Blowing the whistle on customs fraud

By Erika Kelton, Phillips & Cohen LLP
(Reprinted from the Journal of Commerce, March 18, 1999, with permission)

When the Customs Service issues its annual "Accountability Report" this spring, one key statistic will probably be missing: the amount of money the federal government has lost due to customs fraud.

Accurate estimates are hard to come by. Private groups have reckoned that losses from unpaid duties and fees may be as high as $30 billion a year; Customs concedes that its much lower 1997 estimate of $317 million may be unreliable.

Whatever the actual number, the track record at uncovering customs fraud could be improved. Even Customs' own statistics show that the revenue gap from uncollected duties has nearly doubled from 1995 to 1997.

Tackling customs fraud is tough for agency officials to take on alone. Commercial entries have increased steadily throughout the 1990s, topping 20 million in 1998, while the number of Customs fraud investigations from 1994 to 1997 has stayed steady at about 17,000.

Help is needed - from the inside. And it's available from a Civil War-era law that may have more serious repercussions on importers than any existing U.S. Customs fraud-enforcement effort.

The False Claims Act, a powerful, civil anti-fraud statute, allows anyone who knows of a fraud against the government to file a lawsuit and recover damages and fines on the government's behalf. Liable defendants may have to pay as much as three times the government's losses plus additional penalties.

In the past 10 years, the government has collected more than $2 billion as a result of False Claims Act "whistleblower" cases in many industries. Settlements over the next year alone - based upon known pending cases - could bring in an additional $2 billion to the government.

The reason for the False Claims Act's success is that it essentially privatizes government fraud enforcement. In amending the law in 1986, Congress recognized that insiders are often the best source of information about fraud. It changed the statute to create strong financial incentives for private individuals to step forward and bring anti-fraud lawsuits.

Individuals who file such lawsuits in the government's name are rewarded with 15 percent to 30 percent of the amount the government recovers as a result of their cases.

Anyone can file a lawsuit - a secretary, an export/import agent or broker, a longshoreman, a manager, an accountant.

Even a business competitor or an industry association may bring a case. As the False Claims Act becomes better known, more companies are seeing it as an alternative means to redress competitors' unfair business practices. A whistleblower plaintiff simply needs to know about the specific acts of fraud to file a lawsuit on the government's behalf.

Although a high-profile lawsuit brought by the American Textile Manufacturers Institute was dismissed last year, the court clearly stated that False Claims Act liability is appropriate in cases where a company avoids its existing obligations to pay the correct duties.

Both the Justice Department and recent court rulings have endorsed the False Claims Act as an enforcement tool for recovering unpaid customs duties, tariffs and user fees. Lawsuits could be brought against numerous different customs frauds, including practices such as:

  • misclassifying products to avoid or decrease import tariffs
  • falsely undervaluing imported products misrepresenting antidumping duty obligations
  • misstating country of origin to avoid anti-dumping duties or to gain preferential duty status in programs such as the Caribbean Basin Initiative.
  • misdesignating country of origin to avoid apparel quotas and thereby causing an underpayment of tariffs.

With the law's 10-year statute of limitations, companies could be liable for avoiding duties as long ago as 1989.

The False Claims Act's whistleblower provisions have had the greatest impact on the health-care and defense-contractor industries. Other businesses that receive federal funds also have been sued under the law, including environmental contractors, academic institutions and Wall Street investment firms.

Not only have whistleblower cases returned billions of dollars to the federal Treasury, they also are having a profound affect on industry compliance. Recent reports show that improper payments in the Medicare program, for example, have decreased by 46 percent in just two years.

The False Claims Act can be just as effective in uncovering and reducing customs fraud. All taxpayers will benefit when the revenue gap in customs duties shrinks.