Setting the Stage for Customs Fraud
Domestic importers are paying record amounts in customs duties due to a recent surge in the number of new tariffs, according to a recent article in the Wall Street Journal. In October, American companies paid $6.2 billion in duties, including $2.8 billion in new tariffs, according to Tariffs Hurt the Heartland, a lobbying group comprised of companies in the manufacturing, farming and technology sectors. Since May, the amount of import duties has doubled, including an increase of more than 30% from August to October.
While opinions differ on how tariffs affect domestic businesses and consumer prices, there is little doubt that an increase in the number tariffs will create greater incentives for certain importers who try to fraudulently reduce or eliminate the import duties they pay. Even though fraudsters have become more sophisticated at exploiting the shortcomings of current fraud detection systems, the recent increase in tariffs creates an even more favorable risk-reward tradeoff that could tempt less sophisticated importers.
More Tariffs Bring Bigger Penalties for Customs Violations
As tariffs have increased, so too have the consequences for customs violations. Over the past several years, there has been a sharp increase in fines and penalties for violators. Penalties issued by U.S. Customs and Border Protection (“CBP”), which are primarily civil in nature, have more than doubled over the last four years, and are likely to further increase in the future.
According to the publication U.S. Customs and Border Protection Snapshot – December 2018, CPB collects approximately $120.5 million in duties, taxes, and other fees on a typical day. When importers fraudulently reduce or evade their legal obligation to pay customs duties, American businesses and taxpayers both suffer the consequences. Domestic manufacturers and law-abiding importers are placed at a disadvantage because their unscrupulous competitors can undercut them on price. Shortfalls in duty collections by the government ultimately fall on the shoulders of U.S. taxpayers.
If CBP determines that a customs violation has occurred, an importer can be liable under 19 U.S.C. § 1592 (penalties for fraud, gross negligence, and negligence). When allegations of fraud (as opposed to ordinary or gross negligence) are involved, the violation can result in a penalty equal to the domestic value of the merchandise. In the event that an importer fails to pay the penalty, the U.S. Department of Justice (“DOJ”) will file a lawsuit against the importer. In some cases, DOJ will assert joint and several liability by personally naming the officers, shareholders, and/or managers of the importer. If the company is insolvent or no longer in business, DOJ will attempt to recover the penalty from the individuals involved.
Different Methods, Same Objective
Dishonest importers employ a wide array of methods and techniques in their attempts to escape detection, but their objective is always the same – to reduce or completely evade the payment of customs duties.
Undervaluation of goods is the most common form of customs fraud. An importer or shipper can conceal the real cost of goods by falsifying the customs import declaration so that duties and taxes will be assessed on a lower amount. While there are many ways to undervalue imports, the easiest and most common method is simply to include a fake price on the invoice used for the customs declaration.
Another common method used by fraudsters is the false marking of the country of origin. This practice is used to avoid payment of a higher duty imposed on the true country of origin. The location where imported goods are made, and the processes performed in the country of origin must be correctly identified. An importer can face substantial liability for failing to report the true country of origin.
For example, this past summer DOJ announced a settlement with Temple St. Clair, a jewelry designer, manufacturer, and importer. Among other things, the government alleged that Temple St. Clair misrepresented the fact that at least 35% of the value of jewelry was added in Sri Lanka or Thailand. The alleged misrepresentation allowed the company to receive duty-free treatment on its imports pursuant to a trade-preference program. As part of the settlement, the company admitted to underpaying customs duties and failing to properly mark its merchandise. Temple St. Clair also agreed to pay $796,000 to the United States and implement corrective measures to prevent future customs violations.
The misclassification of imported goods is another commonplace practice used by some importers to reduce or evade customs duties. Imported goods are classified according to the Harmonized Tariff Schedule of the United States (HTSUS). The HTSUS provides applicable tariff rates and statistical categories for all goods imported into the United States. Product classification is directly linked to the amount of duties and taxes paid and, therefore, directly impacts an importer’s costs and profitability.
The importer of record is responsible for submitting true and accurate information to CBP, including all parts of the transaction concerning duties. Importers can face substantial penalties by improperly declaring goods with the wrong classification, or falsely describing the goods to avoid suspicion of dumping.
Earlier this year, DOJ announced a settlement with Bassett Mirror Company (“Bassett”) over allegations that the company misclassified imported goods on its customs declarations. Bassett agreed to pay $10.5 million to settle alleged violations of the False Claims Act by knowingly making false statements to avoid paying antidumping duties on wooden bedroom furniture imported from China.
Wooden bedroom furniture imported from China became subject to an antidumping duty in 2004. Products in this category were subject to a 216% antidumping duty while non-bedroom furniture was exempt. From January 2009 to February 2014, Bassett allegedly evaded antidumping duties by knowingly misclassifying the furniture as non-bedroom furniture on its official import documents.
The company’s alleged misconduct was brought the government’s attention by a whistleblower who filed a False Claims Act lawsuit. The whistleblower received an award of approximately $1.9 million.
The False Claims Act: The Government’s Latest Tool to Fight Customs Fraud
It is inevitable that a certain percentage of customs fraud will go undetected given the CBP’s limited resources and the vast number of imports that enter U.S. ports every day. The government needs the public to report suspected violations of regulations involving the importation of goods into the U.S. These types of violations include misclassification of merchandise, false country of origin markings, health and safety issues, valuation issues, and intellectual property rights.
In recent years, the government has increased its reliance on the False Claims Act to identify and prosecute customs fraud. Importers can face liability under the reverse false claim provision of the False Claims Act. The provision, 31 U.S.C. § 3729(a)(1)(G), 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.” Under the statute, the knowledge element can be established by (1) actual knowledge (2) deliberate ignorance; or (3) reckless disregard.
The Office of Budget and Management projects that customs duty revenue will reach $44 billion in 2019. Whistleblowers are an important resource to ensure that the government collects as much of that revenue as possible. Anyone can be a whistleblower, but a customs violator’s employees and business competitors often have the best opportunity to discover and report fraud.