Customs fraud allows companies to circumvent protections for domestic manufacturers and gain a price advantage against honest competitors who pay the required duties to the government. If you have evidence of a company committing customs fraud, you can report it to the Department of Justice through the False Claims Act and potentially receive a reward as a whistleblower. Call 1-800-590-4116 for a free initial consultation with a whistleblower attorney at McEldrew Young.
Liability for Misrepresentations to Customs
Individuals engaged in customs and duty fraud can be liable under a number of different federal statutes imposing civil and criminal liability. One of them is the False Claims Act, which authorizes individuals to bring a lawsuit on behalf of the government and share in the proceeds from the lawsuit. The False Claims Act holds companies liable for false statements made to avoid or decrease payments owed to the U.S. 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). This is often referred to as a reverse false claim.
Companies importing goods into the United States must declare information about the products on entry forms to U.S. Customs and Border Protection. Misrepresentations result in the payment of less tariffs than the company should have paid because customs duties are calculated from the provided information.
Customs fraud is extremely difficult for the government to detect and the government often has to rely on whistleblowers to tip them off. Companies may forge invoices in order to support a lower valuation for calculating import taxes. They might also import goods through a third country in order to avoid anti-dumping and countervailing duties. As a result of the measures taken by companies engaged in evasion of customs duties, competitors and employees are often in a better position to discover evidence of misconduct than the government.
The False Claims Act:
An important precursor to many successful False Claims Act cases is the decision by a whistleblower to bring forth evidence of fraud. When Congress passed the False Claims Act in 1863, it enlisted the support of private individuals in the effort to detect fraud against the government. It recognized that it is difficult and costly for government officials to discover fraud. By offering a reward to individuals who come forward with evidence of misconduct, the government could better recover money lost to fraud.
Whistleblowers Have Reported The Following Types of Customs Fraud in the Past
Misrepresenting the Country of Origin
Products or containers imported into the United States must be marked with the country of origin because customs duties are assessed based on it. Companies who fraudulently misrepresent the origin of goods frequently do so to avoid anti-dumping and countervailing duties imposed by the government and designed to protect domestic industries against predatory pricing by foreign competitors. This has been the subject of a number of False Claims Act lawsuits in the past few years by companies trying to avoid import quotas and anti-dumping duties.
Intertex Apparel settled another country of origin case under the False Claims Act in 2008 for $2.8 million. Among other allegations, the government alleged that Intertex misrepresented the country of origin to allow them to evade quotas on Chinese apparel. Russia and Korea were declared the country of origin when the goods were actually manufactured in China.
Misclassification of Goods
Import tax rates are determined by the classification of products on the Harmonized Tariff Schedule of the United States. By altering the tariff code, a company can fraudulently lower the amount of customs duties it owes on imported products. One recent whistleblower case where this occurred involved CMAI Industries. CMAI falsely misclassified auto parts as unfinished in order to avoid paying customs duties to the government. It subsequently charged its customers the correct 2.5% customs duty and pocketed the proceeds. CMAI settled the lawsuit in 2012 for $6.3 million.
Undervaluation of Imported Goods
Once the appropriate tariff rate is determined, import duties are calculated based on the declared value of imported products. By fraudulently undervaluing imports, companies underpay their duty obligations. Noble Jewelry settled a whistleblower lawsuit involving valuations in 2011 for $3.85 million. They avoided paying more than $1 million dollars in customs duties by understated the value of imported jewelry and submitting fake invoices to U.S. Customs.
In November 2013, Basco Manufacturing paid $1.1 million to resolve allegations concerning false statements on customs declarations regarding the country of origin of aluminum extrusions.
Basco engaged in transshipping and declared Malaysia the country of origin in order to avoid antidumping and countervailing duties on products imported from the People’s Republic of China.
Toyo Ink paid $45 million in order to resolve allegations they misrepresented the country of origin on imported printing ink in 2012.
The government alleged that Toyo Ink avoided anti-dumping and countervailing duties on imports containing colorant carbazole violet pigment number 23 from the People’s Republic of China and India by declaring the country of origin on the goods as Japan or Mexico. The finishing process undertaken in these countries, according to the government, was insufficient to change the country of origin for the purpose of import duties.