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Tariff Wars – Customs Fraud – the False Claims Act & You
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With the new administration engaging in “tariff wars” by imposing stringent tariffs on certain nations it perceives as non-compliant to its wishes, companies will look for ways to evade those tariffs, some lawful and some involving customs fraud. When customs fraud is involved, the False Claims Act provides a mechanism to hold the fraudsters accountable if insiders blow the whistle the right way, with a chance to receive up to 30% of what the government recovers. In customs fraud cases, damages often reach into the millions upon millions of dollars, so it is now more important than ever to report things in a timely manner to be eligible for a Customs Fraud whistleblower award.
Please note this article is not meant to be political at all – the firm takes no position on the wisdom or the efficacy of the tariffs, we just try to hold entities that evade the tariff accountable.
How Tariffs Lead to Customs Fraud
A tariff is like a tax but is not treated as such under the False Claims Act. Traditional tax fraud is addressed through the IRS whistleblower program and thus, there is no remedy under the False Claims Act. A tariff, however, involves certain attestations to import goods into the country, and it is those attestations regarding the actual nature of the goods or the country of origin that, when falsified, can be the basis of a False Claims Act action.
With countries like China seeing the brunt of the tariff wars, they are already hit with a 25% tariff for goods that originate from their country. So, if the cost of a good is $100, it is now $125 with the tariff. However, if they ship it to an intermediary country and make a superficial change to the product, like just repackaging it or inserting batteries, they may then try to falsely claim the intermediary country as the country of origin, when in fact the country of origin is the country where the product was substantially manufactured, not where cosmetic and superficial changes were made to evade the tariff. If that country only has a 9% tariff, then the cost of the goods when they hit the United States is down to $109 (plus the costs of what they did for the intermediary ruse—which, if they are engaging in, is worth it to them to do). That practice is often referred to as “transshipment fraud.”
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Common Types of Customs Fraud
Other types of customs fraud include:
- Undervaluation Fraud: Importers under-report the value of goods to reduce their tariff obligations.
- Misclassification Fraud: Importers deliberately misclassify products under incorrect Harmonized Tariff Schedule (HTS) codes to apply lower duty rates.
- False Country-of-Origin Claims: Similar to transshipment fraud, this involves falsely claiming a product was made in a country with lower tariff rates.
- Duty Drawback Fraud: Companies manipulate duty drawback refunds by fraudulently claiming exports that never occurred or exaggerating the value of exported goods.
- Anti-dumping & Countervailing Duties Evasion: Importers avoid additional duties imposed on goods sold below market value or subsidized by foreign governments.
- Kickbacks & Bribery: Kickbacks are a no-no under the False Claims Act, so anyone engaging in kickbacks or bribery may be guilty of a crime as well as serious civil penalties.
Notable Customs Fraud Cases Under the False Claims Act
In 2023, International Vitamins, a California-based company, settled for over $22 million a customs fraud case based on misclassifying some of their Chinese imports as duty free. International Vitamins admitted to submitting over 1,000 import forms that contained misclassifications of vitamins and nutritional supplements from 2015 to 2019, falsely claiming they were exempt from customs when in fact they owed a tariff on these goods. Despite being flagged by the Customs and Border Patrol (CBP) for classification in 2016 and 2017 and retaining a consultant who specifically told them the correct classifications that would subject them to the duty, the company continued to use incorrect codes to evade the tariff. As a result, the company had to settle for $22 million for misclassifying some of its Chinese imports under a duty-free tariff schedule. Had an insider blown the whistle under the False Claims Act they would be eligible for up to $6 million as a Customs Fraud False Claims Act Whistleblower Reward. (1)
In 2020, Linde (Linde GmbH and its U.S. subsidiary Linde Engineering North America combined) agreed to pay the United States around $22.2. million to resolve FCA allegations that they allegedly made false statements on customs declaration forms to avoid paying duties owed on company imports between 2011 and 2017. Such false statements were the misrepresentation of the nature, classification, country of origin and valuation of the products being imported; with Linde subsequently avoiding duties owed to the United States. This is another settlement in which the whistleblower would be entitled up to $ 6 million as a Customs Fraud Whistleblower Award. (2)
Why Whistleblowers Play a Critical Role in Stopping Customs Fraud
With the global supply chain evolving and the U.S. government aggressively using trade policies as a tactic to marshal concessions from other countries, customs fraud has become a key battleground in tariff enforcement and may become a priority of the incoming administration. The False Claims Act empowers whistleblowers to step forward when they witness fraudulent customs schemes and offers substantial financial incentives for reporting such misconduct. Given the high-stakes nature of these violations, companies engaged in customs fraud risk severe penalties, including treble damages and significant fines. The whistleblower can also receive up to 30% of what the government recovers as a customs fraud whistleblower award plus attorneys’ fees and costs and as you can see from the cited cases – there’s many millions to be had from doing the right thing and blowing the whistle with one of the best whistleblower law firms.
If you suspect customs fraud in your industry, consulting an experienced whistleblower attorney is crucial. You may be entitled to a substantial financial reward.
For more information about how to report customs fraud under the False Claims Act, you should speak with a whistleblower law firm like Brown, LLC who handles matters like these as well as many others.
