Customs fraud occurs when an organization falsely describes the contents of shipments to lower import duties or falsely describes the origin of the goods to avoid anti-dumping and countervailing duties (AD/CV duties). Customs duty evasion is a major concern of the US government.
Whistleblowers can play an important role in stopping customs fraud by providing information about evading tariff and customs duties, or AD/CV duties evasion, since US Customs and Border Protection (CBP) is able to inspect only a small percentage of imported goods.
Stopping customs fraud is important for many reasons. Customs duties are an important source of revenue for the government. Customs duties also help level the playing field for businesses that manufacture and buy US-made goods.
Evading customs duties – whether they are AD/CV duties or other types of duties owed on imported merchandise – give foreign manufacturers an unfair price advantage over American manufacturers by illegally making the costs of the imported goods cheaper. Evading customs duties can save companies millions of dollars.
- How can whistleblowers report customs fraud violations?
- Customs fraud and the False Claims Act.
- Examples of customs fraud to report under the False Claims Act.
- Why become a customs fraud whistleblower?
- Examples of customs fraud whistleblower cases alleging evasion of duties and tariffs.
How can whistleblowers report customs fraud violations?
Whistleblowers can use the False Claims Act, a whistleblower law, to report customs fraud, making them eligible for rewards and protection against job retaliation. This has been used to supplement enforcement of customs laws where importers have tried to avoid tariffs and duties owed.
The False Claims Act allows whistleblowers working with an attorney to file “qui tam” lawsuits to report customs fraud, which will trigger a government investigation. The law protects whistleblowers from job retaliation and offers rewards based on the amount of money collected as a result of their qui tam cases.
Anyone involved in the import process — particularly brokers who may act as importers of record – should know about the False Claims Act. Liability attaches to those who make – or caused to be made – false statements that cause financial losses to the US.
Customs fraud and the False Claims Act
Any failure to pay duties and tariffs is a violation of the False Claims Act, which prohibits knowingly concealing, avoiding, or fraudulently decreasing the amount owed to the federal government.
False statements made on CBP form 7501 may violate the False Claims Act and could be the basis for a whistleblower qui tam lawsuit.
CBP form 7501, which importers and brokers file, includes:
- A detailed description of the merchandise.
- The purchase price of each item.
- The value of each item.
- The country of origin of the merchandise.
- A description of all “assists” – goods or services from outside the US furnished for the production of the merchandise – that are not already included in the invoice price.
Many whistleblower cases that have settled involved evasion of AD/CV duties. Whistleblowers also can bring qui tam cases when merchandise is misclassified, undervalued, falsely described, stated to have a false country of origin or wrongly qualified for preferential treatment or when importers and others submit false statements to CBP to obtain improper drawback refunds.
Anyone who has specific knowledge of evasion of US customs duties can file a lawsuit. This could be an export/import agent or broker, a business competitor, a longshoreman, a manager, an accountant or a secretary, or anybody else with reliable information.
US companies and trade groups that have information about competitors’ improper import practices also may file a False Claims Act lawsuit. In the case of anti-dumping duties in particular, a whistleblower lawsuit can be an effective alternative to the cumbersome and indirect petition process with government agencies.
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Examples of customs fraud to report under the False Claims Act
Many different ploys are used to avoid customs duties and anti-dumping orders, such as transshipment to hide the country of origin, “splitting,” misclassification and undervaluation. Most of these types of customs fraud can be the basis of a whistleblower case under the False Claims Act.
- Brokers may evade AD/CV duties by shipping goods from countries with high anti-dumping duties through other countries that aren’t subject to AD/CV duties and misrepresenting the country of origin.
- Brokers may divide large orders of imports into a series of smaller shipments to evade customs duties, a practice known as “splitting.”
- Goods subject to an anti-dumping order may be misrepresented as outside the scope of the order based on a physical characteristic that is either a phony distinction or that makes no difference to the order’s applicability, such as claiming that the product is a hand‑held cellular phone instead of an in‑car model, or that the import is an assembled product instead of a set of component parts.
- Importers may misrepresent a product’s intended use, for instance claiming that the item is not intended for use in a cellular phone when actually it will be used to assemble cell phones in the US.
- “Dual invoicing” also is a tactic used to avoid customs. The importer undervalues the imported merchandise in documents for US customs officials and provides to buyers another set of documents that contain the actual sales value of the merchandise.
