Customs Fraud, Part 2: The False Claims Act
Earlier this month, we discussed the important role that U.S. Customs & Border Protection (“CBP”) plays in securing our borders and enforcing our trade laws. However, CBP lacks the resources to check each of the millions of containers that enter the United States each year. Because the payment of customs duties is largely based on the honor system, fraudsters sometimes try to avoid paying their fair share. Fortunately, whistleblowers can help fill the gap in CBP’s enforcement resources.
Unscrupulous companies have engaged in a wide variety of frauds wherein they lie about imports to lower the customs duties they pay to the government, or to circumvent a rule against importing goods from certain countries. When importing products into the United States, companies submit CBP Form 7501 (also called an “entry summary”) to CBP. Importers often get help from companies called customs brokers to complete and submit these forms, but the importing company provides the information used on the forms and is responsible for ensuring that these forms are accurate. The importer must swear to the accuracy of the form and associated invoices.
The entry summary contains several key pieces of information, including:
Country of origin. Sometimes, products from certain countries are subject to special duty rates or other prohibitions on imports. An importer may lie about the country of origin to avoid paying duties or to illegally import goods from a country that is embargoed, restricted, or sanctioned.
Value of goods. Duties paid by the importer are calculated based on the value of the imported goods. This incentivizes dishonest importers to understate the value of the imported goods. Invoices listing the sales price are submitted along with the entry summary, but sometimes importers use a “double-invoicing” scheme, where they conduct business using a set of invoices with the real prices, but present a fraudulent set of invoices to CBP—with lower prices and lower duty amounts.
Nature of goods. Another key entry on the form is the Harmonized Tariff Schedule (“HTSUS”) code, a number that identifies the category of goods being imported and their corresponding duty rate. A dishonest importer may falsely identify the type of product being imported to take advantage of a lower duty rate.
Relationship of parties. The entry summary also requires the purchasing importer to disclose whether it is related to the seller. When the purchaser and seller are related, they can agree on a purchase price below market value to reduce import duties, so CBP will base the duty on the fair market value of the imported product rather than the price in the invoice.
CBP officials do not routinely inspect imported products to ascertain whether any of the information provided by the importer is accurate. Accordingly, whistleblowers play an important role in bringing dishonest importers to justice.
A whistleblower, with the help of an experienced attorney, can file a qui tam suit under the False Claims Act to enable the government to recover underpaid duties, plus civil penalties. If the suit is successful, the whistleblower can recover a bounty of up to 30% of the amount the government recovers. For example, last year, the government settled a whistleblower suit for $2.5 million, alleging that an importer had used a fraudulent double-invoicing scheme to avoid paying customs duties. The government settled another whistleblower suit for $1.9 million, alleging that an importer had lied about the country of origin of its goods.
Cory Fein is the Founder of Cory Fein Law Firm
