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 2022, the federal government assessed $111 billion in customs duties. 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 then, paying the proper import duties.
Unscrupulous importers find many ways to cheat the government. It also provides an unfair advantage over their competitors. According to a 2021 study, the U.S. is still trying to collect approximately 79,000 unpaid customs duty bills totaling $5.4 billion incurred between 1993 to 2020.
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. As a result, they have received significant whistleblower rewards.
What Are Customs Duties?
Customs Duties are taxes (also called tariffs) imposed on goods transported into the U.S. 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 U.S. 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:
- Dumping: when a company exports a product so cheaply that it sells for less in a foreign market than it sells for in the exporter’s home market. Dumping is dangerous because it threatens to put the imported product’s competitors out of business and damage the industry in the importing nation. The U.S. combats dumping by imposing “anti-dumping duties” to raise the price of the good so it competes fairly with other products in the market.
- Unfair Foreign Subsidies: Foreign governments sometimes provide assistance to producers and exporters in their home country. This can include cash payments, tax credits, and very cheap loans. The U.S. combats theses subsidies by imposing a tariff to offset or “countervail” the subsidies. These are called “countervailing duties.” Countervailing duties help offset any negative domestic impacts that producers of the same goods might experience due to unfair foreign competition, who in this case, receive subsidies to export the same goods.
The U.S. assesses antidumping duties on products imported at unfairly low prices. Countervailing duties are assessed 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 U.S. to impose additional tariffs on nations engaging in unfair trade practices. For example, 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 Protection (CBP) uses the HTS, to enforce customs duties.
In 2022, $111 billion in duties was 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.
How Are Customs Duties Enforced?
The U.S. employs a very complicated procedure for setting and enforcing customs duties. The Department of Commerce sets the duty rates. CBP, however, collects and enforces duties. This is primarily an honor system. Importers tell CBP the classification and value of the goods they are importing. 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
- the inherent difficulty of verifying evasion conducted through clandestine means;
- limited access to evidence of evasion located in foreign countries;
- the highly specific and sometimes complex nature of products subject to AD/CV duties;
- the ease of becoming an importer of record, which evaders can exploit; and
- the limited circumstances under which CBP can seize goods brought in through evasion.
What is Customs Fraud?
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 2021 study, the U.S. is still trying to collect approximately 79,000 unpaid customs duty bills totaling $5.4
Dishonest importers cheat the U.S. government out of hundreds of millions of dollars in revenue. In addition, those firms gain a significant unfair pricing advantage over competitors who obey the law and pay the correct import duties on similar merchandise.
Common Types of Customs Fraud
While there are as many forms of customs fraud as there are inventive criminals, most customs fraud involves four major schemes.
Transshipment
Transshipment is when an importer sends goods from the country of origin to an intermediate country before it arrives in the U.S. It is legal and commonly used in the ordinary course of business. However, 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
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 or she illegally reduces the import duty owed.
Misclassification
Misclassification occurs when an importer falsely describes an imported product. The specific description of a particular item is what determines the duty rate. An importer can claim it is one with a lower or no duty rate by falsely describing or classifying a product.
Structuring
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.
Whistleblowers Have a Vital Role to Play
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).
Successful False Claims Act Customs Fraud Cases
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.
- Falsifying the Country of Origin: KingKong-Tools GmbH & Co KG, and its American subsidiary, King Kong Tools, LLC settled allegations of customs fraud for $1.9 million. The government alleged that King Kong was falsely labelling its tools as “made in Germany” when, in fact, the tools were made in China. By misrepresenting the origin of the tools, King Kong avoided paying higher tariffs.
- Misclassifying Goods: Florida-based Blue Furniture Solutions that imported wooden bedroom furniture from China agreed to pay a $5.2 Million customs fraud settlement. The importer evaded customs duties by misclassifying the furniture as metal, subject to lower customs duties. The United States criminally charged both owners for the scheme as well. The government learned of the customs fraud only after a competitor filed a False Claims Act complaint.
- 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.
- Structuring: 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
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.