The False Claims Act also has been applied to tariff misclassification cases. Tariff misclassification schemes fall into two general categories:
- Mischaracterizing the product entered and submitting an improper TSUSA item number on entry.
- Misrepresenting the country of origin to obtain preferential tariff rates or duty-free entry for properly classified products.
Why become a customs fraud whistleblower?
Without the help of whistleblower insiders, it is usually impossible for CBP to know about specific actions taken to evade US customs duties.
In qui tam cases, whistleblowers work with an attorney to file a qui tam lawsuit, essentially suing the entity or individual that is defrauding the government and seeking to recover funds on the government’s behalf. The lawsuit is filed “under seal,” meaning that the government keeps the case confidential while it investigates the allegations.
After the government investigates, it must decide whether to join the qui tam lawsuit, at which time the case is unsealed and becomes public.
If the government decides to “intervene” in the case and funds are recovered, the whistleblower will receive a reward of 15% to 25% of the amount collected. If the government decides not to intervene, the whistleblower has the option of continuing the case and receiving up to 30% of the amount recovered for the government.
The False Claims Act also prohibits job retaliation against whistleblowers. The law provides relief for an employee, contractor or agent who “is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment.”
Those who suffer such retaliation may sue for reinstatement, doubled back pay and additional damages, where appropriate.
Examples of customs fraud whistleblower cases alleging evasion of duties and tariffs
The government has pursued a number of qui tam cases that allege evasion of customs duties. The largest settlement of a whistleblower case alleging customs duties evasion was by Toyo Ink SC Holdings for $45 million. Phillips & Cohen has represented whistleblowers in two whistleblower cases that recovered funds for the government.
Toyo Ink SC Holdings Co. – $45 million (2012)
Japan-based printing ink manufacturer Toyo Ink SC Holdings paid $45 million to settle a qui tam case and government charges that it violated the False Claims Act by failing to pay anti-dumping and countervailing duties on a specific imported violet pigment. The whistleblower received nearly $8 million as a reward.
Toyo Ink allegedly misrepresented the colorant’s country of origin, claiming it originated in Japan and Mexico, when in fact it was manufactured in China and India and underwent a finishing process in Japan and Mexico.
Linde GmbH and Linde Engineering North America LLC – $22.28 million (2020)
Industrial gas and engineering company Linde GmbH and it’s North American subsidiary agreed to a $22.28 million settlement of a whistleblower lawsuit, filed by Phillips & Cohen LLP, that alleged the multinational company evaded paying tariffs and the full amount for duties and AD/CV duties on materials it bought and imported to build chemical and natural gas plants.
Phillips & Cohen’s whistleblower client received a reward of $3.78 million for her information and the assistance she and her lawyers provided to the government in the case.
Z Gallerie – $15 million (2016)
Z Gallerie, a California-based furniture vendor, allegedly evaded paying customs duties on wooden bedroom furniture from China by misclassifying the imported goods as furniture items that are not subject to the same duties.
Z Gallerie paid $15 million to settle the qui tam case. The whistleblower was paid a reward of $2.4 million for alerting DOJ to the alleged customs fraud.
University Furnishings LP – $15 million (2015)
University Furnishings LP and its general partner Freedom Furniture Group allegedly misclassified wooden bedroom furniture imported from China to avoid paying customs duties.
According to DOJ’s complaint, University Furnishings imported wooden furniture for sale in the student housing market for dormitory bedrooms but mislabeled the furniture as office furniture or other non-bedroom-related furniture.
University Furnishings paid $15 million to settle the lawsuit. A whistleblower who exposed the alleged customs fraud received a reward of $2.25 million.
Motives – $13.375 million (2016)
Motives, a clothing importer, allegedly misrepresented the value of imported clothing to skirt import duties. Motives admitted it operated a customs-evasion scheme using two sets of invoices: one that undervalued the imported garments and was intended for US customs officials, and another set that contained the actual sales value of the garments, intended for US-based wholesalers. Motives paid $13.375 million to settle the whistleblower lawsuit.
Whistleblower attorneys for customs fraud cases
Before you decide whether to file a qui tam lawsuit, it is important to talk to an experienced whistleblower attorney about the risks and benefits of pursuing a case. Phillips & Cohen has represented whistleblowers in qui tam cases and other government whistleblower reward programs for more than 30 years. We are the most successful whistleblower law firm, with more than $12.3 billion in recoveries from our cases. Contact Phillips & Cohen for a free, confidential review of your matter.