Customs Fraud

Types of Customs Fraud

UNDERVALUATION OF IMPORTED GOODS

The most prevalent type of customs fraud is the undervaluation of goods on the customs import declaration.  The amount of duty an importer must pay is based on the declared value of the imported goods. By fraudulently undervaluing the cost of goods, a company pays less than the amount it rightfully owes. 

In certain cases, a domestic company can be liable for the fraud perpetrated by its importer. For example, a Pennsylvania-based garment wholesaler settled claims brought under the False Claims Act for its involvement in the fraudulent undervaluation of goods by its importer. The company’s importer engaged in a double-invoice scheme whereby it presented fraudulent invoices to U.S. Customs which showed prices for imported garments that were discounted by 75 percent or more. The garment wholesaler was alleged to have aided in the fraudulent scheme by ignoring warning signs that the irregular business practices of its importer were highly suggestive of fraudulent activity.

MISREPRESENTING THE COUNTRY OF ORIGIN

All products and shipping containers imported into the United States must be marked with the country of origin. This requirement allows for the proper assessment of import duties since tariff rates vary according to the country of origin.  Imported goods from certain countries are subject to anti-dumping tariffs and countervailing duties which are designed to protect domestic industries from predatory pricing by foreign competitors.

Unscrupulous importers use various methods to fraudulently misrepresent the origin of goods in order to reduce or evade the payment of duties.  Transshipment is one of the most common methods to disguise the country of origin, and involves the shipping of goods to an intermediate destination prior to reaching the final port of entry. Importers can use transshipments to avoid higher duties applied to certain countries, avoid import restrictions, or take advantage of special trade programs that offer significantly lower duty rates.

MISCLASSIFICATION OF GOODS

Import duties are determined by the classification of products on the Harmonized Tariff Schedule of the United States. By altering the tariff code, an importer can fraudulently declare goods under a different category that is subject to a lower duty. One recent whistleblower case involved an importer that intentionally misclassified bath towels and shop towels as polishing clothes. The misclassification allowed the goods be placed in a category that was subject to a lower tariff. Several federal law enforcement agencies investigated the allegations and determined that the importer had also misclassified other imported goods.  As a result, the importer paid less than the appropriate duties owed on numerous imports. The whistleblower’s information and subsequent investigation by the government led to a settlement of more than $2.3 million.

WILDLIFE WHISTLEBLOWERS

Whistleblower provisions for the protection of wildlife are available under several federal laws, including the Lacey Act and the Endangered Species Act. Under the various federal laws, the Fish and Wildlife Service, the National Marine Fisheries Service and the Departments of Interior, Commerce, Treasury and Agriculture can pay monetary rewards to individuals who disclose original information concerning wildlife crimes that results in a successful enforcement action. In addition to the wildlife whistleblower laws, whistleblowers may also qualify for rewards under the Foreign Corrupt Practices Act and the Act to Prevent Pollution from Ships/Marpol Protocol.

LIABILITY FOR MISREPRESENTATIONS TO U.S. CUSTOMS

Customs and duty fraud can create civil and criminal liability under several different federal statutes. The False Claims Act authorizes individuals to bring a lawsuit on behalf of the government and share in the proceeds from that lawsuit. The False Claims Act holds companies civilly liable for false statements made to avoid or decrease payments owed to the federal government. Specifically, it imposes liability when a person “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government[.]” 31 U.S.C. § 3729(a)(1)(G). The “concealment” and “improper avoidance or decrease” provisions of this subsection are often referred to as a reverse false claim.

“The False Claims Act has helped the U.S. Government recover more than $75 Million lost due to customs fraud.”

the impact of the customs whistleblower

Because customs fraud is easily concealed and often difficult to detect, whistleblowers are an important resource for the government in the discovery and prosecuting of customs violations. Business competitors and employees are typically in the best position to discover and report evidence of customs fraud.