Customs fraud is a catch-all term for frauds committed by companies trying to evade payments that are owed to the federal government in connection with the importation of goods into the United States. While there are many variations, the two major types of payments that are in play for imported goods are “antidumping” duties and “countervailing” duties.
When foreign manufacturers sell goods in the United States at less than their fair market value, it is referred to as “dumping.” This is prohibited because it can lead to unfair pricing or market dominance in the U.S. “Antidumping” duties are imposed on goods from foreign manufacturers to essentially cause the prices to be elevated to a fair market value. These duties are required to be paid to the federal government by the importer. “Countervailing” duties, assessed by the U.S. Department of Commerce (“DOC”) and collected by the U.S. Customs and Border Protection (“CBP”), are intended to offset foreign government subsidies, again trying to level the playing field between imports and domestic products.
What are Common Types of Customs Fraud?
Fraud in connection with antidumping or countervailing duties (“AD/CVD”) can occur in a variety of ways. Because the duties are imposed based on the volume or quantity of goods, obviously any effort to underreport the amount or value of the imports will lessen the amount of duties that will be assessed. Also, there is a highly refined classification system, known as the Harmonized Tariff Schedule, that is used to itemize the products for which duties are assessed.
Many cases of customs fraud turn on the misclassification of products for purposes of avoiding or reducing antidumping duties. For example, products such as credenzas could be represented to be office furniture, when in fact the proper classification was dining room furniture. If antidumping duties were in place for dining room furniture, but not for office furniture, the importer would avoid the payment of those duties.
The imposition of duties will usually turn on both the type of product and the country from which it is being imported. This opens the door to fraud by misrepresenting the country from which the product originates. There are detailed rules for making that determination, sometimes looking at the origin of the component parts, the place of assembly, or the last location at which substantial changes to the product were made. In general, the country of origin for a good is the country in which the good is manufactured, produced or grown. Further work or material added to the product of another country must affect “substantial transformation” of the item to change the item’s country of origin.
Putting aside honest mistakes in designation, fraud occurs when a company deliberately tries to make it appear as though a product came from a country that is simply not a true country of origin. For example, import-export companies have deliberately shipped products from their actual country of origin to another country, and then to the United States, in an effort to claim that intermediate country as the country of origin. This practice is often referred to as “transshipping.” If there are duties imposed on imports from the true country of origin but not the intermediate country, the gaming of the system is obvious.Transshipping is also done to avoid quotas on goods from certain countries.
There are also duties imposed for goods that are imported into the United States with a false country of origin identified. Here, there are no duties owed if the country of origin (“COO”) is properly listed, but there is a ten percent (10%) “penalty” or marking duty on the value of such goods if the COO is falsely identified. 19 U.S.C. § 1304(h). Among numerous documents that are required to be provided when importing goods is an Entry Summary, requiring, among other things, the identification of the country of origin of the imported goods. Falsification of that COO would lead to imposition of stiff 10% penalties.
How Can Custom Frauds be Pursued by Whistleblowers?
Because this type of misconduct involves underpaying the government, or avoiding payment altogether, rather than falsely charging the government, claims for customs fraud under the False Claims Act are generally styled as “reverse” false claims.
Reverse false claims, 31 USC Section 3729(a)(1)(G), involve persons or companies using fraudulent schemes to avoid paying money that is owed to the government. The ability of whistleblowers – or qui tam relators — to bring claims on behalf of the United States and be eligible for an award out of any settlement or judgement for the government is the same for reverse false claims as for any other false claims. One key element is to be able to establish that there is an actual obligation owed to the government, which is readily established in many customs fraud situations.
Who Might See Customs Fraud and Report It?
A significant characteristic of customs fraud qui tam cases is that companies that are competitors of entities engaged in anti-dumping/countervailing duties fraud often have valuable insider information regarding their competitor’s fraudulent schemes and come forward as whistleblowers. Indeed, specific duties are often imposed based on reports by competitors of alleged unfair practices, so those companies are similarly motivated to make sure that the duties are being fairly paid once they are in place. Additionally, current and former employees of companies committing customs fraud are likely relators in import qui tam cases. People who are further down the chain of commerce may also observe questionable behaviors, such as cartons received that are mislabeled for the products contained in the carton, or bills of lading or shipment labels that consistently appear to be inaccurate.
The fraud is not always apparent on its face, since most people are not aware of the intricacies of the duties imposed on certain goods or on imports from certain countries. But repeated inaccuracies of labeling or quantity from one particular company may well be worth bringing to the attention of an experienced qui tam lawyer.
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