(See also our Buy American page)
Is Your Employer or Competitor Misclassifying Imported Goods or Misidentifying the Country of Origin to Evade Customs Duties (Customs Fraud)?
MahanyLaw helps Customs fraud whistleblowers earn and maximize whistleblower rewards.
Whistleblowers play an important role in preventing evasion of both import and export duties. Customs agents can’t inspect every ship, container, parcel, train and truck coming into the United States. These days, much of their time is directed at fighting terrorism, money laundering and drug trafficking. That means whistleblowers play an even more critical role in fighting customs fraud and tariff evasion.
This year, approximately 20,000,000 containers are expected to enter the U.S. by ship, rail and train. Customs and Border Patrol agents will inspect less than 2% and most of those inspections are looking for drugs and weapons. Even fewer outbound containers will be checked.
The federal False Claims Act is almost as old as the first customs duties. Dating back to the Civil War, that law allows whistleblowers with inside “original source” information about fraud involving federal funds or programs to report the fraud by filing a claim in federal court. (These claims are sometimes called “qui tam lawsuits.”) If the government or whistleblower’s legal team ultimately recover money, the whistleblower gets a percentage of those monies.
Whistleblowers Can Report Several Types of Customs & Tariff Fraud for a Cash Award
There are five common types of Customs Fraud
- Misidentification of Country of Origin
- Failure to Identify Country of Origin
- Misclassification of the Goods Being Imported
- Undervaluation of Goods
- Evasion of Specialty Tariffs such as Anti-Dumping Tariffs
Country of Origin Misidentification
Many tariffs, particularly anti-dumping tariffs, are country specific. For example, the U.S. International Trade Commission has declared that wooden bedroom furniture made in China is being “dumped” in the U.S. at below cost. Worried that Chinese companies may simply put U.S. furniture companies out of business (and then subsequently raise their prices, of course), special anti-dumping tariffs have been established for these products if made in China. A similar product made in France, however, might not be subject to the tariff.
An entire industry has sprung up to hide the country of origin. Sometimes that means providing altered paperwork. Other times the fraud involves “transshipping.” In a transshipping scheme, products are sent from the country of origin (typically China) to another country and then to the United States. Customs officials here simply see a shipment from France or Brazil or some other country without a tariff requirement.
Common transshipping countries are Mexico, Taiwan, Malaysia, Thailand, Indonesia, Philippines, Panama, Vietnam, and India.
Failure to Identify Country of Origin
Closely related to misidentification of country of origin is not identifying any country of origin. Failure to label a country of origin subjects imports to a 10% tariff (and possibly higher if after determining the country of origin a higher tariff is identified.)
Failure to identify a country of origin cases received a huge boost in 2016 when a federal appeals court ruled (US ex rel Victaulic Company) that because of the 2009 Fraud Enforcement and Recovery Act of 2009 (FERA), customs fraud whistleblowers could earn an award by simply showing a company avoided a tariff by not disclosing a country of origin. (Traditional False Claims Act cases require an affirmative misrepresentation such as lying on a customs form.)
The Victaulic Company involved the importation of millions of pounds of pipe fittings allegedly with no country of origin markings. According to the court’s decision,
CFI’s complaint alleged that Victaulic imported approximately 83 million pounds of fittings from overseas between 2003 and 2013 and a miniscule fraction of Victaulic’s pipe fittings for sale in the U.S. bear any indication of their foreign origin, with an even smaller percentage bearing country of origin markings compliant with the applicable statute. According to the complaint, ‘Victaulic is able to successfully (albeit unlawfully) import its unmarked pipe fittings into the United States by knowingly failing to pay or disclose to the CBP [Bureau of Customs and Border Protection] the marking duties the company owes … by, among other things, falsifying its entry documents and otherwise concealing the foreign source of its pipe fittings such that CBP will not detect the company’s fraud.’
Misclassification of Imported Goods to Evade U.S. Customs Duties
Customs uses a standardized classification system to administer duties and tariffs. The system is called the Harmonized Tariff Schedule or HTS. A company violates the False Claims Act if they misrepresent the nature or physical characteristics of imported goods in order to pay a lower duty or tariff.
