Duties for virtually every item are listed in the Harmonized Tariff Schedule (HTS). United States Customs and Border Patrol uses the HTS, to enforce customs duties.
In 2019, CBP brought in $71 billion to the federal government in duties imposed on merchandise imported into the U.S. CBP is also responsible for administering the nation’s many free trade agreements and anti-dumping orders.
The United States employs a very complicated procedure for setting and enforcing customs duties. The Department of Commerce sets the duty rates, but CBP collects and enforces duties. This is primarily an honor system. Importers tell CBP the classification and value of the goods they are importing, and CBP independently verifies only a small percentage of imports.
In 2012, the Government Accountability Office looked into the Customs enforcement process and concluded that several challenges impede CBP’s efforts to enforce customs duties and stop customs fraud. These challenges include
Because of this, Whistleblowers have a vital role to play in helping to enforce Customs Duties.
The courts and the U.S. Department of Justice (DOJ) have shown increasing support for applying the so-called “reverse false claims” provisions of the False Claims Act (FCA) to combat and deter customs fraud. That section of the FCA imposes liability on any person who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” As one Federal Appeals Court recently observed:
From a policy perspective, the possibility of reverse false claims liability…makes sense in the context of the larger import/export regulatory scheme created by Congress. Because of the government’s inability to inspect every shipment entering the United States, an importer may have an incentive to decline to mention that its goods are mismarked on the assumption that the mismarking will not be discovered…Moreover, if the importer believes the value of bringing unmarked or improperly marked goods into the country exceeds the risk that the deception will be discovered and the ten percent ad valorem duty will be owed, an importer may decline to mention that its goods are mismarked, since the chance that some goods will be discovered as mismarked and that marking duties will be owed would still result in a net gain to the company. Reverse false claims liability changes that value proposition because a finding of deception carries the possibility of treble damages.
United States ex rel. Customs Fraud Investigations, LLC. v. Victaulic Company, 839 F.3d 242 (3d Cir. 2016).
Customs fraud is any fraudulent attempt to reduce the customs duty (or tariff or tax) imposed on goods when they are imported to the United States from abroad.
CBP officials can inspect only a small fraction of the goods that enter the country each day. The nation’s customs system relies on having importers accurately identify the type, value, and country of origin of the merchandise they import as well as paying the import duties imposed by law. According to a 2019 study by CBP, there were approximately 65,000 unpaid customs duty bills totaling $4.5 billion from 1993 to FY 2018 that CBP was attempting to collect.
Not only do dishonest importers cheat the U.S. government out of hundreds of millions of dollars in revenue, those firms can and do gain a significant unfair pricing advantage over competitors who obey the law and pay the correct import duties on similar merchandise.
While there are as many forms of customs fraud as there are inventive criminals, most customs fraud involves four major schemes.
Transshipment is when an importer sends goods from the country of origin to an intermediate country before it arrives in the U.S. Transshipment is legal and commonly used in the ordinary course of business. However, because customs duties are based on the country of origin. Unscrupulous shippers utilize transshipping to obscure the true country of origin, and illegally evade customs duties.
Undervaluation occurs when an importer declares too low a value for the imported product. Customs duties are set as a percentage of the imported products value. When an importer fraudulently claims too low a value of the import, he illegally reduces the import duty owed.
Misclassification occurs when an importer falsely describing an imported product. Duty rates are set based on the specific description of a particular item. By falsely describing or classifying a product, an importer can claim it is one with a lower or no duty rate.
Structuring occurs when an importer breaks a shipment up into multiple shipments of lower value. Customs law includes a de minimus exception by which imports below a particular value are not subject to customs duties. By breaking up larger shipments into many parts, an importer can fraudulently claim that the shipments fall below the limit to avoid customs duties.
The DOJ has been active in this area, with several notable cases, including:
Persons who come forward to report fraud are often insiders but also can be competitors or consumers. Whistleblowers are critical to the regulation of the customs system because so much of it relies on self-reporting or an honor system and can easily evade detection by CBP.
The above are just some examples of the many different types of customs fraud. If you think you have information related to an importer (including a competitor) committing customs fraud, please contact us for a free, confidential consultation. We have represented clients who have blown the whistle on dishonest importers that misclassified goods and listed incorrect Harmonized Tariff Schedule codes, who failed to identify the true country of origin, and who artificially divided shipments of merchandise to avoid paying import duties.