Customs Fraud In California
We all know we live in an increasingly flattening world – to quote Thomas Friedman’s 2005 book The World is Flat which examines how our world has become a global marketplace in which historical and geographical divisions among countries have grown smaller over time – and while there has been a general shift towards free trade policies over the decades, the US government continues to maintain robust laws and enforcement procedures regarding international trade, and the political pendulum may be swinging back towards more protectionist trade policies.
Many importers are required to pay customs or import duties (also referred to as tariffs) when importing certain types of goods into the United States. While the Department of Commerce sets the custom duty rates, the U.S. Customs and Border Protection (CBP) collects and enforces the payment of such duties, and the Department of Justice – often via the offices of the 93 United Stations Attorneys stationed throughout the country – pursues criminal cases against those businesses and individuals suspected to have violated U.S. custom frauds laws. Such cases can result in millions of dollars of penalties against offending parties as well as prison time. Additionally, private whistleblower plaintiffs may pursue False Claims Act (FCA) lawsuits against those suspected of engaging in customs frauds, with the possibility of recovering substantial whistleblower rewards.
The attorneys of Zweiback, Fiset & Zalduendo have significant experience representing defendants in customs fraud cases, and the skills necessary to guide clients through the often long and complex process of a custom frauds investigation and/or litigation. Furthermore, our attorneys represent both plaintiffs and defendants in FCA qui tam lawsuits related to customs fraud.
Major Types of Customs Fraud
Customs duties by and large are put in place by the federal government to combat what is perceived as unfair competition by foreign countries which favor foreign businesses at the expense of domestic businesses who engage in similar business activities. Such unfair competition can include:
- Dumping which refers to a situation where a foreign company or industry places products into the US economy at an artificially low price with the purpose or effect of putting American competitors selling those same products at higher prices out of business; and
- Foreign subsidies which refers to a situation where a foreign government subsidizes a company or industry, such that it makes it difficult for domestic competitors to compete.
Thus, US federal law often refers to customs duties as “antidumping” and “countervailing” duties (or AD/CV duties) as they serve to even the economic playing field for domestic businesses and industries.
Customs fraud as an umbrella term refers to the illegal practice of attempting to avoid paying such duties in whole or in part. Customs fraud as it is commonly investigated and/or prosecuted by federal authorities can take a number of forms, including but not limited to the following:
Valuation fraud refers to the fraudulent 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 a recent case pursued by the Department of Justice, the offending entity employed a double-invoicing scheme by which an American apparel company used one set of invoices to pay the Chinese manufacturer of goods it was importing, but created a separate set of invoices reflecting a lower and incorrect value to be submitted to the CBP. The offending entity also created fake invoices for “sample goods” which were not subject to customs duties when in reality the products imported were not sample goods. The CEO of the offending entity was ordered to pay penalties of $1,661,617 and sentenced to six months in prison.
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. As one example, in 2019, a US Company agreed to pay $62.5 million in penalties to settle a customs fraud case for importing 36 shipments of saccharin that was manufactured in China but transshipped through Taiwan in order to avoid a 329% antidumping duty applied to saccharin from China, and thus evading approximately $36 million in antidumping duties.
Misclassification of Imported Goods
Misclassification of imported goods fraud overlaps with the concept of valuation fraud, in that importers may 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. The classification of apparel as “sample goods,” to which no customs duty applies, is one example of this. As another example, in 2016 the Department of Justice pursued a customs fraud case against three US importers who imported small-diameter graphic electrodes from China, but improperly classified the size of the electrodes, as custom duties did not apply to larger type electrodes. The companies each faced criminal and civil penalties and ultimately paid $3 million in fines to resolve the enforcement actions.
Structuring or splitting shipments
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.
Again, allegations of customs fraud can trigger an FCA claim, including one brought by a private plaintiff with or without government involvement in pursuing the FCA claim. While the FCA is commonly associated with fraud by which the federal government is billed for subpar, unnecessary, or non-existent goods and services in the healthcare and military defense procurement industries, FCA claims may also be pursued for customs fraud on the grounds that the federal government is fraudulently not receiving the payment of customs duties owed to it (sometimes referred as a “reverse false claim”).
A whistleblower in the context of an FCA claim – who could be anyone from a manager of an importer aware of customs fraud to an individual involved in the actual shipping of goods to even a non-associated outsider with knowledge of customs fraud – stands to receive a financial reward of between 15%-30% of the financial penalties imposed on an entity found to have violated the FCA. Our attorneys work with whistleblowers who have knowledge of customs fraud to pursue FCA claims on their behalf, and our attorneys separately provide robust defense counsel to those individuals and entities who are facing an FCA claim and/or believe such a claim may be imminent.
Experienced Customs Fraud Representation
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.