November 6, 2023
Customs fraud has been a major target of federal government intervention in recent years, particularly as there has been increased scrutiny on perceived improper trade activities by both importers of international goods and the governments of the foreign countries from which those goods are created and imported into the US. Customs fraud generally refers to the actions of importers to avoid the full amount of customs duties (consisting of tariffs and/or taxes) applicable to the goods they import into the US.
Customs duties are determined by federal policy and international treaties, and are based on factors such as the value of the good, where the good was created, what the good is made of (e.g. specific types of metal), and where the good was acquired. Certain customs duties are based on the policy of disincentivizing foreign importation and promoting American manufacturing, which can lead importers of foreign goods to disguise the true nature of the good. Furthermore, customs laws are also put in place to prevent unsafe and/or illegal products from entering the US market.
The US Customs and Border Protection (CBP) enforces customs duties, and federal civil and/or criminal charges may result from acts of customs fraud. However, given the sheer amount of importation of goods each day to supply the American economy, it is a great challenge for the federal government to monitor for all instances of customs frauds. As such, the federal government is assisted in its ability to enforce customs fraud by the False Claims Act (FCA), which allows for a private whistleblower plaintiff (who may be a person working for the importer itself) to bring a private civil lawsuit alleging customs fraud violations, and which provides for a potential large financial reward for the whistleblower.
Types of Customs Fraud
Common types of customs fraud that can result in investigation or prosecution by federal authorities – or in a civil False Claims Act lawsuit pursued by a private whistleblower plaintiff – include:
- Valuation Fraud: This refers to the act of misstating and/or concealing the value of imported goods to the CBP for the purpose of lowering the amount of customs duties to be paid, as customs duties are determined as a percentage of the imported goods’ value. In some cases, such fraud is perpetrated by a company creating “double invoices” by which one set of invoices reflecting the actual costs of goods for the purchaser is created, while a separate fraudulent set of invoices reflecting an incorrect lower price is submitted to the CBP in order to pay lower customs duties.
- Misclassification of Imported Goods Fraud: Civil and criminal liability may follow when importers attempt to lower their customs duties by improperly classifying products as a type of product other than what they actually are in order to obtain a lower customs duty rate, or no customs duty at all. This type of fraud may take the form of providing a false description of the imported goods or providing an incorrect HTS code (HTS refers to the Harmonized Tariff Schedule provided by the CBP).
- Country-of-Origin Fraud: Country of origin fraud, also referred to as “transshipment”, refers to a situation where an importer routes goods from the country of origin through a second, intermediate country before importing to the United States in order to avoid customs duties that would apply to the country of origin. For example, an importer may indicate that goods originated from Mexico to obtain the import benefits of the North American Free Trade Agreement (NAFTA) when the goods actually originated from a different country where higher customs duties would apply.
- Structuring/Splitting of Shipments Fraud: Structuring or splitting fraud occurs where an importer divides shipments of goods into smaller portions in order to avoid customs duties, for example where there is a “de minimus” exception for imports of goods below a certain value, and the importer thus breaks up a larger shipment into several smaller shipments which each fall within the de minimus exception.
Civil Penalties for Customs Fraud
Customs fraud is often enforced against alleged violators based on 19 U.S.C. 1592, which provides penalties for not only fraudulent violation of customs duties law, but also negligent violation (meaning that a party did not necessarily intend to violate the customs law, but did so out of a lack of reasonable care). Where there is a fraudulent violation of the law, the civil penalty can equal the total of the domestic value of the merchandise at issue. Where there is grossly negligent violation of the law, the penalty may be the lesser of the value of the merchandise or four times the value of the duties, taxes and fees that were not paid. In the case of a negligent violation of the law, the penalty may be the lesser of the value of the merchandise or two times the value of the duties, taxes and fees that were not paid.
Again, customs fraud may separately be enforced through the False Claims Act (FCA). The financial penalties imposed upon those who are found to violate the FCA are substantial: currently, an offender faces penalties between $13,508 and $27,018 for each false claim submitted to the federal government as well as three times the damages (“treble damages”) incurred by the government due to the false claims. In such cases, a private plaintiff stands to receive a financial reward of between 15 and 30 percent of the total penalties levied against a defendant, thus, the incentives for a plaintiff with knowledge of customs duties violations to pursue an FCA claim are great.
Criminal Penalties for Customs Fraud
Separately, an importer may face criminal penalties for engaging in customs fraud, which can include attempted customs fraud, aiding and abetting customs fraud by another party, and/or entering into a conspiracy to violate federal customs laws.
There are a number of federal criminal laws pursuant to which federal prosecutors may seek criminal penalties against defendants for customs fraud. These include:
- 18 USC 542 which prohibits importation of goods by means of any fraudulent written or verbal statement, and provides for imprisonment for up to two years and a criminal fine for each separate offense
- 18 USC 545 which prohibits the smuggling of any goods into the United States (which can include importing illegal goods by means of fraudulent paperwork), and provides for imprisonment for up to 20 years and criminal fines
- General conspiracy and mail and wire fraud laws, which also provide for criminal penalties
Contact a California Customs Fraud Attorney Today
Our attorneys have the experience necessary to work with clients of all sizes in providing comprehensive defense counsel in defending against federal investigations into alleged customs fraud as well as federal enforcement actions. Our attorneys also serve as plaintiff’s counsel to whistleblowers with knowledge of customs fraud seeking to pursue an FCA claim. Contact us today to schedule a consultation with an attorney to discuss your customs fraud issue.