Customs Fraud
Goods imported into the United States from other countries are subject to customs tariffs (also known as “duties”). The duty amount an importer has to pay when importing a good depends on the type of product and its country of origin.
Customs fraud occurs when importers avoid paying duties on goods imported into the United States.
Customs fraud exposes U.S. companies to unfair competition, by giving dishonest importers a pricing advantage over their law-abiding competitors.
Customs fraud exposes U.S. companies to unfair competition, by giving dishonest importers a pricing advantage over their law-abiding competitors. Customs fraud also cheats U.S. taxpayers out of much-needed revenue owed to their government.
The United States Customs and Border Protection (CBP), the federal agency responsible for collecting customs duties, works hard to stop customs fraud. But customs fraud can be very hard to detect. CBP processes tens of millions of import entries each year, with trillions of dollars of reported value. What’s more, the customs process effectively operates as an honor system. That leaves a lot of room for unscrupulous importers to cheat.
That’s why the government encourages whistleblowers to come forward to report customs fraud. Whistleblowers who do so by filing a False Claims Act lawsuit can obtain rewards that range from 15 to 30 percent of the money the government collects. Well-placed whistleblowers who have brought successful cases to stop customs fraud have received millions of dollars for their efforts.
What kinds of customs frauds can whistleblowers report?
Some of the most common kinds of customs frauds include:
Undervaluing imported goods. The most common type of customs fraud is the undervaluation of imported goods. Most customs duties are charged on an ad valorem basis, meaning they are calculated as a percentage of a good’s value. There are many ways importers may improperly undervalue goods.
First, importers may falsify the quantity or price of goods. Such cases often involve “double invoicing,” in which an importer has one invoice with lower values that the importer presents to CBP to calculate duties, and a second invoice with higher values that the importer uses to pay the overseas seller. If an importer conspires with an overseas seller to create fake or altered invoices, both the importer and the seller may be liable.
Second, importers may undervalue goods bought from related parties by failing to set sales prices at arm’s length. Even when a U.S. importer and an overseas seller are under common control or part of the same corporate group, they must value a good based on an objective, market-based sales price. An importer unlawfully undervalues a good’s value by basing it on the price paid to a related overseas seller that is not set at arm’s length.
Third, importers may make improper claims under the “first sale rule,” which applies to certain multi-tiered transactions. The rule generally allows the value of a good to be based on the lower-priced sale of the good from the overseas manufacturer to an overseas middleman or vendor, rather than the higher-priced sale from the overseas middleman or vendor to the U.S. importer. To use the lower, first sale value, though, the first sale rule requires that importers meet several strict conditions. Importers may not use the first sale value to undervalue goods when a transaction does not meet the required conditions.
Misrepresenting the country of origin of imported goods. The country in which a good is made or grown determines whether the good may be imported into the U.S., the normal duty rate applied to it, and whether any additional trade-remedy duties—like antidumping duties (ADD), countervailing duties (CVD), and Section 301 or Section 232 duties—apply. All imported goods are “marked” to indicate their country of origin. Unscrupulous importers misrepresent the country of origin of goods to evade duty payments in a few ways.
First, importers may simply mislabel goods, either by marking the wrong country of origin in documentation provided to CBP, applying fraudulent country of origin labels on the goods themselves, or both.
Second, bad actors may engage in “transshipping” goods to misrepresent their country of origin. “Transshipping” means deliberately shipping goods from their actual country of origin to a second country before the goods arrive in the United States, and then misrepresenting the second country as the country of origin.
Third, importers may “structure” the country of origin of a good by moving immaterial or non-value-added parts of the supply chain from one country into a second country, and then claiming the good’s country of origin is the second country.
Misclassifying imported goods. The U.S. government uses the Harmonized Tariff Schedule (HTS) to classify every good imported from abroad. The duty rate for a good depends on its HTS code, as well as the good’s country of origin. Dishonest importers may “misclassify” or falsely describe a product to evade the duty amount owed.
Splitting shipments. Imported goods that are valued below a certain amount are not subject to customs duties. Dishonest importers may “structure” or split a single shipment of goods into multiple shipments to stay below the dollar threshold, improperly avoiding customs duties.
Can a whistleblower get an award for exposing customs fraud?
Customs fraud violates the False Claims Act. An importer or exporter who knowingly fails to pay customs duties may be liable for making false statements to avoid or decrease payments it owes to the government. The False Claims Act exposes importers or exporters liability for three times the actual amount of the fraud, plus penalties for every individual false claim or statement.
Whistleblowers who file a False Claims Act lawsuit can obtain rewards that range from 15 to 30 percent of the money the government collects. Well-placed whistleblowers who have brought successful cases to stop customs fraud have received millions of dollars for their efforts.
Whistleblowers also can report customs fraud directly to CBP via a so-called Moiety claim by using e-Allegations, CBP’s online trade violation reporting system. Unfortunately, CBP cannot pay a whistleblower more than $250,000 for a Moiety claim. By contrast, there is no limit on the amount of the award a whistleblower who reports customs fraud may receive under the False Claims Act.
Who can blow the whistle on customs fraud?
Anyone with knowledge of customs fraud, anywhere in the world, can be a whistleblower. That includes employees of importers and exporters, who often have information and evidence of customs fraud that could lead to a claim and financial reward under the False Claims Act.
It also includes businesses that know of fraudulent conduct by their competitors. Successful False Claims Act cases involving customs fraud are often brought by companies to stop unscrupulous competitors who break the law to get an unfair business advantage. Honest companies that expose customs fraud not only help to level the playing field, but also earn a substantial award that goes directly to their bottom line.
Whistleblower Partners are experienced customs fraud attorneys
The attorneys at Whistleblower Partners have deep experience representing customs fraud whistleblowers. Our clients have successfully exposed duty misclassification, duty evasion through structuring, double invoicing schemes, and more. And we are handling many other confidential matters that allege the other customs fraud schemes described above.
We are False Claims Act experts. But we also have technical expertise with customs requirements. And we enjoy strong working relationships with government enforcers who investigate and prosecute customs fraud.
Whistleblower Partners has the breadth of knowledge and experience to present these complex and difficult cases to the government and bring them to a successful resolution for our whistleblower clients.
Representative cases
Centric: Whistleblower Partners’ attorneys represented a whistleblower who reported a long-running scheme by his former employer to misclassify brake pads imported from Asia to avoid duties, resulting in an $8 million settlement.
Pure Collection: Whistleblower Partners’ attorneys 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 paid $908,000, and the whistleblower received 18 percent of that settlement as a reward.
These descriptions of customs fraud are general in nature and do not constitute legal advice. Customs fraud schemes are complex and ever-evolving. The attorneys at Whistleblower Partners understand the complicated, constantly changing legal landscape and are happy to discuss any potential matter further.
If you would like more information or would like to speak to an attorney at Whistleblower Partners, please contact us for a confidential consultation.