By way of example, let’s say that alkaline batteries sets are subject to a 25% duty while other batteries have no duties. Some unscrupulous importers may try to claim that their alkaline batteries are simply some other type of batteries such as lithium or Ni-Cad simply to charge less. That puts legitimate battery makers at a real disadvantage since the dishonest company can sell for less money by cheating on the duties owed.
Typically, companies will mislabel the goods and use the wrong codes on the bill of lading or receipts.
In January of 2018, textile importer American Dawn agreed to pay $2.3 million to settle charges that it mislabeled towels as polishing cloths in the hopes of paying a lower tariff rate. The case was brought by a former employee who received $397,600 for blowing the whistle.
U.S. Customs Duty Avoidance by Undervaluation of Imports or Exports
Most tariffs and customs’ duties are based on the value of the product being shipped. There are any number of schemes designed to undervalue goods. Finding these schemes, however, is difficult for Customs agents. Whistleblowers with inside information are by far the best eyes and ears for the government and its war on fraud.
Antidumping Rules & Evasion of Specialized Tariffs Are Also Whistleblower Opportunities
The U.S. Congress is concerned that some countries subsidize their businesses and allow them to ship goods to the U.S. at below cost. That puts American businesses in danger of closing down. Certain foreign countries will intentionally try to subsidize an industry long enough so that they can dominate the world market.
After the legitimate companies are forced out of business, the subsidized companies can then dramatically raise their prices since they will not face any competition.
Presently China is the subject of tremendous attention and scrutiny. Many industries including the U.S. steel, electronic and furniture industries all claim they have been paralyzed by crippling competition from China and subsidized goods.
If you have information about your employer or competitor’s U.S. Customs fraud or duty evasion, check with a MahanyLaw customs fraud whistleblower lawyer to learn your rights: 202.800.9791 or Report Online
History of U.S. Customs Fraud and Duties
A customs duty or tariff is a tax or fee levied on the import or export of goods in international trade. A duty levied on goods being imported is referred to as an import duty. Likewise, a duty levied on exports is called an export duty.
In the U.S., customs duties can trace their origins all the way back to the 1st United States Continental Congress. Our founding fathers, although not too keen on the taxes being levied by the King of England, recognized that money was needed to run the government. Hoping to achieve an easy tax to administer, Congress passed the Tariff Act of 1789. Treasury agents collected the tariff before goods could be offloaded from ships.
To prevent smuggling, Congress also created what is today the Coast Guard. Tariffs were the largest (approaching 95% at times) source of federal revenue until the Federal income tax began after 1913.
Today, customs duties and tariffs only make up a small percentage of the budget. They are more a means of economic policy and less for revenue. Today tariffs bring in just 1.2 percent of the budget but that amounts to over $25 billion per year. The U.S. Customs Service primarily collects these funds today.
By World War II, there was general consensus that the world was moving to a global economy. Suddenly tariffs and customs duties became an instrument of public policy. Terms such as the World Trade Organization and NAFTA are today household words.
Whether for trade policy, revenue generation or protection of U.S. jobs, tariffs are accepted as a cost of doing business when dealing with international commerce. Most companies and individuals honor properly pay and accept these taxes but there are always a handful that try to scam the system. When that happens today, it often means legitimate U.S. businesses can’t compete on a level playing field and the loss of precious American jobs.
It doesn’t matter whether the company or people evading the duties are trying to smuggle goods in or avoid duties on exports, both types of conduct violate the False Claims Act.
A Word about the Buy American Act
Customs fraud occurs when a company imports or exports goods without paying the required duties. There is often another set of fraud that takes place, fraud that can also pay big whistleblower awards under the False Claims Act. Under the Buy America and Buy American laws, companies doing business with the federal government or receiving government funds have a requirement to buy American made goods. If a company misuses tax dollars on foreign purchases, there is another opportunity for earning a whistleblower award.
MahanyLaw is the leading U.S. whistleblower law firm and knows how to maximize your reward and protect your job. For a confidential no-cost call with a whistleblower lawyer: 202.800.9791 or Report Online.
All inquiries are kept confidential and protected by the attorney – client privilege. Cases accepted on a contingent fee basis.