Customs Duty Fraud

Improper avoidance of tariffs is actionable under the False Claims Act, and relators who act as whistleblowers can collect 15%-30% of government recoveries. Since 2012, when Greene LLP filed one of the first False Claims Act cases to recover customs duties, the firm has been a leader in applying the law in customs cases on behalf of whistleblowers. In that early case, a settlement resolved claims that an importer of designer bags had misrepresented the cost of goods figure reported to the government as a false valuation. Instead of reporting that it had cost around $0.33 to manufacture each bag in China, the defendant had represented to the government that each bag cost just $0.11.

Since Greene LLP’s first customs case was resolved, it became a fast growing area of False Claims Act litigation. The firm has pursued several other types of customs cases, including false HTSUS code classification to obtain lower duty rates, and false country of origin identification in conjunction with avoidance of antidumping and marking duties.

The False Claims Act and whistleblowers have not yet flexed their full muscle when it comes to acting on customs duty fraud. Some in the government believe that less than 1% of import fraud is redressed, but the application of the False Claims Act is almost limitless: the statute prohibits false statements concerning the value, weight, type, country of origin, or other characteristic and made to reduce or otherwise avoid the full amount owed under an applicable tariff or duty. In addition to liability for affirmatively making a false statement, the act also applies to one who knowingly “conceals” or “improperly avoids or decreases” an obligation owed to the government.

Effective regulation of imports and exports is essential to the trading economy of the United States and its economic partners. The False Claims Act serves as a crucial check on entities seeking to avoid, decrease, or withhold payment of an obligation to pay money to the United States pursuant to an import or export’s appropriate shipping or customs obligation. The success of the False Claims Act in this and other areas depends largely on the acts of whistleblowers, who may receive significant awards for filing a case on the government’s behalf.

Types of Customs Cases Under the False Claims Act

Common fact patterns that can lead to viable False Claims Act cases and whistleblower awards include:

1. “Cost of goods” or “under-invoicing” schemes. One of the most common forms of customs evasion, with this practice, the importer or exporter (or both, in a conspiracy) intentionally declares a lower value for the goods than their actual worth. By doing so, they reduce the amount of customs duties payable, leading to financial losses for the government. Under-invoicing can be accomplished through various means, such as falsifying invoices.
2. Misclassification schemes. Another deceptive practice involves incorrectly categorizing goods in customs declarations to benefit from lower duty rates or exemptions. Importers may intentionally classify their goods under a different product category that attracts lower tariffs or favorable treatment. This evasion technique requires a careful understanding of the customs tariff classification system, often referenced as “HTSUS” or the Harmonized Tariff Schedule of the United States.
3. Avoidance of antidumping duties. Falsely identifying country of origin can result in underpayment of customs duties in a constellation of ways, but avoidance of antidumping duties tops the list. Antidumping duties are enacted by the government to protect United States industries, and are often significant when compared to other types of customs duties. By falsely identifying country of origin, some companies can avoid paying very significant duties that may top 25% of the value of the goods imported.
4. False representations of entitlement to free trade status. Another type of country of origin scheme, this fact pattern is not as common because it requires multiple types of false statements, and free trade status may be subject to more significant scrutiny by customs officials. Through this type of scheme, a company may seek to avoid customs duties altogether for goods that may seem to be entitled to free trade status, such as goods ostensibly manufactured in Canada or Mexico that appear to be covered by the USMCA (United States Mexico Canada Agreement, a successor agreement to NAFTA).
5. Assembly or finishing operations schemes. One method of falsely identifying country of origin involves goods that are made up of component parts and assembled in countries other than the countries in which some of those parts were first manufactured. Goods that are substantially transformed may be considered a new good, depending on how it is classified and whether it is classified in the same section or subsection of the HTSUS as the parts from which it was assembled. False representations about the assembly process may enable a company to falsely avoid antidumping duties, to falsely qualify for free trade status, or to falsely represent that no duties are owed to the United States (especially in cases in which parts of the final product were originally sourced or manufactured in the United States).

Jurisdictional Issues

The unique regulation of customs and duties has presented some interesting legal results, though the jurisdictional conflict does not appear to have had any effect on the ability of a qui tam relator (i.e. “whistleblower”) to bring a False Claims Act suit on behalf of the United States in a federal district court.

Generally speaking, a federal court’s exercise of jurisdiction over False Claims Act cases is fully consistent with 28 U.S.C. 1331 which grants district courts subject matter jurisdiction over “all civil actions arising under the Constitution, laws, or treaties of the United States.” Likewise, section 1345 of that title allows a similar exercise of jurisdiction over civil matters “commenced by the United States” unless congress expressly specifies otherwise. In customs matters, Congress has expressed an intention, pursuant to 28 U.S.C. 1582(3) to confer upon the Court of International Trade (CIT) “jurisdiction of any civil action which arises out of an import transaction and which is commenced by the United States” to, among other things, “recover customs duties.”

Although the distinction has raised some confusion, most False Claims Acts for customs and duties fraud may be brought in a federal district court, rather than the CIT. False Claims Act actions may be brought by the United States government alone, by a qui tam relator in a case in which the government has chosen to intervene, and by a qui tam relator where the government has declined to intervene. Although some courts have considered False Claims Act charges brought solely by the government and without the assistance of a qui tam relator to be actions “commenced by the United States” and thus within Section 1582(3)’s grant of jurisdiction to the CIT, the jurisdictional requirement does not appear to apply to actions brought by a qui tam relator. The distinction does appear odd as it has been well established that the United States government remains “the real party in interest” regardless of whether it initiates a False Claims Act suit, intervenes in one, and even where it declines to intervene in a case.

Example

In April 2014, the U.S. Attorney’s Office for the District of Colorado, the Department of Homeland Security, and the U.S. Customs and Border Protection announced that OtterBox, a Colorado corporation that sells protective cases for smartphones and tablets, agreed to pay $4.3 million in a settlement to resolve allegations that it violated the False Claims Act and the Tariff Act of 1930 by deliberately underpaying customs duties it owed to the government. From 2006 and 2011, OtterBox manufactured its products overseas and imported them into the United States. As such, the company was responsible for paying customs duties owed on those imported products. The government alleged that OtterBox deliberately omitted the value of “assists” from the dutiable value OtterBox declared to Customs on entry documents for imported products. Additionally, the government contended that OtterBox made or caused to be made false statements in other documents submitted to Customs concerning the value of assists, and the customs duties OtterBox owed on the value of those assists, for products it imported between 2006 through 2011. This conduct led OtterBox to knowingly underpay customs duties it owed to the government. The U.S. Attorney in the case noted, “Customs duties are a significant source of revenue for the United States, and this settlement demonstrates that the Department of Justice will zealously enforce their lawful collection.”