Customs Fraud under the FCA: Violations, Whistleblower Rights & Rewards
The False Claims Act (FCA) is a powerful tool that has been around since the Civil War to deter and punish entities and individuals who submit false claims for payment from the United States Government by incentivizing whistleblowers with up to 30% of what the government recovers. In recent years, FCA actions have been brought against companies that submit false claims to avoid paying money to the government, known as reverse FCA actions. Who’s watching the watchers one might ask, because when it comes to customs a large duty about duty is self-reporting and self-reporters tend to leave a lot of dutiable information and items out to lower or eliminate their customs obligations thereby shorted the taxpayer. Commensurate with Customs-related misconduct and consciousness FCA cases are on the rise, and the U.S. government is actively pursuing entities who violate customs laws and regulations and properly rewarding insiders for blowing the whistle and doing their part.
What is Customs Fraud?
Customs fraud involves the submission of false information to U.S. Customs and Border Protection (CBP) regarding the importation of goods. By law Importers are required to provide accurate information about the goods they import, including the country of origin, value, classification, and whether any duties or taxes are due. Customs fraud occurs when importers provide false or misleading information to avoid paying the correct amount of duties or taxes. This can include:
- Misclassification: Importers may misclassify goods to pay lower duties or avoid trade restrictions.
- Undervaluation: Importers may undervalue goods to pay lower duties. Undervaluation may be outright depressing the knowing fair market value (“FMV”), or failure to include all streams of value, such as failure to include royalty payments or other payments that must be imputed in the value.
- False Country of Origin: Importers may falsely claim that the goods were produced in a country with a lower duty rate or are subject to a free trade agreement. Sometimes there’s a complete obfuscation of country of origin, which may implicate other provisions of the False Claims Act such as purchasing from prohibited countries in violation of the Trade Agreements Act (“TAA”) requires that products sold to government agencies must come only from countries with which the United States has a trade agreement.
- False Marking: Importers may falsely mark goods to avoid restrictions or tariffs.
- Circumvention: Importers may circumvent trade restrictions by transshipping goods through a third country or mislabeling them.
- False Claims for Drawback: Importers may falsely claim duty drawbacks for goods that were not exported.
Successful Customs Fraud Prosecutions under the False Claims Act
Customs-related FCA cases often involve whistleblowers who bring qui tam actions on behalf of the government alleging that the company failed to disclose its full customs obligations, or outright evaded customs obligations. After the qui tam is filed confidentially under seal, the government may then choose to intervene in the case and take over the prosecution. Here are a few examples of successful customs-related FCA cases:
Samsung: In 2020, Samsung agreed to pay $75 million to settle an FCA case involving the company’s failure to pay duties on certain products imported into the U.S. Samsung had allegedly misclassified certain products to pay lower duties. Under the False Claims Act the whistleblower was eligible to receive a whistleblower award of up to $18.75 million which is the 25% ceiling for a reward with government intervention.
Toyo Ink: In 2019, Toyo Ink Americas agreed to pay $45 million to settle an FCA case involving the company’s failure to pay anti-dumping duties on certain products imported into the U.S. Toyo Ink had allegedly evaded anti-dumping duties by transshipping goods through a third country. The whistleblowers were eligible for an $11.25 million dollar whistleblower award under the False Claims Act.
Z Gallerie: In 2018, Z Gallerie agreed to pay $15 million to settle an FCA case involving the company’s false country of origin claims. Z Gallerie had allegedly falsely claimed that certain furniture was made in Vietnam to avoid paying higher duties. The whistleblowers stood to receive a $3.75 million dollar whistleblower award.
HMT: In 2017, HMT LLC agreed to pay $2.25 million to settle an FCA case involving the company’s false claims for duty drawbacks. HMT had allegedly claimed drawback on imported goods that were not exported.
As one can see from the illustrative customs fraud examples, insiders under the False Claims Act could potentially receive millions of dollars for their information and hold companies accountable for their conduct.
Violations and Penalties
Customs-related FCA cases can result in significant penalties and damages for importers who violate customs laws and regulations. Importers can be liable for three times the amount of any underpaid duties or taxes, plus civil penalties of up to $23,331 per false claim. In addition, importers may face criminal penalties for deliberate violations, including fines and imprisonment.
Customs fraud is a serious offense that can result in significant penalties and damages for importers who violate customs laws and regulations. If Importers fail to take steps to establish robust customs compliance programs that include written policies and procedures, training, due diligence, proper documentation, audits, and monitoring to ensure that they are complying with customs laws and regulations they may expose themselves to liability. Customs-related FCA cases can lead to significant financial and reputational harm to the company.
Customs fraud whistleblowers, play a critical role in helping the U.S. government prosecute entities and individuals that submit false claims to avoid paying money to the government. Customs fraud occurs when importers provide false or misleading information to U.S. Customs and Border Protection (CBP) regarding the importation of goods, including misclassification, undervaluation, false country of origin claims, false marking, circumvention, and false claims for drawback.
As a customs fraud whistleblower, you can bring a qui tam action on behalf of the government and stand to gain up to 30% of any recovery if the government decides not to intervene, or up to 25% if it does. In recent years, customs-related FCA cases have been on the rise, and the U.S. government is actively pursuing those who violate customs laws and regulations.
By blowing the whistle on customs fraud, you can help the U.S. government prosecute those who violate customs laws and regulations and protect the integrity of the customs system. Don’t hesitate to come forward and report any suspicious activity. As a whistleblower, you have legal protections and may be entitled to a significant portion of any recovery.