Reporting Customs Fraud: Using the False Claims Act for Justice

Customs fraud remains a pervasive issue, posing a significant threat to businesses that follow the law. In an era where international trade is integral to the economy, maintaining the integrity of customs procedures is crucial. With tariff wars going on, companies seek new ways to evade customs and think no one will report them so they can evade accountability.

Fortunately, the federal False Claims Act offers a powerful mechanism for both businesses and individuals to expose customs fraud, level the playing field, and potentially obtain a customs fraud whistleblower reward. Working with experienced whistleblower protection lawyers can help safeguard your rights throughout the process. In this blog, we’ll explore the intricacies of the False Claims Act as it relates to customs fraud, delve into an example of customs fraud, outline how to report such fraudulent activities and explain why you should hire a whistleblower lawyer.

When it comes to reporting customs fraud under the False Claims Act, it’s not just a good idea to have a quality law firm, under the law you can’t even file the lawsuit without a skilled whistleblower lawyer by your side.

What is the False Claims Act for Customs Fraud?

The False Claims Act, also known as the “Lincoln Law,” was initially enacted during the Civil War to combat fraud against the federal government. Its purpose has since evolved to encompass various forms of fraud, including customs fraud. Under the False Claims Act, any person or entity that knowingly submits or causes the submission of a false claim for payment or approval to the government can be held liable. This includes fraudulent activities related to customs duties, tariffs, and imports, since the importer is falsely signing paperwork as a condition of the goods entering the country

Key Provisions of the False Claims Act

Whistleblower Provisions

The False Claims Act includes provisions that empower individuals with knowledge of customs fraud to act as whistleblowers. Whistleblowers, often insiders within a company or industry, play a crucial role in exposing fraudulent practices. The government relies on well placed insiders to blow the whistle or else some types of fraud go undetected.

Potential Customs Fraud Whistleblower Rewards

Whistleblowers who come forward with credible information about customs fraud may be eligible for a whistleblower reward. This reward typically ranges from 15% to 30% of the government’s recovery, providing a powerful incentive for individuals to report fraud.

Protection Against Retaliation

The False Claims Act includes protections for whistleblowers against retaliation by their employers. Individuals who report customs fraudproperly should not fear adverse employment actions as a result of their disclosures and if they are retaliated against have significant rights

What is an Example of Customs Fraud?

To understand the real-world implications of customs fraud, let’s consider a hypothetical example:

Scenario

ABC Importers is a company that specializes in importing electronics from overseas. To reduce their customs duties, they consistently undervalue the imported goods when declaring them to the Customs and Border Protection (CBP). By doing so, they pay significantly lower duties and taxes than they should.

Customs Fraud Elements

In this scenario, ABC Importers knowingly submits false declarations to CBP, misrepresenting the value of their imports. This constitutes customs fraud, as it leads to underpayment of duties and evades the appropriate tariffs.

Consequences

If discovered, ABC Importers could face severe penalties, including fines and potential criminal charges. Additionally, if an insider or competitor were to report this fraud under the False Claims Act, they might be eligible for a whistleblower reward.

How to Report Customs Fraud

Reporting customs fraud is a critical step in upholding the integrity of the customs system. Persons who come forward to report fraud, whether they are insiders, competitors, or consumers, play an indispensable role in the regulation of the customs system. Collaborating with an attorney for whistleblowers ensures that you maintain confidential while the government investigates the allegations. Here’s a step-by-step guide on how to report customs fraud:

1. Consult Customs Fraud Legal Counsel

Before taking any further steps, consider seeking legal counsel, especially if you are an insider or an employee of the company involved in the fraud. An attorney experienced in whistleblower cases can provide guidance and protect your rights.

1. File a Whistleblower Complaint

To report customs fraud under the False Claims Act, you’ll need to file a whistleblower complaint. This can be done by submitting a sealed lawsuit in federal court using a whistleblower lawyer. The complaint should provide a detailed account of the fraudulent activities and the individuals or entities involved.

1. Maintain Confidentiality

The False Claims Act in some cases ensures that whistleblower complaints remain confidential while the government investigates the allegations. This protection is crucial for whistleblowers who may face retaliation from their employers.

1. Cooperate with the Government

Once the complaint is filed, the government may initiate an investigation into the allegations. Whistleblowers should be prepared to cooperate with government agencies throughout the process.

