Customs Fraud
How Can the False Claims Act Prosecute Customs Fraud?
When the true nature of imported goods is intentionally misrepresented to avoid paying the tariffs and duties owed on those goods, a false claim to avoid payment to the United States has been made and thus the False Claims Act (FCA) has been violated. When a false claim is made to avoid payment to the U.S., it is known as a “reverse false claim,” which is contrary to a traditional false claim that is made to receive a payment to which one is not entitled. Under the qui tam provisions of the FCA, anyone with knowledge of reverse false claims relating to imports may file a lawsuit on behalf of the U.S. and serve as a relator.
What Schemes are Used to Fraudulently Evade Tariffs and Duties?
Generally, import/export fraud revolves around misrepresenting one of the key factors for assessing the proper duties: (1) the type of goods as determined by the Harmonized Tariff System (HTS); (2) the value of the goods; and/or (3) the country of origin. These key factors must typically be misrepresented on the bill of lading, which is the primary documentation that identifies the goods to Customs and determines their tariff and duty rate.
“Whistleblowers filing lawsuits under the False Claims Act are needed in order to help the government spot violators [of customs fraud].” -Jim Barger, quoted in AL.com article: “Birmingham company to get $480K for blowing whistle on illegal Chinese imports”
Whistleblowers are Necessary to Enforce Customs Laws.
The inflow of containerized imports to the United States is expected to surpass 20 million containers in 2016. It is estimated that Customs and Border Protection are only able to inspect 2% of containerized traffic, with the focus often on illegal contraband and homeland security – not commercial tariff and duty fraud. Against such odds, information from whistleblowers with inside knowledge of fraud is critical to expose import fraud and protect the American economy.
Companies that are competitors of entities engaged in import fraud often have valuable insider information regarding their competitor’s fraudulent schemes and have thus served as relators in import qui tam cases. Information leading to successful competitor-filed qui tam cases includes in-depth knowledge of the pricing and supply chains in a particular industry, knowledge of the characteristics of evaded products, and experience of being solicited by the same entities that orchestrate customs fraud schemes. Current and former employees and consultants of companies committing import fraud have also served as relators in successful import qui tam cases.
Taking a stand against customs fraud preserves a fair marketplace for American businesses, punishes entities that seek an unfair advantage over competitors, and enforces the policies behind international trade laws. Successful relators in import/export qui tam cases are also entitled to a mandated 15-30% relator’s share of the government’s recovery.
“Frohsin Barger & Walthall Wins One of the Nation’s First Customs Fraud False Claims Act Settlements”
Why Do We Have Customs Duties?
During World War II, international consensus grew around the principle that established laws of economic policy were necessary to prevent another Great Depression or global war. In July 1944, delegates from 44 countries met at Bretton Woods, New Hampshire to establish the structure of the post-war global economy. This Bretton Woods Conference recognized that customs laws are both the backbone and regulator of global commerce. One of the treaties that ultimately resulted from Bretton Woods was the General Agreement on Tariffs and Trade (GATT), which later evolved into the World Trade Organization (WTO). Current members of the WTO are highlighted in the map below. These treaties set a standardized tariff and duty system, established procedures for resolving international trade disputes, and propelled tariffs and duties to the forefront of economic and foreign policy.
In the current economic and political climate, these global trade laws have never been more important in promoting global peace and economic prosperity. Import duties and economic sanctions are now the preferred method of punishing foreign countries that act aggressively or violate treaties. When Russia illegally annexed the Crimea region of Ukraine in 2014, the world’s response was economic and enforced at customs offices around the world – not on a battlefield.
Over the past two decades, China has flooded the world’s markets with manufactured goods and the U.S. economy has been increasingly injured as a result. In an effort to save the American economy from these market-dominating practices, the U.S. has responded with a series of trade laws and economic measures in what has evolved into a U.S.-China trade war. This war is not fought on a battlefield but through legal proceedings, which allow the imposition of duties on goods from China. However, these economic measures implemented to protect peace and prosperity are meaningless when smugglers import goods without paying proper duties and otherwise circumvent international trade laws in pursuit of illegal profit.
Harm Caused by Customs Fraud:
Violating customs laws affects everything from geo-political safety to mom-and-pop businesses. Customs laws are vitally important to promoting innovation, protecting intellectual property, and ensuring that workers in the U.S. and abroad receive a living wage. By promoting these fair trade ideals, customs laws help foster both the fairness and competitiveness of the global economy. Moreover, customs evasion is not just a macro-economic problem; when one entity evades the import duties owed on goods, it gains an unfair advantage over law-abiding competitors. This type of fraud can send family businesses into bankruptcy, simply because they followed the law while their competitor did not. Furthermore, revenue from tariffs and duties is major income source for the federal government: at $30 billion annually, it is the second-largest revenue stream behind income taxes. This revenue collected from imports is also directly proportional to the amount of resources the federal government has to protect our borders from more traditional intrusions such as terrorists, drugs, and illegal immigration. Considering the ever-increasing volume of imports entering the country and the significant consequences at stake, import fraud is a destructive practice that must be confronted by the U.S. and its citizens.