Customs Fraud

Overview

The U.S. Bureau of Customs and Border Protection (CBP) collects more than $30 billion each year 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. 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 study by the Government Accounting Office, however, each year importers fail to pay more than $440 million due to noncompliance with U.S. import laws.

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. 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).

Common Customs Fraud Schemes

Whistleblowers, including not only insiders but also competitors and consumers, are critical to the regulation of the customs system because much of it relies on self-reporting or an honor system and can easily evade detection by CBP. Common types of customs fraud cases include:

  • misclassifying goods being imported.
  • listing incorrect Harmonized Tariff Schedule codes.
  • failing to identify or misrepresenting the true country of origin.
  • artificially dividing shipments of merchandise.

Successful Customs Fraud Cases and Settlements

The DOJ has been active in this area, with several notable cases, including:

  • Submitting false invoices: The DOJ brought criminal charges against the CEO of Stargate, a children’s apparel business, and intervened in a whistleblower’s FCA case against the business itself, for using false invoices and other methods to avoid paying over $1 million in duties on goods imported from China.
  • Undervaluing imports: OtterBox, a seller of protective cases for smartphones and tablets that manufactured many of its products overseas and then imported those products into the U.S. for distribution and retail sale, paid $4.3 million to resolve allegations that OtterBox violated the FCA and the Tariff Act of 1930, as amended, by knowingly undervaluing its imports and thus underpaying customs duties owed to the United States.
  • Splitting imports into multiple packages: Selective Marketing Ltd., a British clothing manufacturer selling into the U.S., paid $610,000 to settle allegations that it artificially split products into multiple packages to avoid and underpay customs duties.

How to Report Customs Fraud

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.

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