When goods are imported into the country, they are subject to tariffs and/or duties that vary depending on what the goods are and their country of origin. The duties serve many purposes, including protecting our country’s economy and jobs by controlling the flow of goods into and out of the country.

For example, companies in countries that exploit their workforces can manufacture and sell goods for far less than the United States. To level the playing field and keep manufacturers in America, the United States may tax those imports, raising their overall costs and keeping pricing closer to that of products made within the country.

Improper efforts to avoid or reduce these fees can be a “Reverse False Claims Act” violation. Under these provisions of the False Claims Act, it is unlawful to conceal, avoid, or decrease an obligation to pay money to the government or to make or use false records or statements for that purpose.

History of Customs Enforcement

It has always been illegal to fail to pay customs duties. Historically, this was enforced by The Tariff Act of 1930, which provides in Section 592 that “no person, by fraud, gross negligence, or negligence… may enter, introduce, or attempt to enter or introduce any merchandise into the commerce of the United States” by means of false documentation.

Violations of this provision are punishable by a civil penalty, the amount of which is based on whether the action was fraudulent or negligent and the value of the goods and/or duties that are evaded. The importer also has to pay whatever duties were owed. These actions can only be brought by US Customs and Border Protection.

Informants can be rewarded if the action is successful, receiving up to $250,000.

Expanding the FCA to Customs Enforcement

In 2009, the False Claims Act was amended by the Fraud Enforcement and Recovery Act of 2009 (FERA). The purpose of FERA was to broaden the FCA’s reach, and one way that it did so was by expanding the reach of “reverse false claims.” Reverse false claims are cases in which, rather than taking money from the government, a fraudster keeps money that should be paid to the government.

Before FERA, the FCA’s reverse false claim provision imposed liability on any person who (among other things) “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.” But in 1999, the Sixth Circuit Court of Appeals interpreted the “obligation to pay or transmit money” to apply only to fixed obligations, not amounts that could vary, as is the case with customs duties.

The FERA amendments closed this loophole by defining the term “obligation” to include responsibilities to pay “whether or not fixed, arising from an express or implied contractual, grantor-grantee, or licensor-licensee relationship, from a fee-based or similar relationship, from statute or regulation, or from the retention of any overpayment.”

By bringing customs duties within the reach of the FCA, relators are able to initiate cases on their own, rather than waiting for enforcement from the US Customs and Border Protection. Also, rather than the fixed $250,000 informant payment, whistleblowers became eligible to be relators and to receive a share of the government’s recovery. Both of these factors are likely reasons why FCA litigation in this area has seen a lot of growth since 2009.

Types of Customs and Import Fraud

Some common types of customs and import fraud are listed below:

Falsification of Country of Origin

Goods imported from a foreign country are generally required to be marked with the country of origin. 19 U.S.C. § 1304(a). This is in large part because imports from certain countries, particularly those with “less friendly” relationships with the United States, can have higher tariff rates, i.e., additional taxes that the importer must pay to bring the goods into the country.

Similarly, in an effort to level the playing field for domestic manufacturers, anti-dumping duties are tariffs imposed on foreign imports priced below fair market value.

Companies may try to avoid paying these high duty rates by falsifying the country of origin for the products. Avoidance of the tariffs doesn’t only hurt the American taxpayers by reducing the income the tariffs are intended to bring. It also weakens the intended effect of the tariffs, which could be to force the reduction of import tariffs employed by other countries. That hurts American manufacturers, farmers, and exporters (countervailing duties) or efforts to force countries through economic sanctions to correct serious human rights violations.

Sometimes importers may simply fail to mark the products with the country of origin. Another way companies try to avoid country of origin tariffs is by shipping finished or near-finished products to a “more friendly” country and falsely declaring that intermediary country as being where the product was manufactured.

For example, the product may be manufactured in China, which may have a higher tariff, but sent to a factory in Mexico or Japan to be painted or have other minor work done before being imported into the United States with a misleading country of origin stamp.