1. Await Government Action

The government may choose to intervene in the case, in which case they will take the lead in prosecuting the customs fraud. If successful, the whistleblower may be eligible for a reward based on the government’s recovery.

Customs fraud is a persistent problem in the United States, undermining businesses that play by the rules and eroding the integrity of the customs system. The False Claims Act serves as a potent weapon against customs fraud, empowering individuals and entities to report these illicit activities and potentially receive financial rewards. Whistleblowers, whether insiders or external observers, are instrumental in regulating the customs system, as so much of it relies on self-reporting and can easily evade detection by the CBP. By coming forward and reporting customs fraud, individuals not only contribute to a fairer marketplace but also stand to benefit from the protections and rewards offered by the False Claims Act using a whistleblower attorney.

Some Customs Fraud Cases & False Claims Act Wins

Customs fraud cases can be substantial depending on the product volume. Some notable custom fraud cases include:

• Linde GmbH (2020): Linde GmbH, a multinational industrial engineering company, agreed to pay $22 million to settle allegations that it violated the False Claims Act by evading custom duties. The German headquartered corporation was alleged to have avoided duties by misrepresenting the nature and value of imported merchandise. The insider received a customs fraud whistleblower reward around $3.7 million.
• International Vitamins Corporation (“IVC”) (2023): IVC, a U.S. based company that imports and sells vitamins and nutritional supplements from China, was accused of misclassifying 32 products from 2015 to 2019 and avoiding duties. The company settled the allegations for almost $23 million. The whistleblower received an award of roughly $ 4 million.
• Alexis, LLC (2024): Alexis, a U.S. based womenswear company, settled accusations of underpaying duties owed on imported merchandise from 2015 to 2022 and circumventing the U.S. Customs and Border Protections. Alexis paid nearly $8 million to settle the claims. There was a roughly $1.43 million whistleblower award.

Common Industries Involved in Customs Fraud

With the diversity of international trade, there are a number of industries that are commonly implicated in customs fraud. The apparel industry is one of these industries. Clothing is often misclassified as having a differing country of origin to reduce the price of applicable tariffs. Another industry that commonly imports goods is the automotive industry. Given the high value of these goods, manufacturers and suppliers misclassify parts to lower the value of tariffs. In a similar vein, the electronics and tech components industry (such as semiconductors, batteries, etc.) is similar in that suppliers will often shift the classification of the value of goods to avoid tariffs. Lastly, the pharmaceutical and medical device industry is highly scrutinized given the regulatory enforcement for chemical ingredients. However, almost anything that is imported may be involved in customs fraud.

Customs Fraud in the Context of the U.S.-China Trade WarAs the tariffs have increased in relation to the U.S.-China Trade War, the U.S. Department of Justice has taken an increased interest in False Claims Act enforcement. Specifically, there are tariffs known as Section 301 tariffs that were imposed in 2018 that focus on technology transfer and innovation which has significantly increased the tariffs between U.S. and China. The current administration has increased these tariffs and has indicated these tariffs are likely to increase even more. Common forms of customs fraud in relation to the increased scrutiny include shipping goods through neighboring Asian countries and altering labels or declaring goods as being non-Chinese. This practice is known as transshipping. These tariffs are on goods that include electric vehicles, solar cells, minerals, steel, polysilicon, tungsten, and other products.

Transshipping

Transshipping refers to the practice of routing goods through an intermediate country before they reach the United States. It becomes illegal when used to disguise the true country of origin of goods in order to evade tariffs, quotas, or trade restrictions. In the wake of the U.S.-China trade war and the imposition of Section 301 tariffs, transshipping has become a frequent method of customs fraud.

Under U.S. customs law, simply repackaging, relabeling, or briefly stopping in a third country is not enough to alter a product’s country of origin. In order for a good’s origin to lawfully change, there must be a substantial transformation or a process that results in a new and different article of commerce with a distinct name, character, or use. Merely making a superficial change like putting in batteries or changing the packaging or applying a “Made in Vietnam” sticker to a Chinese-manufactured product is likely fraudulent.

When importers knowingly misrepresent the origin of goods to CBP—such as by submitting false invoices or certificates of origin—they may violate the False Claims Act. Whistleblowers with insight into these schemes, especially those involving shell companies, layered supply chains, or sham processing facilities, can file qui tam lawsuits and potentially receive a portion of any government recovery.