As the Trump administration implements increased tariffs, U.S. authorities will continue to crack down on companies who seek to evade customs duties. In recent years, the Department of Justice (DOJ) has increasingly used the False Claims Act (FCA) to go after companies committing customs and tariff fraud, and, as with all areas of FCA enforcement, qui tam whistleblowers play a critical role in these efforts.
Customs Fraud and the False Claims Act
Companies can be liable under the FCA for so-called “reverse” false claims when they knowingly conceal and improperly avoid an obligation to pay or transmit money to the U.S. government. Thus, when an individual or company knowingly evades paying custom duties on goods it knowingly violates the FCA.
For example, on April 1, the DOJ reached a $8.1 million settlement with Evolutions Flooring Inc., an importer of multilayered wood flooring, and its owners over allegations that the company knowingly and improperly evaded customs duties on imports of multilayered wood flooring from China.
“Import duties provide an important source of government revenue and level the playing field for U.S. manufacturers against their global competitors,” said Acting Assistant Attorney General Yaakov M. Roth of the Justice Department’s Civil Division. “The department will pursue those who seek an unfair advantage in U.S. markets, including by evading the duties owed on goods imported into this country from China.”
Types of customs duties fraud which individuals and companies can be found liable for under the FCA include:
- Underreporting of Value – importers may undervalue goods to reduce the amount of import duties or taxes payable. By declaring a value lower than the actual transaction value, they can evade the rightful amount of customs duties and taxes.
- Misclassification – goods may be classified under a tariff code that attracts a lower rate of duty than the actual code applicable to those goods. For example, an importer might declare a luxury item as a basic item to benefit from a lower tariff rate.
- False Country of Origin – importers may falsely declare the country of origin for goods to benefit from preferential duty rates or to avoid anti-dumping duties. This is especially pertinent when certain goods from particular countries are subjected to higher duties or restrictions.
- Overstatement of Quantity – importers might declare a higher quantity of low-value items and hide high-value items among them, thereby evading the correct duty on the high-value items.
- False Documentation – using forged or altered documents, like fake invoices or certificates of origin, to deceive customs officials.
- Transshipment Deception – goods might be rerouted through third countries to conceal their true origin, especially if the goods’ actual country of origin faces trade restrictions or higher duties.
DOJ Promises Aggressive Enforcement on Trade and Tariffs
On February 20, Deputy Assistant Attorney General Michael Granston gave a keynote address at the Federal Bar Association’s annual qui tam conference. In addition to promising that under the Trump administration the DOJ “plans to continue to aggressively enforce the False Claims Act,” Granston specifically touched on aggressive enforcement of customs and tariff fraud.
“The False Claims Act has also proven to be a powerful tool for combatting those who seek to avoid the payment of customs duties on imported goods, including goods subject to anti-dumping or countervailing duties, which are intended to protect the American economy against illegal foreign trade practices,” Granston stated.
“You can therefore expect the department to continue to use the False Claims Act to help enforce these trade laws,” Granston added.
Tariffs are particularly vulnerable to fraud schemes. For example, where tariffs on products from countries, like China, are extremely high compared with other countries, there will be temptation for companies to cheat the system by claiming products were produced in a country with lower tariffs.
The Role of Whistleblowers
Under the False Claims Act’s qui tam provisions, whistleblowers with knowledge of customs fraud may file a lawsuit on behalf of the U.S. government. Regardless of whether the government decides to intervene and take over the suit, a whistleblower is eligible to receive between 15-30% of recoveries in a successful qui tam suit.
Whistleblowers have proven to be the bedrock of FCA enforcement. Since the FCA was modernized in 1986, it has allowed the government to recover over $78 billion from fraudsters. More than $55 billion of these recoveries stemmed from qui tam whistleblower lawsuits.
The need for insiders with direct knowledge of fraud is particularly acute in regards to customs duties fraud. A Government Accountability Office report details how Customs and Border Protection “faces several external challenges in attempting to gather conclusive evidence of evasion and deter parties from evading duties.”
A look at recent customs fraud settlements highlights the central role whistleblowers often play in successful enforcement actions. For example, the $8.1 million settlement with Evolutions Flooring stems from a qui tam whistleblower lawsuit filed by Urban Global LLC, who is set to receive $1.2 million of the settlement.
To prove tariff fraud, the government will depend on whistleblowers who have inside information about companies cheating the government out of tariff funds by, among other schemes, falsifying import and export forms and knowingly concealing the country of origin of products.
Conclusion
As tariffs become more widespread and tariff rates increase under the Trump administration, more and more individuals and companies will seek to evade payments through customs fraud. False Claims Act whistleblowers will thus be critical to ensure compliance with any tariffs.
Individuals considering blowing the whistle on customs or tariff fraud should first consult an experienced FCA whistleblower attorney to help ensure they file an effective qui tam suit and that they are protected from retaliation.
Geoff Schweller also contributed to this article.