This was the case in a $45 million settlement between the United States and Toyo Ink. A False Claims Act case alleged that Toyo Ink misrepresented Japan and Mexico as the countries of origin for its product when the products were actually manufactured in China and India. Although the ink underwent a “finishing process” in Japan and Mexico, this was insufficient to constitute a “substantial transformation” of the product necessary to render these countries as the countries of origin.

Such schemes can be very difficult for the United States to catch without a whistleblower because the documentation will support that the product was imported from Mexico or Japan.

Buy American Act and U.S. Trade Agreements Act

Government rules and regulations, including the Buy American Act and U.S. Trade Agreements Act, require government contractors to give preference to American-made goods or goods made in “friendly” countries under the Trade Agreements Act when they are provided to the federal government.

While one might initially think of big-ticket items like the steel that is used in fighter jets, office supply companies such as Staples, Office Depot, and OfficeMax famously settled False Claims Act lawsuits alleging they provided Chinese-made pencils to federal agencies for millions of dollars.

Similarly, Samsung paid $2.3 million to settle allegations that it had certified compliance with the Trade Agreements Act when selling products identified as being made in Korea or Mexico when they were actually made in China.

Misclassification of Goods

The United States has a complex system of customs duties where the amount owed can vary based on the type and purpose of a product. This can create legitimate disputes about what classification is appropriate for a type of good.

For example, in one infamous dispute with the federal government, an importer of Santa Claus costumes litigated the issue of whether these were “wearing apparel” subject to a customs duty or a duty-free “festive article.” Initially, notwithstanding the holiday connotations, and due to the high quality of these particular Santa suits, the Court of International Trade found most of the costumes to be “fancy dress” subject to a hefty duty of 28%-32%.

Some cases are more clear cut and intentionally misclassifying goods to avoid these duties is a violation of the False Claims Act. Multiple furniture importers, for example, have been dinged on a handful of occasions for this type of fraud, such as by falsely describing wooden bedroom furniture as being “metal” or “non-bedroom.”

Undervaluing the Goods

Duties are percentage-based, meaning that rather than charging a fixed fee, they are based on the value of the products being imported. By misstating the values and costs of manufacturing, importers can deprive the government of millions of dollars.

For example, OtterBox, the maker of protective cases for smartphones and tablets, settled a $4.3 million False Claims Act case alleging that it had omitted the value of “assists” when declaring the value of its products. Assists are something of value the importer/buyer provides to the foreign producer that lowers the cost of production.

In a non-qui tam prosecution, the owners of a garment company pled guilty to tax fraud and paid a total of nearly $118 million in restitution, including $18.42 million in unpaid tariffs and interest. In that case, the owner instructed Asian manufacturers to prepare two invoices for the clothing: one that reflected the actual price and was paid by the importer via wire transfer, and one that was 60 to 70 percent the actual price and was given to U.S. Customs for calculation of the tariffs.

Splitting Up Shipments

Another way custom duties are avoided is by splitting shipments up into multiple shipments of lesser value. By dividing a shipment in this fashion, each separate shipment may fail to meet the value that triggers the duties.

For example, a women’s clothing manufacturer paid $610,000 to resolve allegations that it avoided paying customs duties by dividing shipments up into multiple shipments worth less than the $200 threshold.

Trafficking in Endangered Species

In addition to the False Claims Act, there are whistleblower statutes that reward whistleblowers who report unlawful trafficking of endangered plants and animals—both trophies and exotic pets—from foreign countries. These statutes include the Lacey Act, the Endangered Species Act, the Fish and Wildlife Improvement Act, the Foreign Corrupt Practices Act, and numerous species-specific federal protections.

Whistleblower statutes and reporting are of the utmost importance in protecting endangered species from poachers and trophy hunters. Bracker & Marcus LLC has committed to donating 10% of its fee in such cases to charities working towards these causes.

For more information about your potential customs and import fraud case, contact our Atlanta whistleblower attorneys today.

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