Tariffs are tax rates imposed by the government on goods imported from another country, and duties are the amounts actually paid by an importer pursuant to those tariff rates. Increasingly in recent years, tariffs are being used by the United States, through the U.S. Customs and Border Patrol (CPB) as a trade and foreign policy tool. And the amount of duties collected has, as a result, gone up substantially. In 2021, for example, the U.S. government collected approximately $80 billion in duties, making it the third largest source of federal government revenue, behind only income tax and payroll tax.
But as tariffs have become more common, and tariff rates have increased, so too have the incentives to try to avoid the payment of customs duties. Common types of customs fraud include:
- Evasion of tariffs imposed under anti-dumping or countervailing duty orders (AD/CVD orders) issued by the Commerce department, typically after a finding that a foreign country is engage in “dumping” of goods in the U.S. market. Such evasion occurs either by trans-shipping the goods through third countries to deceive U.S. Customs and Border Protection (CBP) concerning the true country-of-origin, or by misclassifying the goods under the Harmonized Tariff Schedule (HTS) to make CBP believe that the goods are outside the scope of the AD/CVD orders.
- Evasion of Section 301 tariffs (sometimes called the “Trump Tariffs,” because these types of tariffs were used extensively against China during the Trump administration; the Biden administration has continued this policy), again either through either trans-shipping or misclassification under the HTS.
- Falsifying the value or quantity of imported goods, including through the use of forged or altered invoices or other documents, leading to underpayment of duties. This type of fraud often involves so-called “dual invoicing” schemes, whereby the importer pays one amount to the seller of the goods pursuant to a true invoice, but then provides a fake invoice (showing a lower price) to CBP.
- Failing to properly mark imported goods with country-of-origin, either by failing to include any country-of-origin marks, by marking using improper methods, or by marking with the wrong country-of-origin. Such failure to properly mark can lead to the imposition of “marking duties,” which can be recovered through a False Claims Act qui tam lawsuit. Cases involving fraudulent trans-shipping will also involve country-of-origin marking violations.
Whistleblowers can play an important role is fighting against these types of fraudulent schemes, which undermine the country’s policy objectives, deprive taxpayers of revenue, and unfairly hurt businesses who try to compete fairly. Indeed, given that the customs system depends on the honest self-reporting of importers, and CBP actually inspects less than 1% of shipping containers entering the country, whistleblowers are often the only way that fraud schemes will be revealed.
The False Claims Act provides on way for whistleblowers both to report fraud to the government, and also to receive substantial monetary rewards for doing so. A company violates the False Claims Act when it “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” 31 U.S.C. § 3729(a)(1)(G).
This is the so-called “reverse false claims” provision of the Act. A knowing failure to pay customs duties violates this provision. United States ex rel. Customs Fraud Investigations, LLC v. Victaulic Co., 839 F.3d 242, 252-56 (3d Cir. 2016). Successful whistleblowers can earn rewards of between 15-30% of the amount collected by the government. Over the past decade, approximately $130 million has been recovered through customs fraud cases brought under the False Claims Act.
A final note: although we typically think of “whistleblowers” as employees blowing the whistle on their employer, the False Claims Act is not so limited. In the customs space, successful False Claims Act cases have been brought by industry specialists, or even by competing companies. Indeed, a Department of Justice official recently revealed that approximately half of customs fraud cases are initiated by competing companies, often U.S.-based manufacturers. Anyone with insider or specialized knowledge can potentially bring a case under the False Claims Act.